Section 196: Appointment

Director Or Manager

of

Managing

Director,

Whole-Time

Applicability
Both Public and Private Company
Note
A company can appoint either Managing Director or Manager not both
Tenure
Appointment of MD, WTD or Manager shall not for a term exceeding five
years at a time.
Re-appointment
Company may re-appoint them for next term in last one year of current term.
Disqualifications

MD, WTD or
Manager who:

Age

Is an
undischarged
or has been
adjudged as an
insolvent

Below 21 year
or

has at any time

suspended
payment to his
creditors or has
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

Above 70 year
(Only by
passing a
Special
Resolution)

Additional Conditions
a) Not being sentenced to imprisonment or fine > Rs. 1000/- for offence
specified in Schedule V

b) Not been detained under the Conservation of Foreign Exchange and

Prevention of Smuggling Activities, 1974
c) He has completed the age of 21 years but has not attained the age of
70 yrs.
d) If managerial person in more than one company and draws
remuneration from one or both companies, total remuneration drawn
should not exceed the higher maximum limit admissible from any of
the companies.
e) he is resident of India i.e. staying in India for a continuous period of not
less than 12 months immediately preceding the date of his
appointment as a managerial person and who has come to stay in
India ---(i) for taking up employment in India; or
(ii) for carrying on a business or vocation in India
This condition shall not apply to the companies in Special Economic
Zones.
Conditions for appointment of MD, WTD or Manager
(i) By passing a resolution in Board Meeting (BOD decide Terms and
conditions of such Appointment)
(ii) Approval of Shareholders by passing resolution in next General
Meeting
(iii)
Appointment should be in accordance with section 197 and
Schedule V
(iv)
If appointment is not accordance with the Schedule V,
Central Government permission required
Note-If such appointment is not approved at the general meeting then any
act done by him before the board meeting shall not be deemed to be invalid.
Overall maximum managerial remuneration and managerial
remuneration in case of absence or inadequacy of profits [Section
197]

Total Managerial Remuneration payable

by a public company in a financial year
Not exceeding 11% of Net Profit of the
company

To MD/WTD
or MANAGER

To Other
Directors

If there are
more than
one
MD/WTD

If there is
one
MD/WTD/Ma
nager

Where there
is no
MD/WTD
/Manager

Where there
is
MD/WTD
/Manager

Maximum
5% of Net
Profit

Maximum
10% of Net
Profit

Maximum
3% of Net
Profit

Maximum
1% of Net
Profit

NOTE
If company wants to pay remuneration exceeding 11% approval of
Shareholders in General Meeting with the Central Government
Approval. (here only schedule- V require to follow or we have to take
approval of CG)

Percentage above is exclusive of Sitting Fees

Net profit is computed as per Section 198

In case of no profit or inadequate profit [Section 197(3) and 197(11)]
1) Pay as per Schedule V OR
2) with previous approval of Central Government.
The remuneration payable determined either by

1) articles of the company or by resolution or

2) by special resolution passed by the company where its articles
require for special resolution.
EXCEPTION: The remuneration payable to directors shall be inclusive
of all remuneration payable to him for services rendered by him in any
other capacity EXCEPT
1) Services rendered are of Professional In Nature and
2) in opinion of Nomination and Remuneration Committee or of
Board of Directors as the case may be, director has requisite
qualification for practice of profession.

SITTING FEES TO DIRECTORS [Section 197(5)]

fee for attending meetings of the Board or Committee
decided by the Board
not exceed one lakh rupees per meeting
for Independent Directors and Women Directors, the sitting fee shall
not be less than the sitting fee payable to other directors
MANNER OF PAYMENT OF REMUNERTION [Section 197(6)]
1) Monthly Payment
2) Specified Percentage of Profit
3) Partly by monthly And partly by Specified Percentage Of Profit
REMUNERATION OF INDEPENDENT DIRECTOR [Section 197(7)]
An independent director shall not be entitled to any stock option and may receive
remuneration by way of
1) sitting fees
2) reimbursement of expenses for participation in the Board and other meetings; and
3) profit related commission as may be approved by the members.
REFUND OF EXCESS [Section 197(9)]
If director receives excess he shall refund such sums to the company and
until such sum is refunded, hold it in trust for the company.
Without Central Government permission, the company shall not waive
recovery of any such sum.
DISCLOSURE BY LISTED COMPANY IN THE BOARDS REPORT [Section
197(12)]
Disclose Ratio of Remuneration of Each Director to the Median
Employees remuneration and such other details as prescribed.
Statement showing the name of every employee of the company, who1) Employed for the whole year and Remuneration>=60 Lac
2) Employed for part of the year and remuneration >=5 Lac per month

