Appointment and Remuneration of Managerial Personnel - ICSI

CHAPTER XIII APPOINTMENT AND REMUNERATION OF MANAGERIAL

PERSONNEL (SEC 196 TO SEC 205)

COMPANIES ACT REFRESHER COURSE SERIES II

AT ICSI - SIRC

Who are managerial personnel?

Appointment of Managerial Personnel

Remuneration of Managerial Personnel

Calculation of profit

Recovery of remuneration in certain cases

Company to fix limit of remuneration

Application to Central Govt.

Compensation for loss of office

Appointment of Key Managerial Personnel (KMP)

Secretarial Audit

Functions of Company Secretary

Agenda

MANAGING DIRECTOR – SEC 2(54)_

a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

WHOLE-TIME DIRECTOR – SEC 2(94)

“whole-time director” includes a director in the whole-time

employment of the company

MANAGER – SEC 2(53)

“manager” means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not

Who are managerial personnel?

REMUNERATION - SEC 2(78) OF COMPANIES ACT, 2013 “Remuneration means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961”

No company shall appoint or re-appoint an MD/ WTD/

Manager for a term exceeding 5 years at a time

No company shall appoint a Managing Director and a Manager at the same time

Appointment of Managerial Personnel – Sec 196

No re-appointment shall be made earlier than one year before the expiry of term

is below the age of 21 years or has attained the age

of 70 years*

No Company shall appoint any person as MD/WTD/Manager, who –

is an undischarged

insolvent or has at any time been adjudged as an

insolvent

has at any time suspended payment

to his creditors or makes, or has at any time made, a composition with

them

has at any time been convicted by

a court of an offence and

sentenced for a period of more than six months

Special resolution is required for appointing a

person who has attained the age of 70 years

Votes cast in favour of the motion exceed the votes, if any, cast against the motion and the

Central Govt. approval is required – effective 12.09.2018 (CA

Amendment 2017)

OR


Recommendation by Nomination and Remuneration Committee (NRC), wherever applicable

Approval by Board of Directors (including terms and conditions of appointment and remuneration payable)

Approval by Shareholders at next general meeting (Special resolution required – for age of 70 years and more) – if not approved by shareholders, any act done by him shall not be deemed invalid.

Step 1

Step 2

Step 3

Approval by Central Government in case such appointment does not fulfil the conditions specified in in Part I of Schedule V and in such form as prescribed

Step 4

Filing of Form with MCA – Form MR-1 within 60 days of appointment / DIR-12 within 30 days of changes

Step 5


TOTAL MANAGERIAL REMUNERATION

payable by public co. shall not exceed 11% of net

profits

REMUNERATION PAYABLE BY COMPANIES HAVING PROFITS (SEC 197)

If exceeds 11% of net profit – shareholders approval is

required

(Central Govt. approval is no more required –

effective 12.09.2018 (CA Amendment 2017)

REMUNERATION TO MANAGERIAL PERSONAL

not exceeding 5% of net profit – in case of one

not exceeding 10% of net profit - in case of more than one

Special resolution [effective 12.09.2018 (CA

Amendment 2017)] in general meeting is required

if exceeds the above threshold

REMUNERATION TO DIRECTORS OTHER THAN

MD/WTD –

1% of net profit if there is a managerial personnel

3% of net profit in other cases

(Exclusive of sitting fees / fee for professional services payable to directors)

Remuneration of Managerial Personnel – Sec 197

For companies defaulted in payment of dues, prior approval of Banks, or secured creditors shall be obtained before obtaining approval in general meeting.

If Company has no/inadequate profit – schedule V shall apply.

Schedule V cannot be overridden by any provision contained in company’s MOA, or in an agreement or in any resolution

Remuneration to be determined by AOA or shareholder’s resolution.

Remuneration may be paid either by way of a monthly payment or at a specified percentage of the net profits or partly by one way and partly by the other.

Premium paid on insurance taken for indemnifying any liability of Managerial Personnel / KMP is not ‘remuneration’ unless he/she is proved to be guilty.


SITTING FEE:

Maximum Rs.1 lakh per meeting of Board or Committee

Sitting fee of ID and Woman Director shall not be less than fee payable to other directors

DISCLOSURE IN BOARD’S REPORT:

Ratio of remuneration of each director to median remuneration of employees and other details as specified under Rules.

Statement on top 10 employees in terms of remuneration drawn and employees who were in receipt of Rs. 102 lakhs through out the FY or Rs.8.50 lakhs per month.

REFUND OF EXCESS REMUNERATION: Director shall refund the excess remuneration drawn without approval, to the

Company within 2 years or lesser period as determined by Company.

Company shall not waive the refundable amount unless approved by a special resolution within 2 years. (Omitted the requirement of CG approval – effective 12.09.2018 (CA Amendment 2017)


MD/ WTD who is receiving any commission from the company shall not be disqualified from

receiving any remuneration or

commission from holding / subsidiary of such

company, provided the same is disclosed in the

Board’s report of Co.

