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CHAPTER XIII

 

APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL

 
 
196. Appointment of managing director, whole-time director or manager.

(1) No company shall appoint or employ at the same time a managing director and
a manager.
(2) No company shall appoint or re-appoint any person as its managing director,
whole-time director or manager for a term exceeding five years at a time:
Provided that no re-appointment shall be made earlier than one year before the expiry
of his term.
(3) No company shall appoint or continue the employment of any person as managing
director, whole-time director or manager who —
(a) is below the age of twenty-one years or has attained the age of seventy
years:
Provided that appointment of a person who has attained the age of seventy
years may be made by passing a special resolution in which case the explanatory
statement annexed to the notice for such motion shall indicate the justification for
appointing such person;
(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;
(c) has at any time suspended payment to his creditors or makes, or has at any
time made, a composition with them; or
(d) has at any time been convicted by a court of an offence and sentenced for a
period of more than six months.
(4) Subject to the provisions of section 197 and Schedule V, a managing director,
whole-time director or manager shall be appointed and the terms and conditions of such
appointment and remuneration payable be approved by the Board of Directors at a meeting
which shall be subject to approval by a resolution at the next general meeting of the company
and by the Central Government in case such appointment is at variance to the conditions
specified in that Schedule:
Provided that a notice convening Board or general meeting for considering such
appointment shall include the terms and conditions of such appointment, remuneration
payable and such other matters including interest, of a director or directors in such
appointments, if any:
Provided further that a return in the prescribed form shall be filed within sixty days of
such appointment with the Registrar.
(5) Subject to the provisions of this Act, where an appointment of a managing director,
whole-time director or manager is not approved by the company at a general meeting, any act
done by him before such approval shall not be deemed to be invalid.
 
 
 
197. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits.

(1) The total managerial remuneration payable by a public company, to its directors,
including managing director and whole-time director, and its manager in respect of any
financial year shall not exceed eleven per cent. of the net profits of that company for that
financial year computed in the manner laid down in section 198 except that the remuneration
of the directors shall not be deducted from the gross profits:
Provided that the company in general meeting may, with the approval of the Central
Government, authorise the payment of remuneration exceeding eleven per cent. of the net
profits of the company, subject to the provisions of Schedule V:
Provided further that, except with the approval of the company in general meeting,—
(i) the remuneration payable to any one managing director; or whole-time director
or manager shall not exceed five per cent. of the net profits of the company and if there
is more than one such director remuneration shall not exceed ten per cent. of the net
profits to all such directors and manager taken together;
(ii) the remuneration payable to directors who are neither managing directors
nor whole-time directors shall not exceed,—
(A) one per cent. of the net profits of the company, if there is a managing
or whole-time director or manager;
(B) three per cent. of the net profits in any other case.
(2) The percentages aforesaid shall be exclusive of any fees payable to directors under
sub-section (5).
(3) Notwithstanding anything contained in sub-sections (1) and (2), but subject to
the provisions of Schedule V, if, in any financial year, a company has no profits or its profits
are inadequate, the company shall not pay to its directors, including any managing or wholetime
director or manager, by way of remuneration any sum exclusive of any fees payable to
directors under sub-section (5) hereunder except in accordance with the provisions of
Schedule V and if it is not able to comply with such provisions, with the previous approval
of the Central Government.
(4) The remuneration payable to the directors of a company, including any managing
or whole-time director or manager, shall be determined, in accordance with and subject to the
provisions of this section, either by the articles of the company, or by a resolution or, if the
articles so require, by a special resolution, passed by the company in general meeting and
the remuneration payable to a director determined aforesaid shall be inclusive of the
remuneration payable to him for the services rendered by him in any other capacity:
Provided that any remuneration for services rendered by any such director in other
capacity shall not be so included if—
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee, if the company
is covered under sub-section (1) of section 178, or the Board of Directors in other
cases, the director possesses the requisite qualification for the practice of the profession.
(5) A director may receive remuneration by way of fee for attending meetings of the
Board or Committee thereof or for any other purpose whatsoever as may be decided by the
Board:
Provided that the amount of such fees shall not exceed the amount as may be prescribed:
Provided further that different fees for different classes of companies and fees in
respect of independent director may be such as may be prescribed.
(6) A director or manager may be paid remuneration either by way of a monthly payment
or at a specified percentage of the net profits of the company or partly by one way and partly
by the other.
(7) Notwithstanding anything contained in any other provision of this Act but subject
to the provisions of this section, an independent director shall not be entitled to any stock
option and may receive remuneration by way of fees provided under sub-section (5),
reimbursement of expenses for participation in the Board and other meetings and profit
related commission as may be approved by the members.
(8) The net profits for the purposes of this section shall be computed in the manner
referred to in section 198.
(9) If any director draws or receives, directly or indirectly, by way of remuneration any
such sums in excess of the limit prescribed by this section or without the prior sanction of the
Central Government, where it is required, he shall refund such sums to the company and until
such sum is refunded, hold it in trust for the company.
(10) The company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless permitted by the Central Government.
(11) In cases where Schedule V is applicable on grounds of no profits or inadequate
profits, any provision relating to the remuneration of any director which purports to increase
or has the effect of increasing the amount thereof, whether the provision be contained in the
company’s memorandum or articles, or in an agreement entered into by it, or in any resolution
passed by the company in general meeting or its Board, shall not have any effect unless such
increase is in accordance with the conditions specified in that Schedule and if such conditions
are not being complied, the approval of the Central Government had been obtained.
(12) Every listed company shall disclose in the Board’s report, the ratio of the
remuneration of each director to the median employee’s remuneration and such other details
as may be prescribed.
(13) Where any insurance is taken by a company on behalf of its managing director,
whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company
Secretary for indemnifying any of them against any liability in respect of any negligence,
default, misfeasance, breach of duty or breach of trust for which they may be guilty in
relation to the company, the premium paid on such insurance shall not be treated as part of
the remuneration payable to any such personnel:
Provided that if such person is proved to be guilty, the premium paid on such insurance
shall be treated as part of the remuneration.
(14) Subject to the provisions of this section, any director who is in receipt of any
commission from the company and who is a managing or whole-time director of the company
shall not be disqualified from receiving any remuneration or commission from any holding
company or subsidiary company of such company subject to its disclosure by the company
in the Board’s report.
(15) If any person contravenes the provisions of this section, he shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees.
 
