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Managerial Remuneration-Closely held Public Ltd Co

Anita Joshi (Practising Company Secretary) (35 Points)

02 April 2010

One closely held public limited company is having authorized capital of Rs. 5 crore and paid up capital of Rs. 4.48 crores and with 3 directors as part of management without any nomenclature like MD or WTD.

Company wanted to increase managerial remuneration which will exceed limit (in view of expected profit) as prescribed under the companies Act, 1956.

Please help me by providing procedure for increase in managerial remuneration exceeding ceiling limit in profit making company.

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5 Replies

Sachin (Chartered Accountant) (419 Points)
Replied 02 April 2010

Dear Anita,

Please write email with full detail of your problem. my email id is sachinagarwalcallb @ gmail.com. you will find reply within 24 hrs.

Thanks

Sachin Agarwal CA LLB

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Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 02 April 2010

First you have to understand the meaning of no profit or inadequate profit. If you are planning to pay remuneration which will be in excess of profits than your company is no more a profit making company from remuneration point of view. This is the case of no profit or inadequate profit.

Meaning of 'no profit' or 'inadequate profit'

If in any financial year, a company has suffered losses or the profit of the company computed in the manner laid down in sections 349 and 350, except that the remuneration of directors shall not be deducted from the gross profit, is less than the overall managerial remuneration payable under the provisions of section 198 read with the provisions of section 309 of the Act, shall be considered as 'no profit' or 'inadequate profit'.

It means that the remuneration payable to the managerial person is more than 5% of the net profit in case of one managerial person or more than 10% of the net profit in case of more than one managerial person.

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Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 02 April 2010

In case of inadequate profit schedule XIII is applicable. Simply calculate your effective capital based on the table given below and decide the appropriate table of schedule XIII applicable to your case and fulfill the conditions of that particular table.

One more thing constitution of remuneration committee is mandatory to proceed under schedule XIII.

MEANING OF THE "EFFECTIVE CAPITAL"

For the purpose of deciding remuneration payable to managerial persons in a company, the effective capital, which is the base for determining eligibility of remuneration, shall be calculated as on the last date of the financial year preceding the financial year in which the appointment is made.

For ascertaining the effective capital of a company for arriving at the maximum permissible remuneration, the following shall be considered and added:—

1. Paid-up share capital (excluding share application money and advances against shares);

2. Share premium account;

3. Reserves and surplus (excluding revaluation reserve); and

4. Long-term loans and deposits repayable after one year but excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee and short-term arrangements.

The following amount shall be deducted:—

1. Investments (except in the case of investment company);

2. Accumulated losses;

3. Preliminary expenses not written off.

The net figure will be considered as the effective capital of a company. Where the appointment of the managerial person is made in the year in which the company has been incorporated, the effective capital shall be calculated on the date of such appointment on the abovesaid basis.

REMUNERATION COMMITTEE

Requirement for appointment of a Remuneration Committee of the Board

Schedule XIII of the Companies Act, 1956 as amended by Notification No. GSR 36(E), dated 16th January, 2002 provides that payment of remuneration of a managerial person shall be approved by a resolution passed by the Remuneration Committee. Therefore, it shall be compulsory for a public company or a private company, which is a subsidiary of a public company to constitute and appoint a remuneration committee of the directors.

Explanation IV of Schedule XIII, inserted by Notification No. GSR 36(E), dated 16th January, 2002 provides that for the purposes of this section, 'Remuneration Committee' means that a committee which consists of at least three non-executive independent directors including nominee director or nominee directors, if any.

Anita Joshi (Practising Company Secretary) (35 Points)
Replied 03 April 2010

Dear Mr. Ankur;

Thanks,

I think i have not asked my query properly.

I would like to clarify further:

Till date no filing was made to ROC for remuneration.

Now, company wanted to increase managerial remuneration which will exceed limit as prescribed under the companies Act, 1956. Company will have profit before tax of Rs. 1.70 crores and company wanted to pay Rs. 45 Lacs as managerial remuneration by way of salary and commission (not being guarantee commission). Company's last year PBT was of Rs. 1.03 crores.

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 03 April 2010

Your query was crystal clear to me.

Simply capitalize Rs. 45 Lacs by 11% as mentioned in section 198. Hence 4500000/11*100==around 4 crore net profit required as per section 349 and 350 to avoid the situation of inadequate profit.

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