Directors are the backbone of a company who keeps every function’s responsibility on their shoulders and act in the best interest of the company. The Board of a company comprises two major types of directors, executive and non-executive directors. Executive directors are involved in day to day functioning of a company and are responsible for taking day-to-day decisions. On the other hand, Non-executive directors participate in key decision-making activities such as Policy Making, key managerial decisions etc.

All the directors should be fairly compensated considering their role in a company. Since directors are themselves running the company and they can’t pay themselves abruptly. Therefore, the Companies Act, 2013 provides detailed provisions related to remuneration payable to directors under Section 197 to 200. 

This article will help you to determine the remuneration payable to directors as per Companies Act, 2013 and what are the penal consequences of non-compliance.

1. Meaning of the term ‘remuneration’

• Remuneration means any money or its equivalent given to any person for services rendered by him/her and includes the perquisites mentioned in the Income-tax Act, 1961. 

• Components not forming part of remuneration:

However, as per Section IV of Schedule V of Companies Act, 2013, the following perquisites shall not form part of the remuneration for computation of the ceiling specified in Schedule V to the Companies Act, 2013 (hereinafter referred to as ‘the Act’):

1.       Contribution to provident fund, superannuation fund, or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act, 1961.

2.     Gratuity payable, not exceeding at the rate of half a month’s salary for each completed year of service.

3.     Leave encashment.

Further, following allowances shall not be included in remuneration of an expatriate managerial person (including a non-resident Indian):

1.       Children’s education allowance subject to maximum of INR 12000 P.m. for maximum 2 children.;

2.     Holiday passage for children studying outside India or family staying abroad: Return holiday passage once in a year by economy class or once in two years by first class to children and to the members of the family from the place of their study or stay

3.     Leave travel concession: Return passage for self and family in accordance with the rules specified by the company where it is proposed that the leave be spent in the home country instead of anywhere in India.

2. How much remuneration can be paid to a director

a. Public Company

The remuneration payable to the Directors of a company is determined by either of the following:

• The articles of the company; or 
• By a resolution; or 
• if the articles so require, by a special resolution, passed by the company in a general meeting

Section 197 of Companies Act, 2013 provides following maximum threshold limit of Director’s remuneration read with Schedule V of the Act: 

i. Companies Having Adequate profits 

Note:

1.       Maximum threshold of total Managerial Remuneration (payable to all managing director, Whole Time director or Manager): 11% of Net Profits

2.     The Company may pay aggregate remuneration exceeding 11% of Net profits, subject to approval of shareholders in the General Meeting.

3.     The Company may pay remuneration exceeding above mentioned threshold limit of 5%, 10%, 1% or 3% subject to approval of shareholders in General meeting through passing special resolution.

4.     However, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of such person is required before obtaining the approval in the general meeting.

ii. Company is not having adequate profits or having losses (Section II and Section III of Part-B of Schedule V of Companies Act, 2013)

1.       In case a company has Losses or no profits or profits are inadequate, i.e., Director’s remuneration is more than net profits, then the company shall not pay to its Directors, including any managing or whole-time director or manager or any other non-executive director.

2.     However, the company may still pay in accordance with provisions of Schedule V in following manner:

Notes: 

• Payment in excess of above-mentioned threshold limit can be made subject to a special resolution passed by shareholders.
• In case the period of service is less than one year, the above-mentioned threshold limit shall be computed on a pro-rata basis.
• Professional Fee:
• Where a managerial person or other director are functioning in a professional capacity then the above-mentioned remuneration can be paid if such person is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly.

• The Company can make payment as per the above-mentioned threshold limit provides:
• Such remuneration is approved by a resolution passed by the board and in case the company is covered under section 178(1) also by the Nomination and Remuneration Committee;
• The Company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor. In case of default, prior approval of such person is required before obtaining the approval in the general meeting.

• An ordinary resolution or a special resolution can be passed in general meeting for payment of remuneration as per aforesaid limits for a maximum period of 3 years.
• Notice for calling general meeting shall be accompanied with a statement containing following information about appointee:

• Background details
• Past remuneration
• Recognition or awards
• Job profile and his suitability
• Remuneration proposed
• Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)
• Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel or other director, if any.

