Schedule 5 of Companies Act, 2013 : Appointment and Remuneration of Managing / Whole-Time Director

SCHEDULE V[1]

(See sections 196 and 197)

[Effective from 1st April, 2014]

PART I

CONDITIONS TO BE FULFILLED FOR THE APPOINTMENT OF A MANAGING OR WHOLE-TIME DIRECTOR OR A MANAGER WITHOUT THE APPROVAL OF THE CENTRAL GOVERNMENT

Appointments

No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely:—

(a)   he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the following Acts, namely:—

(i)   the Indian Stamp Act, 1899 (2 of 1899);

(ii)   the Central Excise Act, 1944 (1 of 1944);

(iii)   the Industries (Development and Regulation) Act, 1951 (65 of 1951);

(iv)   the Prevention of Food Adulteration Act, 1954 (37 of 1954);

(v)   the Essential Commodities Act, 1955 (10 of 1955);

[2](vi)   the Companies Act, 2013 (18 of 2013) or any previous company law;

(vii)   the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(viii)   the Wealth-tax Act, 1957 (27 of 1957);

(ix)   the Income-tax Act, 1961 (43 of 1961);

(x)   the Customs Act, 1962 (52 of 1962);

(xi)   the Competition Act, 2002 (12 of 2003);

(xii)   the Foreign Exchange Management Act, 1999 (42 of 1999);

(xiii)   the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);

(xiv)   the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(xv)   the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922);

(xvi)   the Prevention of Money-Laundering Act, 2002 (15 of 2003);

[4] [(xvii) the Insolvency and Bankruptcy Code, 2016 (31 of 2016)

(xviii) the Goods and Services Tax Act,2017 (12 of 2017)

(xix) the Fugitive Economic Offenders Act, 2018 (17 of 2018)]

(b)   he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974):

Provided that where the Central Government has given its approval to the appointment of a person convicted or detained under sub-paragraph (a) or sub-paragraph (b), as the case may be, no further approval of the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.

(c)   he has completed the age of twenty-one years and has not attained the age of seventy years:

Provided that where he has attained the age of seventy years; and where his appointment is approved by a special resolution passed by the company in general meeting, no further approval of the Central Government shall be necessary for such appointment;

[5] [***]

(e)   he is resident of India.

Explanation I.—For the purpose of this Schedule, resident in India includes a person who has been staying in India for a continuous period of not less than twelve 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.

Explanation II.—This condition shall not apply to the companies in Special Economic Zones as notified by Department of Commerce from time to time:

Provided that a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person’s appointment.

PART II

REMUNERATION

Section I — Remuneration payable by companies having profits:

Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons not exceeding the limits specified in such section.

[3][Section II 

Remuneration payable by companies having no profit or inadequate profit [6] [***]

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may [7] [***] , pay remuneration to the managerial person not exceeding the limits under (A) and (B) given below:-

(A):

(1)		(2)
Where the effective capital is		Limit of yearly remuneration payable shall not exceed (Rupees)
(i)	Negative or less than 5 crores		60 lakhs
(ii)	5 crores and above but less than 100 crores		84 lakhs
(iii)	100 crores and above but less than 250 crores		120 lakhs
(iv)	250 crores and above		120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores:

[8] [Provided that the remuneration in excess of above Iimits may be paid] if the resolution passed by the shareholders is a special resolution.

Explanation.- It is hereby clarified that for a period less than one year, the limits shall be pro-rated.

(B) In case of a managerial person who is functioning in a professional capacity, [9] [remuneration as per item (A) may be paid], if such managerial person is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates:

Provided that any employee of a company holding shares of the company not exceeding 0.5% of its paid up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company;

Provided further that the limits specified under items (A) and (B) of this section shall apply, if-

(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee;

[10] [(ii) the company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.]

(iii) an ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per [11] [***] item (A) or a special resolution has been passed for payment of remuneration as per item (B), at the general meeting of the company for a period not exceeding three years.

(iv) a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely:

I. General information: (1) Nature of industry

(2) Date or expected date of commencement of commercial production

(3) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus

(4) Financial performance based on given indicators

(5) Foreign investments or collaborations, if any.

II. Information about the appointee:

(1) Background details

(2) Past remuneration

(3) Recognition or a wards

(4.) Job profile and his suitability

(5) Remuneration proposed

(6) Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)

(7) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel, if any.

