Appointment & Renumeration of Managerial Personnel
Section 196. Appointment of managing director, whole-time director or manager
196(1).
A company cannot appoint both a Managing Director (MD) and a Manager at the same time.
These two roles have overlapping powers and duties, so only one of them can be in place at a time to avoid conflict in management.
196(2).
A company cannot appoint or reappoint a person as Managing Director, Whole-time Director, or Manager for a period longer than 5 years at a time.
However, reappointment can be made within one year before the expiry of the current term, but not earlier than that.
196(3).
A company cannot appoint or continue any person as MD, WTD, or Manager if the person:
(a) Is below 21 years of age or has attained the age of 70 years.
However, a person older than 70 years can still be appointed if a special resolution is passed with proper justification.
If such a special resolution is not passed but the majority of votes are in favour of the appointment, and the Central Government approves it upon an application by the Board, the appointment will still be valid.
(b) Is an undischarged insolvent or has ever been adjudged insolvent.
(c) Has ever suspended payments to creditors or entered into a composition with them.
(d) Has ever been convicted by a court and sentenced to imprisonment for more than six months.
196(4).
The appointment and remuneration of a Managing Director, Whole-time Director, or Manager must:
Be approved by the Board of Directors at a meeting,
Then be approved by shareholders through a resolution in the next general meeting, and
if the appointment does not meet the conditions under Part I of Schedule V, it must also be approved by the Central Government.
Additional requirements:
The notice for the Board or general meeting must include full details of the proposed appointment, remuneration, and any interest of directors in it.
A return regarding the appointment must be filed with the Registrar of Companies (ROC) within 60 days.
196(5).
If the company later disapproves the appointment at the general meeting, any acts done by the person before such disapproval will still be valid.
This means that the validity of their earlier actions will not be affected just because the appointment was later rejected.
Section 197. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits
197(1).
The total managerial remuneration payable by a public company to all its directors (including Managing Director, Whole-time Director, and Manager) in a financial year cannot exceed 11% of the company’s net profits for that year, calculated as per Section 198.
While computing this, the directors’ remuneration is not deducted from gross profits.
However, the company may pay more than 11% if approved by shareholders in a general meeting and in accordance with Schedule V.
Further limits (without a special resolution):
For MD, WTD, or Manager :
Any one person: up to 5% of net profits.
If more than one: total remuneration up to 10% together.
For other (non-executive) directors:
1% of net profits if the company has an MD, WTD, or Manager.
3% of net profits if it has none of these positions.
If the company has defaulted in paying dues to any bank, financial institution, debenture holders, or other secured creditors, it must first obtain their prior approval before seeking shareholders’ approval.
197(2).
The above percentage limits do not include sitting fees payable to directors under 197(5).
197(3).
If the company has no profits or inadequate profits, it cannot pay any remuneration to its directors (executive or non-executive, including independent directors), except in accordance with Schedule V, which provides specific limits and conditions for such cases.
197(4).
The remuneration payable to directors (including MD, WTD, or Manager) shall be determined as per the company’s articles or by a resolution (or special resolution, if required) in the general meeting.
This remuneration will include payment for services rendered in any other capacity, except when:
(a) The services are of a professional nature, and
(b) The Nomination and Remuneration Committee (or the Board, if there is no committee) is satisfied that the director has the necessary professional
qualifications.
197(5),
A director may receive fees for attending Board meetings, committee meetings, or for any other purpose decided by the Board.
Such fees shall not exceed the prescribed limit.
Different limits may apply for different classes of companies and independent directors, as prescribed.
197(6).
A director or manager may be paid remuneration in any of the following ways:
As a monthly payment, or
As a specified percentage of the company’s net profits, or
Partly by both methods.
197(7).
Omitted.
197(8).
The net profits for the purpose of calculating remuneration shall be computed in the manner laid down in Section 198 of the Companies Act.
197(9).
If any director receives remuneration in excess of the prescribed limit or without the required approval, he must refund the excess amount to the company within two years or within a shorter period as allowed by the company.
Until it is refunded, the director must hold the excess amount in trust for the company.
