Managerial Remuneration: Section 197 Explained

Managerial remuneration is capped by section 197 of the Companies Act, 2013, and the cap is a percentage of profit rather than a rupee figure. The total managerial remuneration payable by a public company to its directors, including the managing director and whole-time director, and to its manager, may not exceed eleven per cent of net profits for that financial year, computed in the manner laid down in section 198.

What are the managerial remuneration limits in section 197?

Managerial remuneration sits under one overall ceiling and two sub-limits, and the sub-limits bite before the ceiling does. Section 197(1) sets the overall figure and its first proviso lets the company in general meeting authorise payment above it, subject to the provisions of Schedule V. The words "with the approval of the Central Government" were omitted from that proviso by Act 1 of 2018, section 67, with effect from 12 September 2018, so the general meeting is now the approving body rather than a first step towards one.

The second proviso carries the sub-limits, and it requires approval of the company in general meeting by a special resolution, those last words having been inserted by the same 2018 amendment.

A third proviso, inserted by the same 2018 amendment, adds a creditor consent step. Where the company has defaulted in payment of dues to a bank, a public financial institution, non-convertible debenture holders or any other secured creditor, the prior approval of that creditor must be obtained before the company seeks the approval in general meeting.

Two things sit outside the percentages. Section 197(2) puts the sitting fee under section 197(5) outside them, and section 197(13) puts the premium on indemnity insurance for a managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary outside them, with a proviso that reverses the treatment if the person is proved guilty.

What happens when a company has no profits or inadequate profits?

Section 197(3) is the loss-making case, and it is a redirect rather than a prohibition. Notwithstanding sub-sections (1) and (2), but subject to Schedule V, a company with no profits or inadequate profits may not pay remuneration except in accordance with Schedule V. Act 29 of 2020, section 40, with effect from 18 March 2021, extended that sub-section to cover "any other non-executive director, including an independent director", which is why a non-executive fee at a loss-making company is now a Schedule V question too.

The old escape hatch is gone. The words "and if it is not able to comply with such provisions, with the previous approval of the Central Government" were omitted by Act 1 of 2018, section 67. Section 197(17) handled the transition: applications pending with the Central Government at the commencement of the Companies (Amendment) Act, 2017 abated, and the company had one year to obtain approval under the amended section instead.

Schedule V Part I is the eligibility gate for the appointment itself, and it is a separate test from the pay ceiling. Appointment of a managing director under section 196 covers that gate.

Section 197(11) closes an obvious route around Schedule V. Where Schedule V applies on grounds of no profits or inadequate profits, any provision that increases a director's remuneration has no effect unless the increase complies with the Schedule, and that is true whether the provision sits in the memorandum, the articles, an agreement, a general meeting resolution or a Board resolution.

How is the net profit figure in section 197 computed?

Not from the profit and loss account as published. Section 197(8) says the net profits for the purposes of the section are computed in the manner referred to in section 198, and section 198 is a set of add-backs and deductions rather than a reference to accounting profit. Calculation of profits under section 198 covers that computation, including the exclusion of unrealised and notional gains added by the 2018 amendment.

Section 200 is the discretion that sits alongside it. A company may, while according approval under section 196 or to remuneration under section 197 in a no-profit or inadequate-profit case, fix the remuneration within the limits in the Act, and in doing so it must have regard to the financial position of the company, the remuneration the individual draws in any other capacity, the remuneration drawn from any other company, professional qualifications and experience, and such other matters as may be prescribed. The words "the Central Government or" were omitted from that section by Act 1 of 2018, section 69, so the discretion is now the company's alone.

What happens if a director is overpaid?

Section 197(9) makes overpayment a debt with a clock on it. A director who draws or receives, directly or indirectly, any sum in excess of the limit or without the approval required by the section must refund it to the company within two years or such lesser period as the company allows, and holds it in trust for the company until then. That sub-section was substituted by Act 1 of 2018, section 67.

Section 197(10) blocks the easy discharge. The company may not waive the recovery unless the waiver is approved by special resolution within two years from the date the sum becomes refundable, and where the company has defaulted to a bank, public financial institution, non-convertible debenture holder or other secured creditor, that creditor's prior approval is needed before the waiver goes to the members.

Section 199 is the separate clawback. Where a company has to re-state its financial statements because of fraud or non-compliance with the Act, it must recover from any past or present managing director, whole-time director, manager or Chief Executive Officer the remuneration, including stock option, received in excess of what the restated statements would have supported.

Section 197(15), as substituted by Act 22 of 2019, section 29, with effect from 2 November 2018, sets the penalty: one lakh rupees on the person in default, and five lakh rupees on the company where the default is the company's.

Where managerial remuneration shows up in a filing

For a listed company the section itself creates two published traces. The Board's report carries the section 197(12) ratio of each director's remuneration to the median employee's remuneration. The auditor's report under section 143 carries the section 197(16) statement on whether remuneration paid is in accordance with the section and whether any director was paid over the limit, a sub-section inserted by Act 1 of 2018, section 67. Section 197(14) adds a third: a managing or whole-time director who draws commission from a holding or subsidiary company is not disqualified from doing so, subject to disclosure by the company in the Board's report.

Where this sits in the disclosure picture

• Calculation of profits under section 198 covers the computation the eleven per cent is a percentage of.
• Appointment of a managing director under section 196 covers the appointment that section 197 prices.
• Schedule IV, the code for independent directors covers the letter of appointment that must set out an independent director's fees and commission.
• The nomination and remuneration committee covers the committee whose opinion section 197(4) relies on for professional-capacity payments.
• Independent director under section 149 covers the stock-option bar in section 149(9) that reads with this section.
• Compensation for loss of office under section 202 covers the separate, capped payment made when the office ends.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.