III. Other information:

(1) Reasons of loss or inadequate profits

(2) Steps taken or proposed to be taken for improvement

(3) Expected increase in productivity and profits in measurable terms

IV. Disclosures

The following disclosures shall be mentioned in the Board of Director’s report under the heading “Corporate Governance”, if any, attached to the financial statement:

• all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc, of all the directors;
• details of fixed component and performance linked incentives along with the performance criteria;
• service contracts, notice period, severance fees; and
• stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.

Explanation: For the purposes of Section II of this part, “Statutory Structure” means any entity which is entitled to hold shares in any company formed under any statute. “.]

Section III — Remuneration payable by companies having no profit or inadequate profit [12] [***] in certain special circumstances:

In the following circumstances a company may, [13] [***], pay remuneration to a managerial person in excess of the amounts provided in Section II above:—

(a)   where the remuneration in excess of the limits specified in Section I or II is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section 197 and 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)   where the company—

(i)   is a newly incorporated company, for a period of seven years from the date of its incorporation, or

(ii)   is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction or National Company Law Tribunal, for a period of five years from the date of sanction of scheme of revival,

it may pay [14] [any remuneration to its managerial persons.]

(c)   where remuneration of a managerial person exceeds the limits in Section II but the remuneration has been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal:

Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified under Section II and the following additional conditions:—

(i)   except as provided in para (a) of this Section, the managerial person is not receiving remuneration from any other company;

(ii)   the auditor or Company Secretary of the company or where the company has not appointed a Secretary, a Secretary in whole-time practice, certifies that 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 under sub-section (4) of section 196.

(iii)   the auditor or Company Secretary or where the company has not appointed a secretary, a secretary in whole-time practice certifies that there is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

[15] [***]

Section IV — Perquisites not included in managerial remuneration:

1. A managerial person shall be eligible for the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II and Section III:—

(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, 1961 (43 of 1961);

(b)   gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and

(c)   encashment of leave at the end of the tenure.

2. In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial person (including a non-resident Indian) shall be eligible to the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II or Section III—

(a)   Children’s education allowance: In case of children studying in or outside India, an allowance limited to a maximum of Rs. 12,000 per month per child or actual expenses incurred, whichever is less. Such allowance is admissible up to a maximum of two children.

(b)   Holiday passage for children studying outside India or family staying abroad: Return holiday passage once in a year by economy class or once in two years by first class to children and to the members of the family from the place of their study or stay abroad to India if they are not residing in India, with the managerial person.

(c)   Leave travel concession: Return passage for self and family in accordance with the rules specified by the company where it is proposed that the leave be spent in home country instead of anywhere in India.

Explanation I.—For the purposes of Section II of this Part, “effective capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

Explanation II.—(a) Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment;

(b) In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

Explanation III.—For the purposes of this Schedule, “family” means the spouse, dependent children and dependent parents of the managerial person.

Explanation IV.—The Nomination and Remuneration Committee while approving the remuneration under Section II or Section III, shall—

(a)   take into account, financial position of the company, trend in the industry, appointee’s qualification, experience, past performance, past remuneration, etc.;

(b)   be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.

Explanation V.—For the purposes of this Schedule, “negative effective capital” means the effective capital which is calculated in accordance with the provisions contained in Explanation I of this Part is less than zero.

Explanation VI.—For the purposes of this Schedule:—

[16] [***]

(B) “Remuneration” means remuneration as defined in clause 78 of section 2 and includes reimbursement of any direct taxes to the managerial person.

Section V — Remuneration payable to a managerial person in two companies:

Subject to the provisions of Sections I to IV, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

PART III

PROVISIONS APPLICABLE TO PARTS I AND II OF THIS SCHEDULE

1. The appointment and remuneration referred to in Part I and Part II of this Schedule shall be subject to approval by a resolution of the shareholders in general meeting.

2. The auditor or the Secretary of the company or where the company is not required to appoint a Secretary, a Secretary in whole-time practice shall certify that the requirement of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar under sub-section (4) of section 196.

PART IV

The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.

NOTES

Exemptions : 

Sub-rule (2) of Rule 7 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that the companies other than listed companies and subsidiary of a listed company may without Central Government approval pay remuneration to its managerial personnel, in the event of no profit or inadequate profit beyond ceiling specified in Section II, Part II of Schedule V, subject to complying with the following conditions namely:—

(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee, if any, and while doing so record in writing the clear reason and justification for payment of remuneration beyond the said limit;

(ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon preference shares and dividend on preference shares for a continuous period of thirty days in the preceding financial year before the date of payment to such managerial personnel;

(iii) the approval of shareholders by way of a special resolution at a general meeting of the company for payment of remuneration for a period not exceeding three years;

(iv) a statement along-with a notice calling the general meeting referred to clause (iii) of sub-rule (2) above, shall contain the information as per sub clause (iv) of second proviso to clause (B) of section II of part-II of Schedule V of the Act including reasons and justification for payment of remuneration beyond the said limit;

(v) the company has filed Balance Sheet and Annual Return which are due to be filed with the Registrar of Companies.

