Remuneration of Director

When a company gets started, board of director, employees, back office staff, plays a key role in smooth functioning of the business. Like, employees are paid reward in form of Salary, same way board of directors are paid in form of remuneration for their work as reward. Managerial remuneration includes pay, compensation or reward for any work which is performed by a managerial person. A key managerial person (KMP) is well defined in Companies Act, 2013. KMP refers to people who have authority and responsibility for directing, planning and controlling the activities of the company. Chief Executive Office, Chief Financial Officer, Company Secretary, Whole Time Director are the Key Managerial Personnel. The concept of KMP is very important to understand for in depth knowledge of remuneration of directors. Companies Act, 2013 has restricted the overall limit for the managerial salary / remuneration of directors.

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What is Maximum Directors remuneration can be Paid ?

As per the provisions of Companies Act, 2013, maximum ceiling for director’s remuneration/salary is applicable to Public Companies and Private company subsidiary of Public company. Private Limited companies are exempt from maximum ceiling for director’s remuneration.

Sec 197 of the Companies Act, 2013, maximum ceiling for director’s remuneration by public companies to its director, whole time director or manager should not exceed the 11% of the net profit of the company in that financial year computed in accordance with section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

Read : Income Tax on Director Salary 

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Category of Remuneration to directors

It can broadly be classified into two categories as under-

I.Managerial Remuneration payable to directors, managing director and whole-time director and its manager

Sr no	Conditions	Maximum Remuneration in any financial year
1	Company with one Managing director/whole time director/manager	5% of the net profits in that financial year
2	Company with more than one Managing director/whole time director/manage	10% of the net profits in that financial year
3	Overall Limit for Remuneration	11% of the net profits in that financial year

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II.Managerial Remuneration payable to directors who are neither managing directors nor whole-time directors

Sr no	Conditions	Maximum Remuneration in any financial year
1	Directors who are neither managing director or whole-time directors and where there is Managing director in the company	1% of the net profits of the company.
2	Directors who are neither managing director or whole-time directors and where there is no Managing director in the company	3% of the net profits of the company.

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Can maximum ceiling for director’s remuneration be paid more than 11% of net profit of the company?

Yes. A public company or a private company subsidiary of Public company can pay managerial remuneration more than 11% of its net profit by complying following procedure.

Step 1: Convey Board Meeting

Step 2: Hold general meeting or Extra Ordinary General Meeting (EOGM) as required

Step 3: Discussion with Remuneration committee and approval of proposal for increase in managerial remuneration

Step 4: Filling of form MGT-14 with concerned Registrar of Companies (ROC) within 30 days from the date of conduct of meeting.

Step 5: Approval or rejection by Registrar of Companies (ROC) depending upon the documents submitted. If ROC is not satisfied with documents, it may raise a query.

Determination of Managerial Remuneration

Managerial remuneration payable to the directors can be determined by-

1. Articles of Association of the company
2. Alteration of Articles of Association of the company by passing special resolution

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What if the company has inadequate Profits or Loss ?

It is a very basic question strikes in mind that where a company does not has profits at all or the profits earned are inadequate, how will a company manage to pay remuneration. According to clause (a), any contribution made to PF (Provident fund), superannuation fund or annuity fund more than the limits of tax under IT Act 1961, shall not be included for the purpose of calculation of managerial remuneration. Whether it is an event of adequate profit or nil profit.The answer to this is that “no amount shall be payable by way of remuneration except if these provisions are followed”

Where the effective capital is:	Limits of yearly remuneration
Negative or less than 5 crores	60 lacs
5 crores and above but less than 100 crores	84 lacs
100 crores and above but less than 250 crores	120 lacs
250 crores and above	120 Lakhs plus 0.01% of the effective capital in excess of 250 Crores

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Sitting Fees to Directors

The directors of the company receives fees for attending various types of meetings of the company and such sitting fees cannot exceed the prescribed limit. Fees for director can be paid either-

1. Monthly basis
2. Specified percentage of the Net profits
3. Partly as monthly and partly on percentage basis

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Can Director remuneration be paid in cash ?

Yes. Director’s remuneration can be paid in cash. For payment of remuneration in cash, the company needs to consider and adhere Income Tax Act, 1961 provisions and sections of payment of Rs 20,000 ceiling. Also with prior consent of board of directors, remuneration can be paid cash to directors and other key personnel in lieu of technical know how or strategical planning or any other service.

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Facilities to Remuneration of director by Company 

Yes. Facilities provided by Company to directors will be considered as remuneration.  A company which give other facilities such as rent free accommodation , farm house , personal , insurance etc. are considered as remuneration in kind. Its not that every remuneration to be paid in monetary terms. Following are some of examples of remuneration paid in kind. 

• Free Accommodation or any amenity
• Company Rest House For accommodation 
• Expenditure on amenities at a concessional rate
• Director life insurance premium , Child Education expenses etc. 
• Expenditure on Indemnify on behalf of Director against any liability in respect of any negligence, default, misfeasance, breach of duty/trust then, in this case, the premium paid on such insurance would be taken as a part of its remuneration.
• Making Payment of director personal expenses 

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Penalty

There are huge penalty for director remuneration provisions for non-compliance of sec 197 of the Companies Act, 201. Minimum fine of Rs.1 Lakh and a maximum fine of Rs. 5 Lakhs for contravention of provisions of sec 197 of the Companies Act, 2013.

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