RM12 - Managerial Personnel, Remuneration and Secretarial Audit

SCHEDULE V (See sections 196 and 197) PART I CONDITIONS TO BE FULFILLED FOR THE APPOINTMENT OF A MANAGING OR WHOLE-TIME DIRECTOR OR A MANAGER WITHOUT THE APPROVAL OF THE CENTRAL GOVERNMENT APPOINTMENTS No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely:— (a) he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the following Acts, namely:— (i) the Indian Stamp Act, 1899 (2 of 1899); (ii) the Central Excise Act, 1944 (1 of 1944); (iii) the Industries (Development and Regulation) Act, 1951 (65 of 1951); (iv) the Prevention of Food Adulteration Act, 1954 (37 of 1954); (v) the Essential Commodities Act, 1955 (10 of 1955); [(vi) the Companies Act, 2013 (18 of 2013) or any previous company law;] (vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (viii) the Wealth-tax Act, 1957 (27 of 1957); (ix) the Income-tax Act, 1961 (43 of 1961); (x) the Customs Act, 1962 (52 of 1962); (xi) the Competition Act, 2002 (12 of 2003); (xii) the Foreign Exchange Management Act, 1999 (42 of 1999); (xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); (xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992); (xv) the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922); (xvi) the Prevention of Money-Laundering Act, 2002 (15 of 2003); [(xvii) the Insolvency and Bankruptcy Code, 2016 (31 of 2016); (xviii) the Goods and Services Tax Act, 2017 (12 of 2017); (xix) the Fugitive Economic Offenders Act, 2018 (17 of 2018).] (b) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974): Provided that where the Central Government has given its approval to the appointment of a person convicted or detained under sub-paragraph (a) or sub-paragraph (b), as the case may be, no further approval of the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval. (c) he has completed the age of twenty-one years and has not attained the age of seventy years: Provided that where he has attained the age of seventy years; and where his appointment is approved by a special resolution passed by the company in general meeting, no further approval of the Central Government shall be necessary for such appointment; (d) where he is a managerial person in more than one company, he draws remuneration from one or more companies subject to the ceiling provided in section V of Part II; (e) he is resident of India. Explanation I.—For the purpose of this Schedule, resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,— (i) for taking up employment in India; or (ii) for carrying on a business or vacation in India. Explanation II.—This condition shall not apply to the companies in Special Economic Zones as notified by Department of Commerce from time to time: Provided that a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person’s appointment. PART II REMUNERATION Section I.— Remuneration payable by companies having profits: Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons [or other director or directors] not exceeding the limits specified in such section. [Section II.— Remuneration payable by companies having no profit or inadequate profit 3***: Where in any financial year during the currency of tenure of a managerial person [or other director], a company has no profits or its profits are inadequate, it may, 3***, pay remuneration to the managerial person [or other director] not exceeding the limits under (A) and (B) given below:— [(A): (1) (2) (3) SI. No. Where the effective capital (in Limit of yearly remuneration payable Limit of yearly rupees) is shall not exceed (in Rupees) in case of a remuneration payable managerial person shall not exceed (in rupees) in case of other director (i) Negative or less than 5 60 lakhs 12 Lakhs crores. (ii) 5 crores and above but less than 100 84 lakhs 17 Lakhs crores. (iii) 100 crores and above but less than 120 lakhs 24 Lakhs 250 crores. (iv) 250 crores and above. 120 lakhs plus 0.01% of the effective 24 Lakhs plus 0.01% of the capital in excess of Rs. 250 crores: effective capital in excess of Rs. 250 crores:] [Provided that the remuneration in excess of above limits may be paid] if the resolution passed by the shareholders is a special resolution. Explanation.— It is hereby clarified that for a period less than one year, the limits shall be pro-rated. (B) In case of a managerial person who is functioning in a professional capacity, [remuneration as per item (A) may be paid], if such managerial person is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates: Provided that any employee of a company holding shares of the company not exceeding 0.5% of its paid up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company: Provided further that the limits specified under items (A) and (B) of this section shall apply, if- (i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee; (ii) [the company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting;] (iii) an ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per 3*** item (A) or a special resolution has been passed for payment of remuneration as per item (B), at the general meeting of the company for a period not exceeding three years. (iv) a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely:- I. General information: (1) Nature of industry (2) Date or expected date of commencement of commercial production (3) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus (4) Financial performance based on given indicators (5) Foreign investments or collaborations, if any. II. Information about the appointee: (1) Background details (2) Past remuneration (3) Recognition or awards (4) Job profile and his suitability (5) Remuneration proposed (6) Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin) (7) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel, if any. (1) Reasons of loss or inadequate profits (2) Steps taken or proposed to be taken for improvement (3) Expected increase in productivity and profits in measurable terms IV. Disclosures: The following disclosures shall be mentioned in the Board of Director’s report under the heading “Corporate Governance”, if any, attached to the financial statement: (i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors; (ii) details of fixed component and performance linked incentives along with the performance criteria; (iii) service contracts, notice period, severance fees; and (iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable. Explanation: For the purposes of Section II of this part, “Statutory Structure” means any entity which is entitled to hold shares in any company formed under any statute. ] Section III.— Remuneration payable by companies having no profit or inadequate 1***profit in certain special circumstances: In the following circumstances a company may, 1***, pay remuneration to a managerial person [or other director] in excess of the amounts provided in Section II above:— (a) where the remuneration in excess of the limits specified in Section I or Section II is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section 197 and the total managerial remuneration payable by such other company to its managerial persons including such amount or amounts is within permissible limits under section 197. [(b) where the company— (i) is a newly incorporated company, for a period of seven years from the date of its incorporation, or (ii) is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction for a period of five years from the date of sanction of scheme of revival, or (iii) is a company in relation to which a resolution plan has been approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) for a period of five years from the date of such approval, it may pay [any remuneration to its managerial persons [or other directors]].] (c) where remuneration of a managerial person [or other director] exceeds the limits in Section II but the remuneration has been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal: Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified under Section II and the following additional conditions:— Explanation I.— For the purposes of Section II of this Part, “effective capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities),accumulated losses and preliminary expenses not written off. Explanation II.— (a) Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment; (b) In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made. Explanation III.— For the purposes of this Schedule, “family” means the spouse, dependent children and dependent parents of the managerial person. Explanation IV.— The Nomination and Remuneration Committee while approving the remuneration under Section II or Section III, shall— (a) take into account, financial position of the company, trend in the industry, appointee’s qualification, experience, past performance, past remuneration, etc.; (b) be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders. Explanation V.— For the purposes of this Schedule, “negative effective capital” means the effective capital which is calculated in accordance with the provisions contained in Explanation I of this Part is less than zero. Explanation VI.— For the purposes of this Schedule:— * * * * * (B) “Remuneration” means remuneration as defined in clause (78) of section 2 and includes reimbursement of any direct taxes to the managerial person. Section V. —Remuneration payable to a managerial person in two companies: Subject to the provisions of sections I to IV, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person. PART III Provisions applicable to Parts I and II of this Schedule 1. The appointment and remuneration referred to in Part I and Part II of this Schedule shall be subject to approval by a resolution of the shareholders in general meeting. 2. The auditor or the Secretary of the company or where the company is not required to appointed a Secretary, a Secretary in whole-time practice shall certify that the requirement of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar under sub- section (4) of section 196. PART IV The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.