197(10),
The company cannot waive the recovery of the refundable amount under 197(9) unless it is approved by a special resolution of the company within two years from the date the amount becomes refundable.
If the company has defaulted in paying dues to any bank, public financial institution, non-convertible debenture holders, or any other secured creditor, it must first obtain prior approval from such creditors before passing the special resolution for waiver.
197(11).
When Schedule V applies due to no profits or inadequate profits, any provision to increase a director’s remuneration — whether in the memorandum, articles, agreements, or resolutions, will have no effect unless the increase complies with the conditions specified in Schedule V.
197(12)
Every listed company must disclose in its Board’s Report:
The ratio of the remuneration of each director to the median employee’s remuneration, and
Any other prescribed details.
197(13).
If a company takes insurance on behalf of its MD, WTD, manager, CEO, CFO, or Company Secretary to indemnify them against liabilities such as negligence, default, or breach of duty, the premium paid on such insurance shall not be treated as remuneration.
However, if the person is found guilty, the premium will be treated as part of the remuneration.
197(14).
A managing or whole-time director who receives a commission from the company will not be disqualified from receiving remuneration or commission from its holding or subsidiary company, provided it is disclosed in the company’s Board’s Report.
197(15).
If any person fails to comply with this section:
The individual shall be liable to a penalty of one lakh rupees.
The company shall be liable to a penalty of five lakh rupees.
197(16).
The auditor must state in his report under Section 143:
Whether the remuneration paid to directors complies with this section,
Whether any director received remuneration beyond the limit, and
Any other prescribed details.
197(17).
After the commencement of the Companies (Amendment) Act, 2017, any pending application before the Central Government under the old provisions of this section shall abate.
The company must, within one year of such commencement, obtain approval in accordance with the amended provisions of this section.
Section 198. Calculation of profits
198(1).
When computing the net profits of a company for the purpose of managerial remuneration:
You must add (credit) the items listed under 198(2).
You must not credit the items listed under 198(3).
You must deduct the items mentioned in 198(4).
You must not deduct the items mentioned in 198(5).
198(2).
Items to be credited (added to profits).
The company shall include in its profit calculation:
Bounties and subsidies received from the Central or State Government or any public authority, unless the Central Government directs otherwise.
For example, if a company receives a subsidy for industrial development or export promotion, that amount is added to its profits unless the Government specifies otherwise.
198(3).
Items not to be credited (excluded from profit):
The following must not be treated as profits while calculating managerial remuneration:
(a) Premium on shares or debentures, unless the company is an investment company (as defined under Section 186).
(b) Profit from the sale of forfeited shares.
(c) Capital profits, such as profits from the sale of the company’s entire undertaking or any part of it.
(d) Profit from the sale of fixed assets or immovable property, unless the company’s business itself involves buying and selling such assets.However, if the selling price exceeds the written down value, the difference up to the original cost of the asset may be credited.
(e) Any change in the carrying amount of assets or liabilities recognized directly in equity reserves or profit and loss surplus because of fair value adjustments.
(f) Any unrealised or notional gains or revaluation gains on assets, since these are paper profits, not actual earnings.
198(4).
Items to be deducted (expenses to be subtracted):
The following must be deducted when computing net profits:
(a) All usual working charges such as rent, salaries, and electricity.
(b) Directors’ remuneration already paid.
(c) Bonuses or commissions paid or payable to employees, engineers, or consultants.
(d) Taxes notified by the Central Government as being on excess or abnormal profits.
(e) Taxes on business profits imposed for special reasons or in special circumstances, as notified by the Government.
(f) Interest on debentures issued by the company.
(g) Interest on mortgages or secured loans secured by fixed or floating assets.
(h) Interest on unsecured loans and advances.
(i) Expenses on repairs to property or assets, excluding capital expenditure.
(j) Outgoings, including contributions under Section 181, such as charitable contributions approved by the Board.
(k) Depreciation as per Section 123.
(l) Past year’s losses - Any excess of expenditure over income from previous years, if not already adjusted.
(m) Compensation or damages payable due to any legal liability or breach of contract.
(n) Insurance premiums paid to cover such liabilities.