Private companies are given exemption from complying with the provisions of sub-sections (4) and (5) of section 196 relating to appointment of and payment of remuneration to a managing director, whole-time director or manager.

[1]   Corresponds to Schedule XIII of the Companies Act, 1956.

[2] Substituted vide Notification No. F. No. l/5/2013 CL-V dated 12th September, 2016. Prior to the substitution it read as under:
“the Companies Act, 2013”

[3] Substituted vide Notification No. F. No. l/5/2013 CL-V dated 12th September, 2016. Prior to the substitution it read as under:

“Section II — Remuneration payable by companies having no profit or inadequate profit without Central Government approval:

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding the higher of the limits under (A) and (B) given below:—

(A):

(1)		(2)
Where the effective capital is		Limit of yearly remuneration payable shall not exceed (Rupees)
(i)	Negative or less than 5 crores		30 lakhs
(ii)	5 crores and above but less than 100 crores		42 lakhs
(iii)	100 crores and above but less than 250 crores		60 lakhs
(iv)	250 crores and above		60 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores:

Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution.

Explanation.—It is hereby clarified that for a period less than one year, the limits shall be pro-rated.

(B) In the case of a managerial person who was not a security holder holding securities of the company of nominal value of rupees five lakh or more or an employee or a director of the company or not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, — 2.5% of the current relevant profit:

Provided that if the resolution passed by the shareholders is a special resolution, this limit shall be doubled:

Provided further that the limits specified under this section shall apply, if—

(i)   payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee;

(ii)   the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person;

(iii)   a special resolution has been passed at the general meeting of the company for payment of remuneration for a period not exceeding three years;

(iv)   a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely:—

I.General Information:

(1)   Nature of industry

(2)   Date or expected date of commencement of commercial production

(3)   In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus

(4)   Financial performance based on given indicators

(5)   Foreign investments or collaborations, if any.

 

II.Information about the appointee:

(1)   Background details

(2)   Past remuneration

(3)   Recognition or awards

(4)   Job profile and his suitability

(5)   Remuneration proposed

(6)   Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)

(7)   Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel, if any.

 

III. Other information:

(1)   Reasons of loss or inadequate profits

(2)   Steps taken or proposed to be taken for improvement

(3)   Expected increase in productivity and profits in measurable terms.

 

IV. Disclosures:

The following disclosures shall be mentioned in the Board of Director’s report under the heading “Corporate Governance”, if any, attached to the financial statement:—

(i)   all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;

(ii)   details of fixed component and performance linked incentives along with the performance criteria;

(iii)   service contracts, notice period, severance fees;

(iv)   stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.”

[4] Inserted by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[5] Omitted words “(d) where 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;” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[6] Omitted words  “without Central Government approval” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[7] Omitted words  “without Central Government approval” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[8] Substituted for the words “Provided that the above limits shall be doubled” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[9] Substituted for the words “no approval of Central Government is required” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[10] Substituted by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018, prior to substitution it read as under-

“(ii) the company has not committed any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person and in case of a default, the company obtains prior approval from secured creditors for the proposed remuneration and the fact of such prior approval having been obtained is mentioned in the explanatory statement to the notice convening the general meeting;”

[11] Omitted words “the limits laid down in” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[12] Omitted words  “without Central Government approval” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[13] Omitted words  “without Central Government approval” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[14] Substituted for the words “remuneration up to two times the amount permissible under Section II” by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018.

[15]Omitted by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018. Prior to omission it read as under:

“(d)   a company in a Special Economic Zone as notified by Department of Commerce from time to time which has not raised any money by public issue of shares or debentures in India, and has not made any default in India in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in any financial year, may pay remuneration up to Rs. 2,40,00,000 per annum.”

[16] Substituted by Notification No. File Number 1/5/2013-CL-V dated 12th September, 2018, prior to substitution it read as under-

“(A) “current relevant profit” means the profit as calculated under section 198 but without deducting the excess of expenditure over income referred to in sub-section 4(1) thereof in respect of those years during which the managerial person was not an employee, director or shareholder of the company or its holding or subsidiary companies.”