Penalty for default of Sec 197 - If any person makes

any default, he shall be liable to a penalty of Rs.1

lakh and where any default has been made

by a company, the company shall be liable

to a penalty of Rs.5 lakhs.

Auditors shall in his report, make a statement on whether the payment

of remuneration is in conformity with the provisions of the Act


REMUNERATION PAYABLE BY COMPANIES HAVING NO PROFIT OR INADEQUATE PROFIT (SECTION II OF SCHEDULE V)

Effective capital Remuneration limit (p.a.)

Negative or < 5 crs. 60 lakhs

5 crs. & above but < 100 crs. 84 lakhs

100 crs. & above but < 250 crs.

120 lakhs

250 crs. & above 120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crs.

Remuneration in excess of above limit can be paid with special resolution

upto three years (Omitted “the above limits shall be

doubled....” – effective 12.09.2018 (CA

Amendment 2017)

Remuneration as above may be paid [effective 12.09.2018 (CA Amendment 2017)] to managerial person who is functioning in professional capacity, if –

such person is not having any interest in capital of company/holding/subsidiary co. directly or indirectly (holding up to 0.5% under ESOP is exempted) or related to directors/promoters of company/holding/subsidiary co. during last 2 years before or on or after the date of appointment.

possesses graduate level qualification with expertise and specialized knowledge in the field in which the company operates


For the purposes of Section II of this Part, “effective capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.


(a) Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment; (b) In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

SECTION III OF SCHEDULE V - CERTAIN SPECIAL CIRCUMSTANCES

A Company may pay remuneration

to a managerial person in excess of the amounts

provided in Section II , if -

the remuneration is paid by foreign co. or any other Co. with their

shareholders approval and the same is within

the total limit of that Co.

The Co. is a newly incorporated company

– up to 7 years from the date of

incorporation

The Co. is a sick Co. and revival scheme has been ordered by BIFR – up to 5 years from the date of

sanction of scheme

A resolution plan has been approved for the Co. by NCLT under IBC,

2016 - up to 5 years from the date of

approval

Remuneration has been fixed by BIFR or NCLT

subject to certain conditions prescribed (given in next slide)


Remuneration has been fixed by BIFR or NCLT subject to the following conditions – The managerial person is not receiving remuneration from any other company. Certificate from auditor or CS/PCS (in absence of CS) that all secured creditors and

term lenders have given written NOC for appointment of managerial person / his remuneration and such certificate to be filed with MR-1.

Auditor or CS/PCS (in absence of CS) to certify that there is no default on payments

to any creditors and all dues to deposit holders are being settled on time.


SECTION IV OF PART II OF SCHEDULE V Following Perquisites shall not be included in managerial remuneration specified in Section II and Section III of Schedule V –

Contribution to PF/superannuation fund Gratuity Leave encashment For expatriate managerial person –

o Children’s education allowance o Holiday passage for children studying outside India or family staying

abroad o Leave travel concession


SECTION V OF PART II OF SCHEDULE V

Managerial person can draw remuneration from one or both companies – provided the total remuneration does not exceed the higher maximum limit admissible from any of the companies in which he is a managerial person.

Credit shall be Given

[Sec. 198(2)]

• Bounties and subsidies received from Govt. or any public authority constituted by Govt., unless directed otherwise.

Credit shall not be given

[Sec. 198(3)]

• Profits of capital nature.

• Unrealised gains, notional gains or revaluation of assets.

To be Deducted

[Sec. 198(4)]

• Normal business expenses including remuneration to directors, employees, interest on loan / debentures, bad/written off debts etc.

Not to be Deducted

[Sec. 198(5)]

• Income tax, voluntary damages or compensation, loss of capital nature, change in carrying amount of asset or liability.

Calculation of profits – Sec 198

Where a Company is required to restate its financial statement due to fraud or non-compliance under Act/Rules, the company shall recover from past / present MD/ WTD/ CEO/ Manager (during that period) the remuneration (including ESOP) paid in excess of what would have been payable to him as per restatement of financial statements.

Recovery of remuneration in certain cases – Sec 199

Where the Company has inadequate or no profit, the Company shall have regard to the following while fixing the remuneration –

Financial position of the company

remuneration or commission drawn by the individual concerned in any other capacity;

remuneration or commission drawn by him from any other company;

professional qualifications and experience of the individual concerned;

Financial/operation performance of the company during 3 preceding FY;

relationship between remuneration and performance

principle of proportionality of remuneration within the company

Explanation for difference – if remuneration policy for directors differs from remuneration policy for other employees;

securities held by the director, including options and details of the shares pledged as at the end of the preceding financial year.