(o) Bad debts written off or adjusted during the year.
198(5).
Items not to be deducted:
The following must not be subtracted when computing profits:
(a) Income tax or super tax payable under the Income Tax Act or any other tax on income, except the special taxes mentioned in clauses (4)(d) and (4)(e).
(b) Voluntary payments, such as compensation, damages, or payments made voluntarily, not legally required.
(c) Capital losses - Llosses from the sale of the company’s undertaking or part thereof, except where it represents the excess of written down value over sale
price or scrap value.
(d) Unrealised or fair value changes in asset or liability values recorded directly in equity or reserves.These exclusions prevent artificial reduction of profits and maintain consistency in determining managerial remuneration.
Section 199. Recovery of remuneration in certain cases
If a company has to restate its financial statements because of:
(a) Fraud, or
(b) Non-compliance with any provision of the Companies Act or related rules,
Then the company must recover any excess remuneration paid during the affected period.
The recovery applies to:
The present or past Managing Director (MD)
Whole-Time Director (WTD)
Manager
Chief Executive Officer (CEO), by whatever title called.
The company must recover from them any remuneration received beyond what they would have been entitled to if the financial statements had been correctly prepared.
This recovery includes stock options, bonuses, or any other performance-based incentives that were granted on the basis of the incorrect financial statements.
Section 200. Central Government or company to fix a limit with regard to remuneration
This section has an overriding effect and it takes precedence even if other provisions in the same Chapter state otherwise.
Even if the usual profit-based limits on managerial pay cannot be applied (for instance, when a company has no or inadequate profits), this section allows an exception.
When the company is giving approval for the appointment or remuneration of its Managing Director, Whole-Time Director, or Manager under Section 196 and Section 197, and the company has no profits or inadequate profits, the company may still decide a suitable remuneration amount.
However, such remuneration must be fixed only within the limits prescribed in Schedule V of the Companies Act.
While deciding the amount of remuneration, the company must consider the following factors:
(a) Financial position of the company - The company’s overall financial health and stability.
(b) Remuneration or commission drawn by the individual in any other capacity.
(For example, if the same person is earning from another role in the same company (such as a consultant or technical expert).
(c) Remuneration or commission drawn from any other company – If the individual is a director or employee in another company and earns income from there.
(d) Professional qualifications and experience – The person’s expertise, skill level, and experience should influence what is reasonable.
(e) Other prescribed matters – Any additional factors that may be specified in the rules.
201. Forms of, and procedure in relation to, certain applications
201(1).
Every application made to the Central Government under Section 196 (relating to the appointment of Managing Director, Whole-Time Director, or Manager) shall be made in the prescribed form.
201(2).
Before any such application is made by a company to the Central Government:
(a) The company must issue a general notice to its members, indicating the nature of the application proposed to be made.
(b) This notice must be published at least once:
In a newspaper printed in the principal language of the district where the company’s registered office is situated and circulating in that district, and
At least once in English in an English newspaper circulating in the same district.
(c) Copies of these notices, along with a certificate by the company confirming proper publication, must be attached to the application submitted to the Central Government.
Section 202. Compensation for loss of office of managing or whole-time director or manager
202(1).
A company may make payment to a Managing Director, Whole-Time Director, or Manager (but not to any other director) as compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement.
202(2).
No payment shall be made under 202(1) in the following cases:
(a) When the director resigns due to the reconstruction of the company or amalgamation with another body corporate, and is appointed as Managing Director, Whole-Time Director, Manager, or any other officer in the reconstructed or amalgamated company.
(b) When the director resigns voluntarily, not due to reconstruction or amalgamation.
(c) When the director’s office is vacated under Section 167(1).
(d) When the company is wound up, either by an order of the Tribunal or voluntarily, and the winding up is due to the negligence or default of the director.
(e) When the director has been guilty of fraud, breach of trust, gross negligence, or gross mismanagement in conducting the affairs of the company or its subsidiary or holding company.
(f) When the director has instigated or taken part, directly or indirectly, in bringing about the termination of his office.
202(3).