 
 
198.Calculation of profits.

(1) In computing the net profits of a company in any financial year for the
purpose of section 197,—
(a) credit shall be given for the sums specified in sub-section (2), and credit
shall not be given for those specified in sub-section (3); and
(b) the sums specified in sub-section (4) shall be deducted, and those specified
in sub-section (5) shall not be deducted.
(2) In making the computation aforesaid, credit shall be given for the bounties and
subsidies received from any Government, or any public authority constituted or authorised
in this behalf, by any Government, unless and except in so far as the Central Government
otherwise directs.
(3) In making the computation aforesaid, credit shall not be given for the following
sums, namely:—
(a) profits, by way of premium on shares or debentures of the company, which
are issued or sold by the company;
(b) profits on sales by the company of forfeited shares;
(c) profits of a capital nature including profits from the sale of the undertaking
or any of the undertakings of the company or of any part thereof;
(d) profits from the sale of any immovable property or fixed assets of a capital
nature comprised in the undertaking or any of the undertakings of the company,
unless the business of the company consists, whether wholly or partly, of buying and
selling any such property or assets:
Provided that where the amount for which any fixed asset is sold exceeds the
written-down value thereof, credit shall be given for so much of the excess as is not
higher than the difference between the original cost of that fixed asset and its writtendown
value;
(e) any change in carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on measurement of the
asset or the liability at fair value.
(4) In making the computation aforesaid, the following sums shall be deducted, namely:—
(a) all the usual working charges;
(b) directors’ remuneration;
(c) bonus or commission paid or payable to any member of the company’s staff,
or to any engineer, technician or person employed or engaged by the company, whether
on a whole-time or on a part-time basis;
(d) any tax notified by the Central Government as being in the nature of a tax on
excess or abnormal profits;
(e) any tax on business profits imposed for special reasons or in special
circumstances and notified by the Central Government in this behalf;
(f) interest on debentures issued by the company;
(g) interest on mortgages executed by the company and on loans and advances
secured by a charge on its fixed or floating assets;
(h) interest on unsecured loans and advances;
(i) expenses on repairs, whether to immovable or to movable property, provided
the repairs are not of a capital nature;
(j) outgoings inclusive of contributions made under section 181;
(k) depreciation to the extent specified in section 123;
(l) the excess of expenditure over income, which had arisen in computing the
net profits in accordance with this section in any year which begins at or after the
commencement of this Act, in so far as such excess has not been deducted in any
subsequent year preceding the year in respect of which the net profits have to be
ascertained;
(m) any compensation or damages to be paid in virtue of any legal liability
including a liability arising from a breach of contract;
(n) any sum paid by way of insurance against the risk of meeting any liability
such as is referred to in clause (m);
(o) debts considered bad and written off or adjusted during the year of account.
(5) In making the computation aforesaid, the following sums shall not be deducted,
namely:—
(a) income-tax and super-tax payable by the company under the Income-tax
Act, 1961, or any other tax on the income of the company not falling under clauses (d)
and (e) of sub-section (4);
(b) any compensation, damages or payments made voluntarily, that is to say,
otherwise than in virtue of a liability such as is referred to in clause (m) of sub-section (4);
(c) loss of a capital nature including loss on sale of the undertaking or any of the
undertakings of the company or of any part thereof not including any excess of the
written-down value of any asset which is sold, discarded, demolished or destroyed
over its sale proceeds or its scrap value;
(d) any change in carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on measurement of the
asset or the liability at fair value.
 
