Managerial Remuneration

The General Circular No. 4/2011 Dated:- 4th March, 2011 issued by Ministry of Corporate Affairs is welcome. Some grey areas in the provisions of Section 309 and Section 198 will now stand clarified with this circular. For the benefit of readers I have analyzed the provisions of the above two relevant Sections of the Companies Act,1956 herein below:-

Firstly readers may note that as per the recent circular companies do not require approval of the Central Government for making payment of remuneration by way of commission to its Non- Whole Time Director(s) in addition to the sitting fee if the total commission to be paid to all those Non-Whole Time Directors does not exceed 1% of the net profit of the company if it has a Whole Time Director(s) or 3% of the net profit of the company if does not have a Managing Director or Whole Time Director(s).

The provisions of Section  198 and 309 of the companies act,1956 are analysed below.

1. Section 309(1) provides that the remuneration payable to directors of a company, including any Managing Director or whole time director shall be determined in accordance with the provisions of Section 198 and 309.
2. Section 309(2) of the Companies Act, 1956 provides that a director may receive remuneration by way of a fee for each meeting of the Board or a committee thereof attended by him.
3. Section 309(3) provides that a director who is in the whole time employment or Managing director may be paid remuneration either by way of monthly payment or at a specified  % of net profits of the company or partly by one way and partly by other. Section 309(4) reads as under

[(4) A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either-

1. By way of a monthly, quarterly or annual payment with the approval of the Central Government; or    
2. By way of commission if the company by special resolution authorises such   payment:

 Provided that the remuneration paid to such director, or where there is more than one such director, to all of them together, shall not exceed-

1. One per cent of the net profits of the company, if the company has a managing or whole-time director,  or a manager;
2. Three per cent of the net profits of the company, in any other case:

Provided further that the company in general meeting may, with the approval of the Central Government, authorizes the payment of such remuneration at a rate exceeding one per cent or, as the case may be, three per cent of its net profits.

The following emerge from the  above:

• Remuneration can be paid to directors(other than WTD/MD) either monthly/ quarterly/annual with the approval of Central Govt.
• Remuneration by way of commission can be paid, if a special resolution of the shareholders is passed without Central Govt.’s approval.
• The remuneration shall be within limits of 1%( if Company has MD/WTD) or 3 %
• The proviso indicates  that Central Govt.’s approval is required , if payment is made in excess of limits specified above

2. Section 198 fixes the limits for overall managerial remuneration which shall not be more than 11%  of the net profits computed in the manner  laid down u/s 349 and 350.

3. Section 198(2) clarifies that  the above ceiling on remuneration does not include sitting fess paid to non whole time directors.

4. Section 198(3) provides that within the said ceiling monthly remuneration may be paid to whole time director or Manger in accordance with Section 309 or 387 as the case may be.

5. Let us analyze  Section 198 (4) as it is relevant for our present problem. It reads as under:

[(4) Notwithstanding anything contained in sub-section (1) to (3), but subject to the provisions of Section 269, read with Schedule XIII, 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 whole time director or manager, by way of remuneration any sum [exclusive of any fees payable to directors under sub-section (2) of section 309], except with the previous approval of the Central Government.²⁸]

The following points emerge from the above:

• In case of no profits or inadequacy of profits, remuneration can not be paid with out Central government’s approval.
• But there is an exception to this, i.e if the payment is within the limits of  Schedule XIII
• If the company has profits, then  no approval of Central Govt. is required.

Section 310 provides that any provision for increase in remuneration shall not have any effect unless it is approved by the Central Government. This section is totally contradictory to section 198 and 309 which permits payment of commission to non whole time  directors within ceilings provided a special resolution of the shareholders is passed. Any such resolution is valid for 5 years. When such controversy arises as to interpretation, we have to rely on judicial precedents.

In Fenner (India) Limited v. Additional ROC,  reported in (1994) 80 Comp. Case. 1 (Mad)  in para  no.G  and H( page no 5 &6) it is held as follows:

The plain language of the section does not postulate or cast an obligation on the petitioners that such a special resolution should be communicated to the Central Government for approval. The section is merely declaratory that such a resolution would not have any effect unless it is approved by the Central Government.. . . . . .

There cannot be any manner of doubt that before a person can be said to have contravened any provision of the Act, there must be a specific prohibition or direction thereunder.

Now this new circular removes the doubts one may have in interpreting the above sections.

G S Rao

OCL