• Remuneration payable by companies having no profit or inadequate profit in certain special circumstances: (Section IV of Part-B of Schedule V of Companies Act)

In the following circumstances, a company may, pay remuneration to a managerial person or other director in excess of the amounts specified above:

1.       where the excess remuneration is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and such company treats this amount as managerial remuneration and shall include such amount while computing its threshold limit under section 197 and Section 198.

2.     Upto 7 years in case of a newly incorporated company;

3.     In case of a sick company, for whom a scheme of revival or rehabilitation has been ordered by the BIFR, for a period of 5 years from the date of sanction of scheme of revival, or

4.     In case of a company to which a resolution plan has been approved by the NCLT under the Insolvency and Bankruptcy Code, 2016 for a period of 5 years from the date of such approval.

5.     where remuneration of a managerial person or other director exceeds the limits in Section II but the remuneration has been fixed by the BIFR or NCLT

6.     Further, Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified under Section II and the following additional conditions:—

o    except as provided in para (a) of this Section, the managerial person is not receiving remuneration from any other company;

o    the auditor or Company Secretary certifies that all secured creditors and term lenders have no objection for the appointment of the managerial person or other director as well as the quantum of remuneration 

o    the auditor or Company Secretary certifies that there is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

b. Private Company

The Companies Act does not provide any specific provisions for remuneration to managerial person for private Company. Therefore, Private company may pay remuneration as determined by Articles of Association

3. What other payments can be made to the Directors

A Director can receive following amounts and the same shall not be considered as remuneration and shall not be considered for computing above mentioned threshold limit:

a. Sitting Fee

A director may receive a fee for attending meetings of the Board or Committee thereof. However, Sitting fee shall be decided by the Board of directors which shall not exceed INR 1,00,000 per meeting of the Board or committee thereof. 

Further, for Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors

b. Professional Fee

Any Director or managerial person can also receive remuneration for services rendered in other capacity if—

1.       the services rendered are of a professional nature; and

2.     In the opinion of the Nomination and Remuneration Committee or the Board of Directors, the director possesses the requisite qualification for the practice of the profession.

c. Insurance Premium

• Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel.
• However, if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.

4. What reporting and disclosures are required with respect to Directors Remuneration

a. Disclosure in Board Report: Every company shall disclose in its board report following points:

• the ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year;
• % increase in remuneration of each director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year;
• the % increase in the median remuneration of employees in the financial year;
• the number of permanent employees on the rolls of company;
• average percentile increase in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration
• affirmation that the remuneration is as per the remuneration policy of the company.
• Various other points are required to be disclosed as per Rule 5-”Disclosure in Board’s Report”.

b. Audit Report:

The auditor of the company shall make a statement in his report that whether the remuneration paid by the company to its Directors is in accordance with the provisions of this section or not.

5. Frequently Asked Questions:

a. What should be frequency of payment of remuneration?

Like employees, directors’ can be paid on a monthly basis as per the limits applicable for public companies and articles of association of a company.

b. How is Net Profit computed?

For the computation of threshold limit of Managerial Remuneration, Net profit is computed as per Section 198 of Companies Act, 2013.

c. What are the consequences of non-compliance?

1. If any director receives remuneration in excess of the limit specified above or required approvals are not obtained then he shall refund such excess sum to the Company within two years or such lesser period as may be allowed by the company.
2. Until such sum is refunded, the director shall hold it in trust for the company.
3. If any person contravenes the provisions of this section, he shall be punishable with fine of minimum INR 1,00,000 and maximum INR 5,00,000.

6. Conclusion

A director’s remuneration has to be in proportion to his/her ability, services and time devoted to the company, difficulties involved, responsibilities assumed, success achieved, corporation earnings, profits and prosperity, and all other relevant factors. Public companies being accountable to a large number of shareholders has to adhere to the maximum limits of remuneration provided in the Companies Act, 2013 and the nomination and remuneration committee, if applicable considering articles of association, must consider all aforesaid relevant factors while recommending remunerations for directors of public companies. On the other hand, private companies have to abide by the articles of association and board resolution should be passed for appointment of directors with appropriate remuneration details in the appointment letter.