RITU BAJAJ (COMPANY SECRETARY) (158 Points)
25 May 2010Plz advice me on payment of commission to directors of a public unlisted company. Can commission be paid as a fixed amount if its within the limit of section 309 or it has to be as a percentage of profit? What steps are involved in it? Does only Form 23 is required to be filed?
Awaiting reply...
Thanks in advance.
Ankur Garg
(Company Secretary and Compliance Officer)
(114773 Points)
Replied 25 May 2010
Dear Ritu,
First understand the provisions mentioned below:
Ceiling on remuneration of ordinary or non-executive directors
Sections 309(4) and 309(7) deals with remuneration payable to the part time directors, that is to say the directors who are neither in the whole-time employment of the company nor a managing director, within the overall limit stipulated in section 198(1) and further in section 309(4) itself.
Section 309(4) authorises payment of remuneration to part time directors in two alternative ways:—
(i) by way of monthly, quarterly or annual payment with the approval of the Central Government; and/or
(ii) by way of commission without the approval of the Central Government, subject to the approval of the members by way of special resolution.
Therefore, if the commission payable exceeds the limit, payment can be made only with the approval of the Central Government.
Quantum of commission that may be paid to non-executive directors
Section 309(4) provides that a director or directors who is/are not managing or whole-time directors may be paid remuneration periodically with the approval of the Central Government or may be paid commission, provided the said remuneration shall not exceed 1% of the net profits if the company has a managing or whole-time director and 3% in other cases. The net profits shall be computed in terms of sections 198, 349 and 350 of the Act.
Commission may be paid to all non-executive directors
At the time of initiating the payment of commission to non-executive directors, subject to necessary approvals, the Board may decide that the same shall be shared equally by and amongst all such directors or in any other way as may be approved by the Board or as prescribed in the Articles.
Special resolution shall be valid for a period of five years
The approval of members by way of special resolution will be valid at a time for a period of five years. The said approval shall be prior to the payment of the commission.
Central Government's approval
One of the most shocking part of my research. Go through the observation very carefully as with sound understanding of these provisions/interpretations you may reach places in your professional career.
Although the section prescribes that the approval of the Central Government is necessary only for payment of fixed remuneration to non-executive directors, it is found that the Department is of the view that a company cannot pay commission to non-executive directors based on 1% or 3% of net profits, as the case may be, without the prior approval of that government on the ground that any such payment would mean increase in the remuneration to a director which would attract the provisions of section 310 and thus need the approval of the Central Government.
The Government's view is that where directors receive fees for Board meetings attended by them, proposal for payment of commission or other remuneration to them would mean increase in remuneration under section 310. However, where the directors do not receive Board meeting fees or other remuneration, Central Government's approval is required as any remuneration proposed to be paid will be deemed to be an increase in remuneration and will require approval of the Government under section 310 and also approval of members by special resolution.
As per provisions of Section I of Part II of Schedule XIII to the Companies Act, 1956, subject to the provisions of sections 198 and 309, a company may pay any remuneration, by way of salary, dearness allowance, perquisites, commission and other allowances, which shall not exceed 5% of its net profits for one such managerial person, and if there is more than one such managerial person, 10% for all of them together.
Section 309(3) provides that managerial personnel may be paid remuneration either by way of a monthly payment or at specified percentage of the net profits of the company or partly by one way and partly by the other. In case if remuneration exceeds 5% or 10% as the case may be, it cannot be paid without the approval of the Central Government.
Ankur Garg
(Company Secretary and Compliance Officer)
(114773 Points)
Replied 25 May 2010
To conclude: We may say that payment of commission as a fixed amount is allowed but that would be a part of managerial remuneration u/s 309 read with section 198. For payment of commission approval of shareholders through special resolution is very much required. After passing SR you have to file form 23 accordingly.
Please wait for the opinion of other learned members.
Best Regards
RITU BAJAJ
(COMPANY SECRETARY)
(158 Points)
Replied 27 May 2010
Dear Ankur Sir,
Thanks a lot for your valuable advice & guidance.
Please clarify me one point that in your observation you have mentioned that in view of the Department a Company cannot pay commission to directors without the prior approval of the Central Government. But in your conclusion you have not suggested Central Government's Approval. Your observation seems to me a bit confusing one. Plz clarify the same further if possible.
Thanking You,
Ritu Bajaj.
Ankur Garg
(Company Secretary and Compliance Officer)
(114773 Points)
Replied 27 May 2010
Plz do not get confuse. See for paying commission within limits CG approval is not required.
The shocking part of my first reply is connected with the applicability of section 310. Analyse this in the light of section 310. Also check the applicability of section 310 in your case and decide accordngly.
CASE—1
CG’s interpretation: Let’s discuss CG’s opinion with the help of an example. CG is of the view that if director is already drawing sitting fee and company proposed to pay commission to such director then it would be equal to increase in remuneration within the meaning of section 310 and CG approval would be required u/s 310 and nothing else. It is a separate issue.
CASE—2
On the other hand if you fix the remuneration of a director and add commission as an component of remuneration ----no CG approval required if within limit.
CONCLUSION—
To conclude I would say in case 1 CG approval is required even when remuneration is within limits due to separate applicability of section 310. In case to case 2 no CG approval is required if commission and remuneration are within limits as per section 309.
This is my personal understanding regarding CG’s opinion. May be wrong. Wait for other expert opinions.
Best Regards
RITU BAJAJ
(COMPANY SECRETARY)
(158 Points)
Replied 27 May 2010
Thanks a lot Sir for making it clear to me in such an elaborate manner.
Ankur Garg
(Company Secretary and Compliance Officer)
(114773 Points)
Replied 27 May 2010
Really thankful to you Ritu for such quick understanding and approving the reply.
Best Regards
Meeta
(Company Secretary)
(24 Points)
Replied 17 July 2010
Dear Sir,
Please advice on the following:
Facts of the case are:
1. ABC limited is a listed manufacturing company and passed an SR to pay commission to its Non-executive Director for providing services of professional nature (i.e. the director advices the company in securing tenders and he raises invoice of commission for each such tender, accordingly he is been paid commission.)
My queries are as follows;
1. Is the commission so paid is exempt from taking approval of Central Government under the provisions of section 309?
2. The net profit of which year is to be considered for reckoning the limit of 1% i.e. current year or that of financial year as while paying the commission during the year, the Company can only have projected profits and the final figures shall come at the year end only?
3. What are the consequences ond remedial course of action, if the commission exceeds the limit of 1% without taking prior approval of Central Govt.
Kind Regards
Meeta
vivek
(CS)
(751 Points)
Replied 17 July 2010
1. Upto 1% no requirement of CG approval.
2. Year in which you are paying commission that F.Y. profit will be subject to calculation. If you are paying during the year calculate on projected profit and release and final adjustment will be done at year end. While finalisation of balance sheet if you have plan to release the commision you can have provision for that.
3. Upto my understanding if you have paid in excess you will have to recover the excess amount.
Others views solicited.
priyanka chowdhary
(icwai)
(26 Points)
Replied 13 February 2014
plz advice me payment of commisiion to directors in a listed company...??????
Shivani Khandelwal
(Company Secretary)
(21 Points)
Replied 09 June 2014
please provide the Board Resoution for
very urgent
Thanks
CAclubindia