 
 
199.Recovery of remuneration in certain cases.

Without prejudice to any liability incurred under the provisions of this Act or any
other law for the time being in force, where a company is required to re-state its financial
statements due to fraud or non-compliance with any requirement under this Act and the rules
made thereunder, the company shall recover from any past or present managing director or
whole-time director or manager or Chief Executive Officer (by whatever name called) who,
during the period for which the financial statements are required to be re-stated, received the
remuneration (including stock option) in excess of what would have been payable to him as
per restatement of financial statements.
 
 
 
200.Central Government or company to fix limit with regard to remuneration.

Notwithstanding anything contained in this Chapter, the Central Government or
a company may, while according its approval under section 196, to any appointment or to
any remuneration under section 197 in respect of cases where the company has inadequate
or no profits, fix the remuneration within the limits specified in this Act, at such amount or
percentage of profits of the company, as it may deem fit and while fixing the remuneration, the
Central Government or the company shall have regard to—
(a) the financial position of the company;
(b) the remuneration or commission drawn by the individual concerned in
any other capacity;
(c) the remuneration or commission drawn by him from any other company;
(d) professional qualifications and experience of the individual concerned;
(e) such other matters as may be prescribed.
 
 
 
201. Forms of, and procedure in relation to, certain applications.

(1) Every application made to the Central Government under this Chapter shall be
in such form as may be prescribed.
(2) (a) Before any application is made by a company to the Central Government
under any of the sections aforesaid, there shall be issued by or on behalf of the company
a general notice to the members thereof, indicating the nature of the application proposed
to be made.
(b) Such notice shall be published at least once in a newspaper in the principal language
of the district in which the registered office of the company is situate and circulating in that
district, and at least once in English in an English newspaper circulating in that district.
(c) The copies of the notices, together with a certificate by the company as to the due
publication thereof, shall be attached to the application.
 
 
 
202.Compensation for loss of office of managing or whole-time director or manager.

(1) A company may make payment to a managing or whole-time director or manager,
but not to any other director, by way of compensation for loss of office, or as consideration
for retirement from office or in connection with such loss or retirement.
(2) No payment shall be made under sub-section (1) in the following cases, namely:—
(a) where the director resigns from his office as a result of the reconstruction of
the company, or of its amalgamation with any other body corporate or bodies corporate,
and is appointed as the managing or whole-time director, manager or other officer of
the reconstructed company or of the body corporate resulting from the amalgamation;
(b) where the director resigns from his office otherwise than on the reconstruction
of the company or its amalgamation as aforesaid;
(c) where the office of the director is vacated under sub-section (1) of section 167;
(d) where the company is being wound up, whether by an order of the Tribunal
or voluntarily, provided the winding up was due to the negligence or default of the
director;
(e) where the director has been guilty of fraud or breach of trust in relation to, or
of gross negligence in or gross mismanagement of, the conduct of the affairs of the
company or any subsidiary company or holding company thereof; and
(f) where the director has instigated, or has taken part directly or indirectly in
bringing about, the termination of his office.
(3) Any payment made to a managing or whole-time director or manager in pursuance
of sub-section (1) shall not exceed the remuneration which he would have earned if he had
been in office for the remainder of his term or for three years, whichever is shorter, calculated
on the basis of the average remuneration actually earned by him during a period of three
years immediately preceding the date on which he ceased to hold office, or where he held the
office for a lesser period than three years, during such period:
Provided that no such payment shall be made to the director in the event of the
commencement of the winding up of the company, whether before or at any time within
twelve months after, the date on which he ceased to hold office, if the assets of the company
on the winding up, after deducting the expenses thereof, are not sufficient to repay to the
shareholders the share capital, including the premiums, if any, contributed by them.
(4) Nothing in this section shall be deemed to prohibit the payment to a managing or
whole-time director, or manager, of any remuneration for services rendered by him to the
company in any other capacity.
 