Company to fix limit of remuneration – Sec 200

Application to Central Govt. – Sec 201

Every application to Central Govt. shall be made in Form MR-2

Before making an application to Central Govt., Company shall issue a general notice to the members indicating the nature of the application proposed to be made

Such notice shall be published in English and vernacular language (principal language in the district where the registered office is situated)

Copies of notice and certificate by company about the publication of notice shall be attached to the application

Every such application seeking approval shall be made to the Central Government within a period of 90 days from the date of such appointment.

Central Govt. approval under this Chapter

Only in the following situations, Central Govt. approval is required -

Sec 196(3)(a) – For age of seventy years, simple resolution is passed by shareholders, Central Govt approval is required.

Sec 196(4) – If the appointment is in variance to the conditions prescribed under Part I of Schedule V – Central Govt. approval is required

Compensation for loss of office – Sec 202

Company may make payment to MD/WTD/Manager (not to any other director) by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.

No payment shall be made for following cases –

Director resigned for reconstruction / amalgamation of company and is appointed as MD/WTD/Manager of the reconstructed/amalgamated company.

Director resigns otherwise than of reconstruction / amalgamation ;

Office is vacated under Sec 167(1);

Company being wound up;

Director has been guilty of fraud or breach of trust;

Director has instigated or taken part in bringing the termination of his office

Any such payment shall not exceed the remuneration which he would have earned for the remainder of his term or for three years, whichever is shorter, calculated on the basis of avg. Remuneration earned during preceding 3 years from date of cessesion.

KEY MANAGERIAL PERSONNEL – SEC 2(51):

MD/CEO/Manager/WTD

Company Secretary

Chief Financial Officer

Such other officer, not more than one level below the directors who is in whole-time employment, designated as KMP by the Board; and

Such other officer as may be prescribed;

– effective 12.02.2018 (CA Amendment 2017)

Appointment of key managerial personnel – Sec 203

(A)

Listed Company

Class of Companies required to appoint a whole-time KMP u/s 203

(B)

Public Company having paid-up share capital of

Rs.10 crore or more

Companies other than (A) and (B), but having paid up share capital

of Rs. 5 Crores or more shall have a

whole time Company Secretary

For Sec 203, KMP means – MD/ CEO/

Manager/WTD; CS; CFO


Board shall appoint whole time KMP and approve terms and conditions / remuneration.

Chairperson and MD/CEO cannot be the same person unless its AOA provides otherwise or Company does not carry on multiple businesses.

With effect from April 1, 2020 – Chairperson of top 500 listed companies shall be an NED and not related to MD / CEO (term “relative” as defined under the Companies Act, 2013) – SEBI (LODR) (Amendment) Regulations, 2018.


A whole time KMP is allowed to be KMP of subsidiary company at the same time.

A KMP can be director of any company with the permission of Board.

Vacancy of whole time KMP shall be filled up by Board at its meeting within 6 months

In case of default, penalty for a Company – Rs.5 lakhs and Every director/KMP – Rs.50,000/- and Rs.1000/- per day for continual default.


Listed Company

Following companies shall annex with its Board’s Report, a Secretarial Audit Report in Form MR.3, given by a PCS

Public Company having paid-up share capital of

Rs.50 crs or more

Public Company having a turnover of Rs.250 crore or more

BoD shall explain in Board’s Report any qualification / observation / remark made by Secretarial Auditor in his report.

Secretarial audit – Sec 204

In case of default - the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 5 lakh.

Based on the Kotak Committee recommendation, in addition to annual secretarial audit report, SEBI has introduced an ANNUAL SECRETARIAL COMPLIANCE REPORT to be issued by PCS to listed companies as per the format prescribed by SEBI.

PCS are required to check the compliance of all applicable SEBI Regulations and circulars/ guidelines issued there under.

Above report shall be submitted to stock exchanges within 60 days from the end of FY (effective FY ended March 2019) - SEBI circular dated February 8, 2019


Examination of books, papers, minute books, forms and returns filed and other records maintained by the Company according to the provisions of –

(i) The Companies Act, 2013 (the Act) and the rules made there under;.

(ii) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made there under;

(iii) The Depositories Act, 1996 and the Regulations and Bye-laws Framed there under ;

(iv) Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder to extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial borrowings

REGULATIONS TO BE COVERED UNDER SECRETARIAL AUDIT


The following Regulations and Guidelines prescribed under the SEBI Act, 1992:-

(a) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

(b) SEBI (Prohibition of Insider Trading) Regulations, 2015;

(c) SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(d) SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;

(e) SEBI (Issue and Listing of Debt Securities) Regulations, 2008;

(f) SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with client;

(g) SEBI (Delisting of Equity Shares) Regulations, 2009; and

(h) SEBI (Buyback of Securities) Regulations, 2018;

Compliance with the applicable clauses of the following:

(i) Secretarial Standards issued by ICSI

(ii) SEBI LODR


Functions of company secretary – Sec 205

COMPANY SECRETARY OR SECRETARY – SEC 2(24):

Company secretary or secretary means a company secretary as defined in Sec 2(1)(c) of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act.

