What limits a director’s pay?
A public company’s payment to its directors is limited by section 197 to a percentage of net profits, unless the shareholders pass a special resolution for a higher share. A private company that is not treated as a public company sets pay in its articles and its resolutions.
What does section 197 cap?
The cap is on the net profits of that financial year, computed under section 198. The whole of the managerial remuneration to the directors, including a managing director and a whole-time director, and to the manager, is not more than 11 percent. Inside that, one managing director, whole-time director, or manager is not more than 5 percent. If there is more than one such person, they together are not more than 10 percent.
Directors who are not managing or whole-time directors share 1 percent if the company has a managing director, a whole-time director, or a manager, and 3 percent if it has none of them. A special resolution can authorise a payment above these percentages. A sitting fee for attending a board or committee meeting is capped by the rules at ₹1 lakh a meeting.
What applies when profits are inadequate?
If the company has no profits, or its profits are inadequate, the percentages cannot be applied to a profit that is not there. Schedule V then sets what a managerial person may be paid, by reference to the company’s effective capital and the other conditions in that Schedule. A payment beyond Schedule V needs the special resolution and the further approvals the Schedule requires, including the prior approval of lenders or deposit holders where the company is in default to them. The yearly rupee bands in Schedule V are the Schedule’s own table. They are not a flat salary for every company.
Does a private company use the same cap?
Section 197 states the limit for a public company. A private company that is not a subsidiary of a public company follows its articles and the board or shareholder resolution that approves the pay. A private company that is a subsidiary of a public company is a public company for the Act, so section 197 applies to it. Who counts as a director is on the director page.
An independent director is not entitled to a stock option. That director may receive a sitting fee and a commission that is related to the profits, within the cap that applies to directors who are not managerial persons. The pay is disclosed in the board’s report and in the notes to the financial statements, to the extent those provisions apply to that company.
Is the pay salary or a service?
Where the director is an employee, the company deducts tax under section 192 and the sum is salary. Sitting fees, and remuneration paid to a director who is not an employee, are not that salary relationship. Those sums are a service by the director to the company, and goods and services tax on them is payable by the company under reverse charge. The income-tax deduction on a non-salary payment follows the TDS section that matches the payment.
Frequently asked questions
Four questions cover a higher percentage, stock options, a sitting fee, and a private company.
Can shareholders cross the 11 percent cap?
Yes. A public company may pay more than the percentages in section 197 if the shareholders pass a special resolution.
Can an independent director take a stock option?
No. Section 149(9) says an independent director is not entitled to stock options. That director may take a sitting fee and a commission on profits.
Is a sitting fee inside the 11 percent?
A sitting fee is a separate payment for attending a board or committee meeting. The rules cap it at ₹1 lakh a meeting. It is not the monthly salary of a managing director.
Does section 197 apply to every private company?
No. The percentage caps are for a public company. A private company that is a subsidiary of a public company is treated as a public company for this Act.
Sources
Managerial remuneration is section 197. Net profits for that section are computed under section 198. Inadequate profits follow Schedule V. An independent director’s stock option is barred by section 149(9).