Companies Act Section 197

Companies Act, Section 197: Overall Maximum Managerial Remuneration and Managerial Remuneration in Case of Absence or Inadequacy of Profits

Section 197 of the Companies Act, 2013 governs the remuneration of directors, including the Managing Director (MD), Whole-time Director (WTD), and Manager. It sets limits on compensation, outlines procedures for payment during periods of inadequate or no profits, and aims to ensure fairness, transparency, and stakeholder protection.

1. Limits on Total Managerial Remuneration

Section 197(1) limits total managerial remuneration in a public company to 11% of its net profits (as calculated under Section 198), excluding director remuneration. This cap applies to directors, including the MD, WTD, and Manager. However, it can be exceeded with shareholder approval via a special resolution, subject to Schedule V conditions.

Specific Remuneration Limits for Different Directors and Managers

Managing Director or Whole-time Director or Manager: The remuneration paid to any one managing director, whole-time director, or manager cannot exceed 5% of the net profits of the company.
Multiple MDs or WTDs: If there is more than one managing director or whole-time director or manager, the total remuneration paid to all such individuals cannot exceed 10% of the net profits of the company.
Non-Executive Directors: The remuneration payable to directors who are not managing directors or whole-time directors (i.e., non-executive directors) is subject to the following limits:
One percent of net profits if there is a managing director, whole-time director, or manager in the company.
Three percent of net profits if there is no managing director, whole-time director, or manager.
This structure ensures that the total managerial compensation remains reasonable and that the distribution of profits is not overly skewed toward executive pay, which could harm the company’s financial health or shareholder interests.

2. Remuneration During Absence or Inadequacy of Profits

If a company has no or inadequate profits, it may still pay remuneration to its directors (including MD, WTD, or Manager) only in accordance with Schedule V. Such remuneration excludes director fees under Section 197(5) and is subject to strict conditions to ensure fairness without compromising financial stability.

3. Method of Determining Managerial Remuneration

Managerial remuneration must align with the company’s articles and may be set by a resolution or special resolution in a general meeting. It includes pay for other roles held by the director, except for professional services, which may be paid separately if the director is properly qualified.

4. Director’s Fees for Attending Meetings

Section 197(5) allows directors to receive fees for attending board or committee meetings or for other services, within MCA-prescribed limits. The MCA may set different fee structures for various classes of companies, including higher fees for independent directors, ensuring fairness and alignment with company standards.

5. Payment Methods for Managerial Remuneration

Directors, including MDs, WTDs, or Managers, may be paid via a fixed monthly salary, a percentage of net profits, or a combination of both, allowing flexibility based on the company’s needs and financial position.

6. Refund of Excessive Remuneration

If a director, managing director, whole-time director, or manager receives remuneration that exceeds the limits specified in Section 197, they are required to refund the excess amount to the company. The refund must be made within two years, or any shorter period allowed by the company. Until such a refund is made, the excess remuneration must be held in trust for the company.

7. Waiver of Recovery

A company may waive recovery of excess remuneration by passing a special resolution within two years of it becoming refundable. If in default to secured creditors, their prior approval is also required, ensuring proper oversight and creditor protection.

8. Disclosure of Remuneration in the Board’s Report

Section 197(12) requires listed companies to disclose in the Board’s report each director’s pay ratio to the median employee remuneration, along with other prescribed details, promoting transparency in executive compensation.

9. Insurance Premium for Key Personnel

A company may insure its key officers against liabilities from misconduct or negligence. The premium isn’t treated as remuneration unless the individual is found guilty, in which case it is counted as part of their pay.

10. Commission from Holding or Subsidiary Companies

A director who is already receiving commission from the company and is also a managing or whole-time director will not be disqualified from receiving remuneration or commission from its holding company or subsidiary company. However, such payments must be disclosed in the Board’s report to maintain transparency.

11. Penalty for Default

Non-compliance with Section 197 may result in a penalty of ?1 lakh for individuals and ?5 lakh for companies, aimed at ensuring fair managerial remuneration and protecting stakeholder interests.

12. Auditor’s Report

The auditor of the company must, in their audit report, provide a statement confirming whether the remuneration paid to directors complies with the provisions of Section 197. If any remuneration exceeds the prescribed limits, the auditor must report the excess payments, along with other relevant details, as prescribed by the regulations.