 
 
203.Appointment of key managerial personnel.

(1) Every company belonging to such class or classes of companies as may be
prescribed shall have the following whole-time key managerial personnel,—
(i) managing director, or Chief Executive Officer or manager and in their absence,
a whole-time director;
(ii) company secretary; and
(iii) Chief Financial Officer :
Provided that an individual shall not be appointed or reappointed as the chairperson
of the company, in pursuance of the articles of the company, as well as the managing director
or Chief Executive Officer of the company at the same time after the date of commencement
of this Act unless,—
(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesses:
Provided further that nothing contained in the first proviso shall apply to such class of
companies engaged in multiple businesses and which has appointed one or more Chief
Executive Officers for each such business as may be notified by the Central Government.
(2) Every whole-time key managerial personnel of a company shall be appointed by
means of a resolution of the Board containing the terms and conditions of the appointment
including the remuneration.
(3) A whole-time key managerial personnel shall not hold office in more than one
company except in its subsidiary company at the same time:
Provided that nothing contained in this sub-section shall disentitle a key
managerial personnel from being a director of any company with the permission of the
Board:
Provided further that whole-time key managerial personnel holding office in more than
one company at the same time on the date of commencement of this Act, shall, within a period
of six months from such commencement, choose one company, in which he wishes to
continue to hold the office of key managerial personnel:
Provided also that a company may appoint or employ a person as its managing director,
if he is the managing director or manager of one, and of not more than one, other company
and such appointment or employment is made or approved by a resolution passed at a
meeting of the Board with the consent of all the directors present at the meeting and of which
meeting, and of the resolution to be moved thereat, specific notice has been given to all the
directors then in India.
(4) If the office of any whole-time key managerial personnel is vacated, the resulting
vacancy shall be filled-up by the Board at a meeting of the Board within a period of six
months from the date of such vacancy.
(5) If a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees and every director and key managerial personnel of the company who is in
default shall be punishable with fine which may extend to fifty thousand rupees and where
the contravention is a continuing one, with a further fine which may extend to one thousand
rupees for every day after the first during which the contravention continues.
 
 
 
204.Secretarial audit for bigger companies.

(1) Every listed company and a company belonging to other class of companies
as may be prescribed shall annex with its Board’s report made in terms of sub-section (3) of
section 134, a secretarial audit report, given by a company secretary in practice, in such form
as may be prescribed.
(2) It shall be the duty of the company to give all assistance and facilities to the
company secretary in practice, for auditing the secretarial and related records of the
company.
(3) The Board of Directors, in their report made in terms of sub-section (3) of
section 134, shall explain in full any qualification or observation or other remarks made by
the company secretary in practice in his report under sub-section (1).
(4) If a company or any officer of the company or the company secretary in practice,
contravenes the provisions of this section, the company, every officer of the comapny or the
company secretary in practice, who is in default, shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to five lakh rupees.
 
 
 
205. Functions of company secretary.  

(1) The functions of the company secretary shall include,—
(a) to report to the Board about compliance with the provisions of this Act, the
rules made thereunder and other laws applicable to the company;
(b) to ensure that the company complies with the applicable secretarial standards;
(c) to discharge such other duties as may be prescribed.
Explanation.—For the purpose of this section, the expression “secretarial standards”
means secretarial standards issued by the Institute of Company Secretaries of India constituted
under section 3 of the Company Secretaries Act, 1980 and approved by the Central
Government.
(2) The provisions contained in section 204 and section 205 shall not affect the duties
and functions of the Board of Directors, chairperson of the company, managing director or
whole-time director under this Act, or any other law for the time being in force.