3) Employed for full or part of the year and remuneration

INSURANCE FOR INDEMNIFICATION [Section 197(13)]
Where any insurance is taken by company for Key Managerial Personnel
Liability Insurance Premium of such insurance shall not be included to the
remuneration of any key managerial personnel.
However, if such person found guilty, such premium shall be treated as part
of their remuneration.
RECEIVING COMMISSION [Section 197(14)]
Any Director receiving commission from the company and who is MD/WTD
may receive any remuneration or commission from holding or subsidiary
company and such information should be disclosed in the Board Report.
CONTRAVENTION
Fine not less than Rs. 1 Lac but which may extend to Rs. 5 lacs.

SCHEDULE V
PART I OF SCHEDULE V

Satisfy following
conditions

Not sentenced to imprisonment or fine exceeding Rs.

1000/ Not been detained under COFEPOSA, 1974

If he is a managerial person In More Than One

Company, he draws remuneration from one or more
companies subject to the ceiling provided in section V
of Part II

He is resident of

a) for taking up employment

in India; or
b)
India. for carrying on a business
or vacation in India

Example: If a person is Managerial person in only Company A and acco. To

197 he can take 20Lakh as Remuneration. And if he is Managerial person in
Company B as per section 197 he can take 30lakh remuneration. But if
same person is Managerial person in both Company A & B. Then maximum
remuneration he can get all together is 30Lakh.
PART II SECTION II OF SCHEDULE V REMUNERATION IN CASE OF
INADEQUATE OR NO PROFIT

Higher of the two

(Without CG
Approval)

A
Approval of the
company by Ordinary
Resolution in General
Meeting
B
2.5% of the Current
Relevant Profit

A
Where the effective capital is

Limit of yearly remuneration

payable
shall
not
exceed
(Rupees)
Negative or Less than ` 5 crore
30 lakhs
` 5 crores or more but less than ` 100 42 lakhs
crores
` 100 crores or more but less than ` 60 lakhs
250 crores
` 250 crores or more less than ` 50 ` 60 Lakhs plus 0.01 % of the
crores
effective capital in excess of `
250 crores

B
Managerial personnel who was not a:
A) Security Holder holding Securities of the company of nominal value of
rupees five lakh or more or
B) An employee or
C) A director of the company or
D) Related to any director or promoter, at any time During The Two Years
Prior To His Appointment as a managerial person

NOTE
If shareholders pass special resolution then this limit will be doubled
CONDITIONS
1. This remuneration should be approved by resolution of Board of
director and also by Nomination and Remuneration committee (where
it is)
2. The remuneration shall be approved by a resolution of shareholders in
general meeting.
3. The company has not made any default in repayment of its debt or
debenture or interest thereon for a continuous period of 30 days in
preceding financial year
4. The approval of remuneration by special resolution should be for not
more than three year. (SR is require only when we are giving
remuneration double to limit mention.)
5. The statement along with the notice of this resolution should provide
information mentioned in schedule.
6. The Auditor or Company Secretary of company or company secretary
in practice certify that the requirement of this Schedule have been
complied with and such certificate shall be incorporated in the return
filed with the Registrar.
PART II SECTION III OF SCHEDULE V REMUNERATION IN CASE OF
INADEQUATE OR NO PROFIT
In these cases, the company may pay remuneration in excess of
section ii:

a) Where Remuneration
Company,

in excess of these limit is Paid By

Any Other

Condition:

That other company is either a foreign company or has got the

approval of its shareholders in general meeting to make such payment,
That other company treats this amount as managerial
remuneration for the purpose of section 197.

The total managerial remuneration payable by such other company to

its managerial persons including such amount or amounts is within
permissible limits under section 197.

b) In these cases, the company may pay remuneration in excess of

Section II: where
(i) The company is a newly incorporated company, for a period of Seven
Years From The Date Of Its Incorporation, or
(ii) The company Sick Company within five years from sanction of scheme
of revival.
c) Where Remuneration exceeds the limit in section- II but Remuneration
fixed by BIFR & NCLT.
d) An unlisted company in SEZ may pay up to Rs. 240 Lakh yearly if,
company has not raised any money by

Public issue of shares in India

Public issue of Debentures in India
Has not made any default in repayment of any of its debt or debenture
or interest payable thereon for a continues period of 30 days

THE CONDITIONS FOR SECTION III ARE:

1.

