Managerial Remuneration in unlisted companies having no profits/inadequate profits

MCA has amended Part C of the Schedule XIII of Companies Act vide Notification GSR 70(E) . Earlier Central Government approval was required for Managerial remuneration if the proposed remuneration was exceeding Rs. 4 lacs per month and the Company had inadequate or no profits. The said approval has been dispensed with for unlisted companies.

The below Press Note seeks to explain the rationale behind such amendments.

Ministry of Corporate Affairs Press Note No. 4/2011 dated 8.2.2011

Companies are divided into private limited and public limited companies. Public limited companies are of two types listed companies (whose sharesare listed on a stock exchange) and unlisted companies.  Normally, the general public does not hold shares in unlisted companies.  Private limitedcompanies are not subject to any limits on managerial remuneration.  Publiclimited companies (listed and unlisted) with no profits/ inadequate profits arecurrently required to approach the Ministry for approval in those cases wherethe remuneration of Directors/ equivalent managerial personnel exceedscertain limits.

2. The matter has been re-examined in the light of the evolving economicand regulatory environment. The primary purpose of regulations over managerial remuneration is to protect stakeholders, particularly shareholdersand creditors.  Unlisted companies are in several respects similar to privatelimited companies. A substantial number of the applications coming to theMinistry fall under this category and the Ministry™s limited manpower isdisproportionately involved in this exercise. In the case of unlisted companiesso long as the conditions specified in Schedule XIII, including specialresolution of shareholders and absence of default on payment to creditors,are fulfilled approval will not be needed hereafter.

3. Accordingly, Schedule XIII of the Companies Act 1956 is beingamended to provide that unlisted companies (which are not subsidiaries oflisted companies) shall not require Government approval for managerialremuneration in cases where they have no profits/ inadequate profits, provided they meet the other conditions stipulated in the Schedule.