FUNCTIONS & DUTIES OF COMPANY SECRETARY:

Report to Board about compliance with Companies Act, Rules, other applicable laws.

Ensure compliance with Secretarial Standards.

Guidance to directors.

Facilitate convening of meetings and maintaining minutes of meetings.

Represent before various regulators / authorities.

Assist / advise Board in ensuring / compliance with good corporate governance practices.

Such other duties as assigned by Board.

Regulation Amendment Applicability

17(6)(ca) Special resolution shall be obtained every year, if annual remuneration payable to a single Non-executive Director (NED) exceeds 50% of the total annual remuneration payable to all NEDs.

April 1, 2019

17(6)(e) Special resolution in general meeting is required for fees/compensation payable to Executive Director (ED) who are from P&PG, if – Annual remuneration payable to such ED exceeds Rs.5 crs.

or 2.5% of the net profits, whichever is higher.

For more than one ED, the aggregate annual remuneration to such directors exceeds 5% of the net profits.

April 1, 2019

SEBI (LODR) (AMENDMENT) REGULATIONS, 2018

P. Sujatha Sr. VP & Company Secretary Cholamandalam Investment and Finance Company Limited

Section 198 - Calculation of profits

(2) In making the computation aforesaid, credit shall be given for the bounties and subsidies received from any Government, or any public authority constituted or authorised in this behalf, by any Government, unless and except in so far as the Central Government otherwise directs.

(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares unless the company is an investment company as referred to in

clause (a) of the Explanation to section 186 (b) profits on sales by the company of forfeited shares; (c) profits of a capital nature including profits from the sale of the undertaking or any of the undertakings

of the company or of any part thereof; (d) profits from the sale of any immovable property or fixed assets of a capital nature comprised in the

undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets:

Provided that where the amount for which any fixed asset is sold exceeds the written-down value thereof, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value;

(e) any change in carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.

(f) any amount representing unrealised gains, notional gains or revaluation of assets.

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(4) In making the computation aforesaid, the following sums shall be deducted, namely:— (a) all the usual working charges; (b) directors’ remuneration ; (c) bonus or commission paid or payable to any member of the company’s staff, or to any engineer, technician or person

employed or engaged by the company, whether on a whole-time or on a part-time basis; (d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits; (e) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central

Government in this behalf; (f) interest on debenture issued by the company; (g) interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or

floating assets; (h) interest on unsecured loans and advances; (i) expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature; (j) outgoings inclusive of contributions made under section 181; (k) depreciation to the extent specified in section 123; (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section

in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

(m) any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract;

(n) any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (m); (o) debts considered bad and written off or adjusted during the year of account.

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(5) In making the computation aforesaid, the following sums shall not be deducted, namely:—

(a) income-tax and super-tax payable by the company under the Income-tax Act, 1961, or any other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

(b) any compensation, damages or payments made voluntarily, that is to say, otherwise than in virtue of a liability such as is referred to in clause (m) of sub-section (4);

(c) loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess of the written-down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value;

(d) any change in carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.

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Part I of Schedule V

No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely:—

(a) he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the following Acts, namely —

(i) the Indian Stamp Act, 1899 (2 of 1899); (ii) the Central Excise Act, 1944 (1 of 1944); (iii) the Industries (Development and Regulation) Act, 1951 (65 of 1951); (iv) the Prevention of Food Adulteration Act, 1954 (37 of 1954); (v) the Essential Commodities Act, 1955 (10 of 1955); (vi) the Companies Act, 2013 the Companies Act, 2013 (18 of 2013) or any previous

company law; (vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (viii) the Wealth-tax Act, 1957 (27 of 1957); (ix) the Income-tax Act, 1961 (43 of 1961); (x) the Customs Act, 1962 (52 of 1962);

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Part I of Schedule V

(xi) the Competition Act, 2002 (12 of 2003); (xii) the Foreign Exchange Management Act, 1999 (42 of 1999); (xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); (xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992); (xv) the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922); (xvi) the Prevention of Money-Laundering Act, 2002 (15 of 2003); (xvii) the Insolvency and Bankruptcy Code, 201.6 (31 of 2016) (xviii) the Goods and Services Tax Act,20t7 (12 of 2017) (xix) the Fugitive Economic Offenders Act, 2018 (17 of2018) (b) he had not been detained for any period under the Conservation of

Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974): Provided that where the Central Government has given its approval to the appointment of a person convicted or detained under sub-paragraph (a) or sub-paragraph (b), as the case may be, no further approval of the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.

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Appointment and Remuneration of Managerial Personnel - ICSI

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