06 August 2010
The amended Companies Act basically says the shareholders should approve the remuneration of the top management. Thus, companies were freed from the hassle of taking permission from the Central government. But, in certain special cases such as reporting of in adequate profit or losses, companies have to seek approval of the Central government.
The Act also specifies the overall limit on remuneration payable based on the quantum of profit. This provision attempts to keep a tab on the remuneration paid to directors and ensure that extremely high remuneration is not paid out by companies to top personnel. The Act tries to link remuneration with the financial performance of the companies.
Technically, it sounds fine that the shareholders of a company should approve the remuneration. However, approval of the shareholders is just a formality. This is true irrespective of the company owned and managed by promoters or managed by professionals with no holding due to apathy of institutional investors in participation of matters concerning the shareholders.
The sections that deal with managerial remuneration include 198, 269 and 309 of the Companies Act, 1956. Following are in brief the stipulations under these sections:
Section 198: Total managerial remuneration payable by a public company or a private company, which is a subsidiary of a public company, to its directors and its manager for any financial year should not exceed 11% of the net profit of that company for that financial year. The Act separately specifies manner of calculation of net profit, which is covered under Sections 349, 350 and 351.
If the profit is not adequate or there is a loss, the company need not pay its directors. In such cases, the company needs to seek the previous approval of the Central government.
Section 269: The section specifies that the appointment of managing or whole-time director or manager will require the Central government's approval only in certain cases. Remuneration to a managing or whole-time director should be in accordance with the provisions of schedule XIII (Part I and II). Otherwise, approval of the Central government is mandatory.
Section 309: This section covers mode and way of payment of remuneration. For instance, whole time employee or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profit or a combination of both.
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