Nomination and Remuneration Committee – Company Registration in Madurai

Under Companies (Amendment) Act, 2013, the remuneration paid to a director for any services rendered in any other capacity shall not be so included if in the opinion of the Nomination and Remuneration Committee formed under section 178(1) of the 2013 Act or in the opinion of the Board of directors, in cases where the company is not required to constitute Nomination and Remuneration committee, the director possesses the requisite qualification for the practice of the profession. The power which was exercised by the Central Government is now relegated to the Nomination and Remuneration committee or the Board of directors of the company, as the case may be. Section 198(3) of the 1956 Act read with sections 309(3) and 387 of the 1956 Act, permitted a company to pay remuneration to a director or manager by way of monthly payment or at a specified percentage of net profit or partly by another while section 197(6) of the 2013 Act permits remuneration to be paid to a director or manager (not restricted to those in whole time employment) by way of monthly payments or at a specified percentage of net profit or partly by one and partly by another. It is now no longer restricted to a director in whole time employment or managing director.

Broadly a person to be remunerated as a Managing Director or Whole-time Director or manager will fall under one of the following cases:

• Profit making company and the person proposed to be appointed as a managing or Whole-time director or manager is complaint with part 1 and part 2 Section 1 of Schedule 4.
• Loss making company or company with inadequate profits and complaint with Part 1 as well as Part 2 section 2 A of Schedule 5.
• Person proposed to be appointed not complying with Part 1 of Schedule 5.
• Where remuneration in excess of the limits under Schedule 5 is proposed to be paid. Approval of the shareholders will be sufficient in cases falling under A and B) above as they are covered in Part 1 and Part 2 read with Part 3 of the Schedule 5 to the 2013 Act. It is pertinent to note that the second provision to section 197(1) of 2013 Act (for payment of remuneration in excess of 5% or 10% or 1% or 3% of the net profits as the case may be) does not specify the nature of resolution , but it is advisable to pass a special resolution in such cases.

Limits on remuneration

A plain reading of clauses (A) and (B) of the sub-clause (2) to the second provision to section 197(1) indicate that for payment of commission, to non-executive directors, not exceeding 1% or 3% of the net profits of the company does not require approval of the shareholders but as per section 197(7) approval of the shareholders is necessary in such cases too. This appears to be a drafting issue and the intention of the statute appears to be one where approval of the shareholders is necessary only if such commission proposed to be paid to the non-executive directors exceeds 1% or 3% as the case may be. A newly incorporated public company may pay remuneration in excess of the limits under schedule 5 and this relaxation to pay remuneration up to two times the amount permissible under section 2 of schedule 5 is available for a period of seven years form the date of incorporation of the company.

Remuneration for independent directors

Section 197(7) of the 2013 Act, contains provisions relating to payment of remuneration to an independent director. It prohibits grant of stock options to Independent director, in lines with SEBI regulations. ESOPs granted earlier to non-executive non-promoter directors which were exercised will fall under section 149(6) of the 2013 Act and will affect the independence of the directors. An independent director shall receive fees for attending meetings of Board and Committees, expenses for attending such meetings and profit related commission. This means an independent director cannot be paid a monthly remuneration. However, commission which is already accrued for the previous year may be paid as monthly remuneration in the subsequent year. The section is in the nature of an enabling provision.

Other compliance requirements relating to disclosures

Section 197(12), (13) and (14) of the 2013 Act are new provisions relating to disclosure in Board’s report, premium paid on directors & directors liability policy and receiving of commission from any holding or subsidiary company. A special resolution passed by a company, which has inadequate profits or is incurring losses, for payment of remuneration to a managing director, Whole-time Director, manager shall be valid for a period of three years, as per the provisions of Schedule 5 Part 2 section 2.

Applicability of section 196 and 197 of the 2013 act to private Companies

While a private company is subjected to the requirement of section 196 of the 2013 act relating to appointment of Managing Director, Whole-time Director or Manager, provisions of section 197 relating to limits of managerial remuneration are not applicable to a private company. Therefore, a private company may pay remuneration in excess of eleven percent of net profit. A private company is not required to have a nomination and remuneration committee under section 178(1) of the 2013 Act. Section 197(1) of the 2013 Act makes it clear that the limits on managerial remuneration are applicable only to public companies. While section 197(3) of the 2013 Act refers to a company and not public company as referred in section 197(1), the intention of the statute appears to be to cover only public companies under section 197 and hence provisions of section 197 relating to remuneration may not be applicable to a private company. Further section 197(3) refers to section 197(1) and (2) which refers to limits on remuneration and such limits on remuneration are applicable only to “companies”, but this can be understood as public companies. Section 197(3) of the 2013 Act has raised a doubt as to whether schedule 5 of the 2013 Act shall be applicable to a private company with no or inadequate profits. This according to the editor does not appear to be the intention of the statute as section 197 overrides section 197(1) and (2) which only deal with public companies with adequate profits and not private companies. Private companies are in any event outside the purview of section 197(1) and (2) of the 2013 Act. The question is of limits of remuneration in case of a public company with adequate profits and one with inadequate or no profits. This Schedule 5 is partly applicable to private companies (i.e. in relation to part 1 that deals with appointment), and partly not applicable to private companies (i.e. Part 2 that deals with remuneration).

