Section 197 of the Companies Act 2013 is key in managing how much money top managers and directors get paid. It aims to make sure payments are fair and clear. This is important for good corporate governance.
The Act sets rules for how much can be paid out, who can get it, and when it must be shared with everyone. This helps keep payments in check and ensures they’re fair for everyone involved.
The Act also has rules for who can be a top manager. They must be at least 21 and no older than 70. But, they can stay on past 70 with the company’s okay.
Key Takeaways
- Section 197 of the Companies Act 2013 regulates managerial remuneration for key managerial personnel and other directors.
- The primary objective of Section 197 is to ensure fairness and transparency in the payment of managerial remuneration.
- Companies are required to disclose the remuneration paid to their directors and key managerial personnel.
- The eligibility criteria for appointment as a managing or whole-time director or manager include a minimum age of 21 years and a maximum age of 70 years.
- The Companies Act 2013 provides for the payment of managerial remuneration, including the maximum permissible limits and disclosure requirements.
- Managerial remuneration is subject to the approval of the Board and the Nomination and Remuneration Committee, if applicable.
Understanding the Scope of Section 197 Companies Act 2013
Section 197 deals with how much money top managers can earn. It makes sure their pay is fair and matches the company’s success. This balance helps everyone involved in the company.
This rule applies to all kinds of companies, big and small. It came about because of new challenges in how companies are run. The rules have changed over time to help companies manage their pay better.
Key Objectives of Section 197
Section 197 has a few main goals:
- It makes sure top managers get paid fairly.
- It makes sure their pay matches the company’s success and what others in the industry get.
- It gives companies a clear guide on how to handle pay.
Applicability to Different Types of Companies
Section 197 helps both big public companies and smaller private ones. It ensures that everyone gets paid fairly, following a set of rules.
Historical Context and Evolution
Section 197 started because of new problems in how companies were run. Over the years, the rules have changed to help companies manage their pay better. Now, it makes sure top managers get paid fairly, based on the company’s success and what others earn.
Maximum Permissible Limits for Managerial Remuneration
The Companies Act, of 2013, sets out managerial remuneration limits to prevent overpaying directors. A public company can pay its directors, including the managing director, up to 11% of its net profits.
The Act also has rules for managerial remuneration limits:
- For a company with one managing director/whole-time director/manager: 5% of the net profits
- For a company with more than one managing director/whole-time director/manager: 10% of the net profits
- For directors who are neither managing director nor whole-time director: 1% of the net profits if there is a managing director/whole-time director, and 3% if there is no managing director/whole-time director
Companies must follow these managerial remuneration limits to avoid penalties. These rules help keep compensation fair and prevent too much pay.
Components of Managerial Compensation
Managerial compensation is key in corporate governance. It’s covered by Section 197 of the Companies Act 2013. The components of managerial compensation are fixed salary, performance-linked variables, and other benefits. These parts make up the total pay package and follow certain rules.
The fixed salary is a big part of what managers get paid. It’s based on their job, experience, and skills. Managers might also get performance-linked variables. These are based on how well they meet certain goals.
Other perks like stock options and allowances can be part of the package too. The total pay, including all these parts, can’t be more than 11% of the company’s net profits. This rule is set by Section 197(1) of the Companies Act, 2013. It helps keep pay fair and in line with the company’s success.
Here are the main limits on what managers can earn:
- 5% of the net profits for a company with one Managing Director/whole-time director/manager
- 10% of the net profits for a company with more than one Managing Director/whole-time director/manager
- 11% of the net profits for the overall limit on total managerial remuneration
Procedural Requirements for Remuneration Approval
The rules for approving remuneration are key for companies to follow the Companies Act, 2013. The remuneration approval process has several steps. These include the board of directors setting managerial pay and the shareholders giving their okay. Section 197 of the Companies Act, 2013 outlines these procedural requirements.
The main steps in the remuneration approval process are:
- Determination of managerial remuneration by the board of directors
- Approval of managerial remuneration by the shareholders
- Special resolutions must be passed at a general meeting to approve managerial remuneration packages
If a company wants to pay more than 11% of its net profits, it needs the central government’s okay. The government checks if the extra pay is good for the company and its shareholders.
Category | Limit |
---|---|
Managing Director/Whole-time Director | 5% of net profits |
Multiple Managing/Whole-time Directors | 10% of net profits |
Non-Executive Directors | 1% of net profits (when there is a Managing/Whole-time Director), 3% of net profits (in other cases) |
Companies need a clear plan for paying directors. This plan should be updated often to keep up with market standards and legal rules. It helps the company stay competitive and earn the trust of its shareholders.
Special Provisions for Loss-Making Companies
Loss-making companies have special rules for paying managers. The Companies Act 2013 sets these rules. They help keep the company running while protecting shareholders and creditors.
The conditions for payment of remuneration are in Schedule V of the Act. It says how much managers and directors can earn. For example, if the company’s value is under ₹5 crores, managers can earn up to ₹60 lakhs. Other directors can earn up to ₹12 lakhs.
