What limit does section 197 place on managerial remuneration?
Section 197 limits the managerial remuneration a public company may pay its directors, including a managing director and a whole-time director, and its manager, to 11 percent of the net profits of that financial year. The company in general meeting may authorise more, subject to Schedule V. A private company is not under this limit.
What is the percentage?
Net profits are computed in the manner of section 198. Within the 11 percent, a further approval by special resolution is required if the pay to any one managing director, whole-time director, or manager would exceed 5 percent, or if the pay to more than one of them taken together would exceed 10 percent. Directors who are neither managing nor whole-time directors stay within 1 percent if the company has a managing director, a whole-time director, or a manager, and within 3 percent if it does not.
Those percentages do not include fees for attending meetings of the board or of a committee. The fee for a meeting shall not exceed ₹1 lakh, which is the amount prescribed. If the company has defaulted in payment of dues to a bank, a public financial institution, a holder of non-convertible debentures, or any other secured creditor, that creditor’s prior approval is obtained before the general meeting approves remuneration above the ordinary line. An independent director takes no stock option. Who counts as independent is on the independent-director page.
What if profits are inadequate?
If in a financial year the company has no profits, or its profits are inadequate, it does not pay remuneration beyond sitting fees except in accordance with Schedule V. A provision that would increase that pay, whether it sits in the memorandum, the articles, an agreement, or a resolution, has no effect unless the increase meets Schedule V. This page does not reproduce the Schedule V table. The limit is a public-company limit. It is not applied to a private company by calling the private company public.
What happens to an excess?
A director who draws a sum in excess of the limit, or without the approval the section requires, refunds it to the company within two years, or within such lesser period as the company allows. Until it is refunded, the director holds it in trust for the company. The company does not waive that recovery unless the members pass a special resolution within two years from the date the sum becomes refundable. A default to a bank, a public financial institution, a non-convertible debenture holder, or another secured creditor again requires that creditor’s prior approval before the waiver.
A person who contravenes the section is liable to a penalty of ₹1 lakh, and the company is liable to a penalty of ₹5 lakh. The auditor’s report states whether the remuneration paid is in accordance with the section and whether any director was paid in excess of the limit.
Frequently asked questions
Four questions cover a private company, sitting fees, an independent director, and a waiver.
Does the limit apply to a private company?
No. Section 197 limits the remuneration of a public company. A private company is outside that section.
Do sitting fees count toward the 11 percent?
No. Fees for attending meetings are outside the percentages in section 197. The fee for one meeting cannot exceed the prescribed ceiling of ₹1 lakh.
Can an independent director take a stock option?
No. An independent director is not entitled to a stock option. The director may receive sitting fees, reimbursement of meeting expenses, and a profit-related commission approved by the members.
Can the company waive a refund?
Only by a special resolution passed within two years of the sum becoming refundable. If the company is in default to a bank, a public financial institution, a non-convertible debenture holder, or another secured creditor, that creditor’s prior approval is also required.
Sources
Managerial remuneration of a public company is section 197 of the Companies Act, 2013. Net profits are computed under section 198. Payment where profits are absent or inadequate follows Schedule V.