Any payment made under 202(1) shall not exceed the remuneration the director would have earned for the remainder of his term or for three years, whichever is shorter.
This amount is calculated based on the average remuneration actually earned during the three years immediately preceding the date he ceased to hold office, or during the shorter period if he served for less than three years.
No such payment shall be made if the company goes into winding up (before or within twelve months after the director leaves office) and the company’s assets, after deducting winding-up expenses, are insufficient to repay shareholders their share capital (including premiums, if any).
202(4).
This section does not prohibit payment to a Managing Director, Whole-Time Director, or Manager for services rendered in any other capacity to the company.
Section 203. Appointment of key managerial personnel
203(1).
Every company belonging to the prescribed class or classes must have the following whole-time Key Managerial Personnel (KMP):
(i) Managing Director (MD), or Chief Executive Officer (CEO), or Manager and in their absence, a Whole-Time Director.
(ii) Company Secretary (CS).
(iii) Chief Financial Officer (CFO).
An individual cannot be appointed or reappointed as both the Chairperson of the company and the Managing Director or Chief Executive Officer at the same time, unless:
(a) The Articles of the company provide otherwise, or
(b) The company does not carry on multiple businesses.
This restriction does not apply to companies engaged in multiple businesses that have appointed one or more CEOs for each such business, as may be notified by the Central Government.
203(2).
Every whole-time Key Managerial Personnel must be appointed through a Board resolution specifying the terms, conditions, and remuneration of the appointment.
203(3).
A whole-time KMP cannot hold office in more than one company at the same time, except in its subsidiary company.
A KMP may still serve as a director in another company with the permission of the Board.
If a whole-time KMP holds office in more than one company at the commencement of this Act, they must, within six months, choose one company where they wish to continue as KMP.
A company may appoint or employ a person as its Managing Director even if that person is already a Managing Director or Manager of one, and not more than one, other company provided the appointment is approved by a Board resolution passed with the consent of all directors present, and specific notice of the meeting and resolution has been given to all directors in India.
203(4).
If the office of any whole-time KMP becomes vacant, the Board must fill the vacancy at a Board meeting within six months from the date of such vacancy.
203(5).
If a company fails to comply with the provisions of this section:
The company is liable to a penalty of ₹5,00,000, and
Every director and KMP in default is liable to a penalty of ₹50,000, plus a further penalty of ₹1,000 per day if the default continues.
Section 204. Secretarial audit for bigger companies
204(1).
Every listed company and such other classes of companies as may be prescribed must annex a Secretarial Audit Report with its Board’s Report under Section 134(3).
This report must be prepared and signed by a Company Secretary in Practice in the prescribed form.
204(2).
It is the duty of the company to provide all necessary assistance, information, and access to records to the Company Secretary in Practice for conducting the secretarial audit.
204(3).
The Board of Directors, in its report under Section 134(3), must explain in detail any qualification, observation, or remark made by the Company Secretary in Practice in the secretarial audit report.
204(4).
If a company, any officer, or the Company Secretary in Practice contravenes the provisions of this section, then:
The company, every officer in default, and the Company Secretary in Practice shall each be liable to a penalty of ₹2,00,000.
Section 205. Functions of company secretary
205(1).
The Company Secretary plays a key role in ensuring legal and regulatory compliance. Their main functions are:
(a) To report to the Board about compliance with:
The Companies Act,
Rules made under the Act, and
Other laws applicable to the company.
(b) To ensure compliance with the applicable Secretarial Standards , these are official standards issued by the Institute of Company Secretaries of India (ICSI)
and approved by the Central Government.(c) To perform any other duties that may be prescribed under law or by the company.
Explanation
“Secretarial Standards” refer to professional guidelines issued by ICSI that specify best practices for conducting Board meetings, general meetings, and maintaining company records to ensure proper governance.
205(2).
Duties of the Company Secretary do not reduce or override the responsibilities of:
The Board of Directors,
The Chairperson,
The Managing Director (MD), or
The Whole-Time Director (WTD).
Each of them continues to remain responsible under the Companies Act or any other law in force, even if a Company Secretary is performing compliance functions.
