Updates on Managerial Remuneration

Ministry of Corporate Affairs vide its notification dated March 18, 2021 has notified for commencement of section 32 and 40 of Companies (Amendment) Act, 2020 w.e.f. March 18, 2021.

Further through another notification dated March 18, 2021 amendments got effective in Schedule V of Companies Act, 2013

All these amendments are interlinked to one another. To understand these notifications let’s have a glimpse of section 32 and 40 of Companies Amendment Act, 2020.

Section 32 of Amendment Act,2020 brings Amendment of section 149 of Companies Act, 2013Section 40 of Amendment Act,2020 brings Amendment of section 197 of Companies Act, 2013
In section 149 of the principal Act, in sub-section (9), the following proviso shall be inserted, namely: “Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.”.   In section 197 of the principal Act, in sub-section (3), after the words “whole-time director or manager,”, the words “or any other non-executive director, including an independent director” shall be inserted

Amendment of section 149 of Companies Act, 2013

Section 149 of Companies Act, 2013 deals with the Board of Directors of the Company. Section 149(9) states for payment of remuneration and reimbursement of expenses to an Independent Director.

As per the amendment act, Independent Directors now may get remuneration or other payments even in case of no profit or inadequate profit. Earlier this provision was available for managerial personnel only which included managing director and whole-time director, and its manager.

In absence of specific mention to Independent Directors, in case of loss or inadequate profit Companies not used to pay remuneration to Independent Directors.

This remuneration to the Director will be paid according to schedule V of the Companies Act, 2013 which also got amended vide notification dated March 18,2021.

Amendment of section 197 of Companies Act, 2013

Section 197 of Companies Act, 2013 Overall Maximum Managerial Remuneration and Managerial Remuneration in Case of Absence or Inadequacy of Profits. Section 197(3) of Companies Act, 2013 states that in case of inadequacy of profit or no profit Company can pay remuneration managing or wholetime director or manager as per the criteria laid down in schedule V.

Now after an amendment, Company may pay remuneration in case of loss or inadequate profit to any other non-executive director, including an independent director.

Amendment in Schedule V of Companies Act, 2013

Now moving further to the amendment in schedule V changes are introduced to align them with the amended section.

Section I: Remuneration payable by companies having profits

Section II: Remuneration payable by companies having no profit or inadequate profit

Section III: Remuneration payable by companies having no profit or inadequate profit in certain special circumstances.

In all these sections earlier conditions were mentioned for Managerial Person i.e. managing or wholetime director or manager, pursuant to this amendment in all these sections after the words ―managerial person wherever occurred “other director” is inserted except in clause (i) of the proviso of Section III.

Other Director means a non-executive director or an independent director

Part A of Section II has specified certain limits for payment of Remuneration in case of no profits or inadequate profit, the table also got amended to include the effect of limits for Other Director which is given as below:

S.NoWhere the effective capital (in rupees) isLimit of yearly remuneration payable shall not exceed (in Rs) in case of a managerial personLimit of yearly remuneration payable shall not exceed (in Rs.) in case of other director
Negative or less than 5 crores. 60 Lakhs60 Lakhs
5 crores and above but less than 100 crores.84 Lakhs 84 Lakhs
100 crores and above but less than 250 crores.120 Lakhs 120 Lakhs
250 crores and above120 lakhs plus 0.01% of the effective capital in excess of Rs.250 crores 24 Lakhs plus 0.01% of the effective capital in excess of Rs.250 crores

The crux of these amendment is that the law has given an opportunity to Independent Directors and other non-executive director to receive remuneration or other payments at par with the Managerial Personnel. This is a welcome step as it will boost the morale of other directors working for the Company.

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