Remuneration by way of stock options to directors

The grant of stock options to employees, and specifically directors, will be governed by section 62(1)(b) of the 2013 Act, read with regulations and Guidelines issued by SEBI. SEBI has issued on 28-10-14 the SEBI (Share Based Employee Benefits) Regulations, 2014. Rule 12 of the Companies (share capital and debentures) Rules, 2014, also govern the issue of shares to employees. There can be two routes by which stock options may be granted to employees (including directors). These are (a) Direct route, where fresh allotment of equity shares is made by the companies to the employees as and when fresh allotment of equity shares is made by the companies to the employees as and when they exercise their options and (B) Trust route, where the company issues shares to a trust, for the administration of ESOP, which will onward transfer the shares to employees. Thus, directors can be allotted shares as part of an employee stock option scheme provided the following conditions are satisfied:

• The director is not an Independent Director (as provided by section 197(7) of the 2013 Act).
• The director does not belong to the promoter group or promoter family (section 62(1)(b) read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
• The director does not hold either directly or indirectly more than 10% of outstanding equity shares of the company.(section 62(1)(b) read with Rule 12 of the Companies (share capital and debentures) Rules, 2014.

The following persons or class of persons will not be entitled to be trustees of a trust formed for administration of ESOPs.

• A director, Key Managerial Personnel (KMP) or promoter of the company or its holding, subsidiary or Associate company or any relative of such director, KMP or promoter; or
• Employees or a director who beneficially holds ten percent or more in the paid-up share capital of the company.

Maximum managerial remuneration

Section 197(1) of the 2013 Act was earlier covered in section 198(1) of the 1956 Act (as the total managerial remuneration payable by a public company or a subsidiary of a public company to its directors and its manager, in any financial year, shall not exceed eleven percent of its net profits). Drafting of section 197(1) of the 2013 Act is only to provide better clarity. Second provision to section 197(1) provide flexibility to a company to pay an amount exceeding five percent for all of them collectively, by passing a resolution at a general meeting. The second provision to section 197(1) is similar to provision to section 309(30 of the 1956 Act except that instead of the central Government, approval now need to be taken from the shareholders at a general meeting. The limit of overall remuneration of eleven percent is subject to the provisions of Schedule 5. A company can now pay remuneration exceeding eleven percent of the net profits of the company, if so authorized by the shareholders at a general meeting and if such payment is approved by the Central Government. This means that in a profit making company, the managing director or Whole-time director or manager can individually be paid remuneration exceeding 5% of net profits provided the same is approved by the shareholders and provided the same is within the overall remuneration of 10% of net profits for all of them collectively and provided it is within the overall ceiling of 11% of net profits unless necessary approval of approval of the shareholders or the Central Government, as the case may be, is obtained.

Exclusion of sitting fees in total remuneration

Section 197(2) of the 2013 Act is the exact reproduction of section 198(2) of the 1956 Act and sitting fees paid to the directors shall not be counted.

Remuneration in case of no or inadequate profits

Section 197(3) of the 2013 Act corresponds to section 198(4) of the 1956 Act. However there is one difference. Under the 1956 Act it was the necessary to obtain prior approval of the Central Government for payment of remuneration, by a company with no profits or inadequate profits, in excess of the scale in Schedule 13 Part 2 Section 2 (of the 1956 Act) but in the 2013 Act greater flexibility is given to the shareholders and it is not necessary to seek approval of the Central Government if the conditions prescribed in Schedule 5 of the 2013 Act are complied with. Approval of the Central Government is required only if the provisions of Schedule 5 are not met. Approval of the shareholders will need to be taken as per the second provision to section 197(7) of the 2013 act and in accordance with the provisions of Schedule 5 special resolution need to be passed in few cases. Substantial powers have been given to the shareholders in the matter of remuneration of managerial personnel and approval of Central Government is required only in few cases. Section 197 of the 2013 Act as well as Schedule 5 does not specify prior approval of the shareholders if a company has no profits or has inadequate profits and hence it will be sufficient compliance if approval is obtained after such appointment. No approval of central Government is necessary if the remuneration does not exceed the limits prescribed under Section 2 A of Part 2 of Schedule 5 in cases Where the company has no profits or inadequate profits.

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