An auditor or Company Secretary of the company or company

secretary in practice has certifies that:
2.
All
secured creditors and
term
lenders have
stated
in
writing that they have no objection for the appointment of the
managerial person as well as the quantum of remuneration and such
certificate is filed along with the return as prescribed
3.
There is no default on payments to any creditors, and all dues to
deposit holders are being settled on time.
4.
For Para (b) and (c), the managerial person is not receiving
remuneration from any other company.

PART II SECTION IV OF SCHEDULE V PERQUISITES NOT INCLUDED

IN MANAGERIAL REMUNERATION
1. Managerial person shall be eligible for:
a) 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.
b) gratuity payable at a rate not exceeding half a months salary for each
completed year of service
c) Encashment of leave at the end of the tenure
2. A expatriate managerial person shall be eligible for:
a) Childrens education allowance
b) Holiday package studying outside India or family staying outside India
c) Leave travel concession
PART II SECTION V OF SCHEDULE V REMUNERATION PAYABLE TO
MANAGERIAL PERSON IN TWO COMPANIES
A managerial person shall draw remuneration from one or both companies.
The total remuneration drawn should not exceed the higher maximum limit
admissible from any company of which he is a managerial person.
PART III OF SCHEDULE V
The appointment and remuneration referred to in Part I and Part II of
Schedule V shall be subject to approval by a resolution of the shareholders in
general meeting.
PART IV OF SCHEDULE V
The Central Government may, by notification, exempt any class or classes of
companies from any of the requirements contained in Schedule V.

CALCULATION OF PROFITS [SECTION 198]

Particulars
Net Profit after tax
Add
1

Allowed Credits
Profit on Sale of Immovable Property
(Original Cost WDV)

Less
1

Credits Disallowed
Premium on Shares and Debentures

2
3
4

Profit on sale of forfeited shares

Profit on sale of immovable property
(Sale value of immovable property Original cost)
Surplus in P & L on measurement of asset or liability at fair value

Less
1
2
3
4
5
6
7
8
9
10
11
12
13

Expenses Allowed
All the usual working charges
Directors Remuneration
Bonus or commission paid to staff
Tax on excess or abnormal profits
Tax on business profits imposed for special reasons
Interest on Debentures
Interest on loans
Expenses on repairs ( Other than Capital Expenditure)
Contributions made under section 181 (Bonafide Charitable Trusts)
Depreciation
Prior Period Items
Legal liability for compensation or damages
Insurance expenses

Add
1
2
3

Expenses Disallowed
Income Tax
Compensations, Damages or payments made voluntarily
Capital Loss on sale of Undertaking or part thereof (Does not include loss on
sale of Asset)
Expenditure on P & L on measurement of asset or liability at fair value

Recovery of Managerial Remuneration in certain cases (Section 199)

As per Section 199 a company can recover excess remuneration(including
stock option) paid to any Directors if found after restatement of its financial
statements due to fraud or non-compliance with any requirement under this
act.
Central Government or company to fix limit with regard to
remuneration (Section 200)
The CG may fix remuneration within the limits prescribed subject to
provisions of Sec 196 and 197 in case company has inadequate or no profits
having regard to:
a) the financial position of the company;
b) the remuneration or commission drawn by the individual concerned in
any other capacity;
c) the remuneration or commission drawn by him from any other
company;
d) professional qualifications and experience of the individual concerned;
e) any other matters as may be prescribed

According to the Companies (Appointment and Remuneration of Managerial Personnel) Rules,

2014, for the purposes of clause (e) above the Central Government or the company shall have
regard to the following matters, namely:1) the Financial and operating performance of the company during the
three preceding financial years.
2) the relationship between remuneration and performance.
3) the principle of proportionality of remuneration within the company,
ideally by a rating methodology which compares the remuneration of
directors to that of other directors on the board and employees or
executives of the company.
4) whether remuneration policy for directors differs from remuneration
policy for other employees and if so, an explanation for the difference.
5) the securities held by the director, including options and details of the
shares pledged as at the end of the preceding financial year.
Compensation for loss of office [Section 200]
In case of loss of office director is eligible for compensation for 3 years or unexpired term
whichever is less of Avg. remuneration .Such Avg. Remuneration will be calculated on the basis
of Remuneration earned is past 3 years or expired term whichever is less.
3 Years X Avg. Remm
Unexpired term X Avg. Remm
However in the following cases, the director is not eligible for compensation:1) The director resigns voluntarily.
2) The company is under merger or acquisition & he has been offered same post in the new
company still he resigned.
3) He involved in fraud, misfeasance, negligence.
4) He responsible for his removal.
5) He is disqualified for appointment.
No payment if both conditions are satisfied :
1) The winding up commences
- within 12 Months of cessation of Office or Before date of cessation of
office
2)
Surplus after winding up is insufficient