The following table shows how much managers and directors can earn based on the company’s value:
Effective Capital | Maximum Yearly Remuneration (Managerial Persons) | Maximum Yearly Remuneration (Other Directors) |
---|---|---|
Less than ₹5 crores | ₹60 lakhs | ₹12 lakhs |
₹5 crores and above but less than ₹100 crores | ₹84 lakhs | ₹17 lakhs |
₹100 crores and above but less than ₹250 crores | ₹120 lakhs | ₹24 lakhs |
₹250 crores and above | ₹120 lakhs plus 0.01% of the effective capital exceeding ₹250 crores | ₹24 lakhs plus 0.01% of the effective capital exceeding ₹250 crores |
Penalties and Consequences of Non-compliance
Not following Section 197 of the Companies Act 2013 can lead to serious penalties for companies and their directors. These penalties can harm a company’s reputation and financial health.
Some penalties for not following the rules include:
- Civil penalties, with fines from INR 1 lakh to INR 5 lakhs
- Criminal penalties, with jail time up to 10 years in some cases
- More penalties for not following rules, like INR 1 thousand per day
A table below shows some penalties for not following the rules:
Section | Civil Liability | Criminal Liability |
---|---|---|
197 | INR 1 lakh to INR 5 lakhs | Not specified |
203 | INR 1 lakh to INR 5 lakhs | Not specified |
204 | INR 1 lakh to INR 5 lakhs | Not specified |
It’s very important for companies to follow Section 197. This helps avoid consequences and keeps good corporate governance.
Recent Amendments and Their Impact
The Companies Act 2013 has seen recent changes that affect corporate governance, mainly in how managers are paid. Now, the total pay for managers can’t be more than 11% of the company’s net profits. This includes a cap of 5% for one top manager and 10% for more than one.
These updates have made it easier to approve manager pay. Before, the government had to okay it. Now, shareholders can vote on it through a special resolution. This change is expected to make things more transparent and accountable.
Key Changes in Remuneration Rules
New rules have set limits for non-executive directors’ pay. It can’t be more than 1% of profits if there’s a top manager. Without one, it’s 3%. Also, non-executive directors can get up to Rs.100,000 for each meeting.
These changes aim to make pay fair and clear. They’ve also made it easier to stop certain directors from managing companies. This includes rules from the Insolvency & Bankruptcy Code, 2016, and the Goods & Services Tax Act, 2017.
Effect on Corporate Governance
These updates mark a move towards more flexible pay for directors and managers in public companies. With about 20 changes to Section 197, Schedule V, and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the rules for corporate governance keep changing.
Remuneration Category | Limit |
---|---|
Managing or Whole-time Director | 5% of net profits (single director), 10% (multiple directors) |
Non-Executive Directors | 1% of profits (with managing/whole-time director), 3% (without) |
Conclusion
As we wrap up our talk on Section 197 of the Companies Act 2013, it’s clear that rules on manager pay are key. They make sure things are open, fair, and match what everyone wants. The main takeaways are about knowing the rules for manager pay, mainly in tough times.
The summary shows how important it is for companies to follow the rules. They must stick to pay limits, get shareholder okay, and get government approval when needed. Also, new changes to the Act make the rules even stronger, showing a push for better corporate rules and protecting everyone’s interests.
Looking ahead, companies, directors, and experts need to keep up with new rules and best practices in pay. By being open and making pay match long-term goals, companies can gain trust, spark new ideas, and add value for everyone involved.
FAQ
What is the importance of Section 197 of the Companies Act 2013?
Section 197 of the Companies Act 2013 is key in managing how much money top managers get paid. It makes sure the pay is fair and matches the company’s success.
What are the key objectives of Section 197?
Section 197 aims to make sure manager pay is fair and matches the company’s success and industry standards.
How does Section 197 apply to different types of companies?
Section 197 covers both public and private companies. It has changed over time to keep up with corporate governance issues.
What are the maximum permissible limits for managerial remuneration under Section 197?
The limits for manager pay are based on the company’s net profits. Going over these limits can cause big problems.
What are the components of managerial compensation regulated under Section 197?
Section 197 deals with different parts of manager pay. This includes fixed salary, bonuses, stock options, and other perks.
What are the procedural requirements for approving managerial remuneration?
Approving manager pay involves the board, a special committee, and shareholders. This ensures everything is done right and follows Section 197.
How does Section 197 handle special provisions for loss-making companies?
For companies that lose money, Section 197 has special rules. It includes getting government approval and how to deal with too much pay.
What are the penalties and consequences of non-compliance with Section 197?
Breaking Section 197 can lead to big fines and legal trouble. It shows how important it is to follow the rules.
How have the recent amendments to the Companies Act 2013 impacted Section 197 and managerial remuneration?
New changes to the Companies Act 2013 have made big impacts on manager pay rules. They’ve improved corporate governance, transparency, and fairness in pay practices.