Finin2minCompanies Act Professional Series

SC05 - Schedule V - Managerial Personnel and Remuneration

A professional guide to sections 196-202, appointment eligibility, remuneration in profit and no/inadequate-profit years, effective capital, shareholder and creditor approvals, excluded perquisites, filing controls and excess-remuneration recovery.

4 Parts
Eligibility, remuneration, common provisions and exemption power

2 Roles
Managerial person and other director

4 Capital Slabs
Base annual ceilings under Section II(A)

3-Year Window
Shareholder approval under Section II conditions

Executive snapshot

What Schedule V actually controls

Part I

Conditions for appointment of an MD, WTD or manager without Central Government approval, including age, residence and disqualification screens.

Part II

Remuneration with profits, remuneration without or with inadequate profits, professional-capacity cases, special situations, excluded perquisites and two-company limits.

Parts III-IV

Shareholder approval, compliance certificate and Central Government power to exempt classes of companies.

Applicability caution: Section 197's overall percentage framework is expressed for public companies. Private companies should separately test applicable exemptions, articles, employment arrangements and any listing, borrowing or group restrictions.

Decision map

Appointment and approval lifecycle

Sections 196 and 197

Act-level gateway before applying Schedule V

Control	Professional interpretation	Key action
Tenure	MD, WTD or manager cannot ordinarily be appointed for more than five years at a time; reappointment is not made earlier than one year before expiry.	Check tenure dates and Board/general meeting timing.
Dual office	A company cannot appoint both a managing director and a manager at the same time.	Review existing KMP/managerial-person contracts.
Age	Minimum 21. A person aged 70 or more requires the statutory special-resolution route and justification.	Capture date of birth and explanatory-statement reasons.
Board and members	Appointment and remuneration are approved at a Board meeting and placed before the next general meeting, subject to the statutory route.	Prepare Board note, NRC note where applicable and member notice.
Overall remuneration	Section 197 uses profit-linked percentages and Schedule V when profits are absent/inadequate or the statutory route requires it.	Compute section 198 profits and separately test Schedule V.
Creditor default	Specified lender/secured-creditor approval is a prior gate before member approval where the company has defaulted.	Document default status and obtain written prior approvals.

Part I

Eligibility of MD, WTD or manager

Conviction restriction

The appointee should not have been sentenced to imprisonment for any period, or fined more than Rs. 1,000, for conviction under the Acts listed in Schedule V:

Indian Stamp Act, 1899
Central Excise Act, 1944
Industries (Development and Regulation) Act, 1951
Prevention of Food Adulteration Act, 1954
Essential Commodities Act, 1955
Companies Act, 2013 or previous company law
Securities Contracts (Regulation) Act, 1956
Wealth-tax Act, 1957
Income-tax Act, 1961
Customs Act, 1962
Competition Act, 2002
Foreign Exchange Management Act, 1999
Sick Industrial Companies (Special Provisions) Act, 1985
Securities and Exchange Board of India Act, 1992
Foreign Trade (Development and Regulation) Act, 1992
Prevention of Money-Laundering Act, 2002
Insolvency and Bankruptcy Code, 2016
Central Goods and Services Tax Act, 2017
Fugitive Economic Offenders Act, 2018

Other mandatory screens

No detention for any period under COFEPOSA, subject to the approval mechanism stated in the Schedule.
Completed 21 years and not attained 70 years, unless appointment at/above 70 is approved by special resolution.
Where acting in more than one company, total remuneration must remain within Part II Section V.
Resident in India, including the specified 12-month residence/employment/business route.
The residence condition does not apply to qualifying SEZ companies, but employment-visa and filing requirements remain relevant for non-residents.

Common failure: Treating a clean DIN/KYC search as a substitute for Schedule V conviction, detention, age and residence declarations.

Part II - Section I

Company having profits

Where profits exist, remuneration remains subject to sections 197 and 198. The key public-company ceilings are ordinarily:

Category	Ordinary section 197 ceiling	Control point
Total managerial remuneration	11% of net profits computed under section 198	General meeting can authorise a higher amount, subject to Schedule V and lender-approval conditions where default exists.
One MD/WTD/manager	5% of section 198 net profits	Test individual plus aggregate limits.
More than one MD/WTD/manager	10% collectively	Allocate the collective ceiling across contracts.
Other directors where MD/WTD/manager exists	1% collectively	Fees under section 197(5) are separately considered.
Other directors where no MD/WTD/manager exists	3% collectively	Independent director cannot receive stock options.

Accounting control: The section 198 profit base is not simply profit before tax or profit after tax. Maintain a documented statutory reconciliation.

Part II - Section II(A)

No profit or inadequate profit - base annual limits

Effective capital	Managerial person	Other director
Negative or less than Rs. 5 crore	Rs. 60 lakh	Rs. 12 lakh
Rs. 5 crore and above but less than Rs. 100 crore	Rs. 84 lakh	Rs. 17 lakh
Rs. 100 crore and above but less than Rs. 250 crore	Rs. 120 lakh	Rs. 24 lakh
Rs. 250 crore and above	Rs. 120 lakh + 0.01% of effective capital above Rs. 250 crore	Rs. 24 lakh + 0.01% of effective capital above Rs. 250 crore

For a period shorter than one year, the applicable limit is pro-rated.
Payment in excess of the table can use a special-resolution route, subject to the remaining Schedule V conditions.
The "other director" category means a non-executive director or independent director.

Effective capital

Build the statutory capital base correctly

Formula: Paid-up share capital excluding share application money + securities premium + reserves and surplus excluding revaluation reserve + eligible long-term loans/deposits - specified investments - accumulated losses - preliminary expenses not written off.

Include	Exclude/deduct	Timing
Paid-up share capital; securities premium; reserves and surplus excluding revaluation reserve; long-term loans and deposits repayable after one year.	Share application money/advances; working-capital loans, overdrafts, unfunded interest, bank guarantees and other short-term arrangements; specified investments; accumulated losses; preliminary expenses not written off.	New company: appointment date. Other cases: last day of the preceding financial year.

Example: Paid-up capital Rs. 40 crore + premium Rs. 15 crore + eligible reserves Rs. 30 crore + long-term debt Rs. 25 crore - investments Rs. 8 crore - accumulated losses Rs. 5 crore = effective capital Rs. 97 crore. The managerial-person base annual limit is Rs. 84 lakh.

Boundary example: Effective capital of exactly Rs. 250 crore falls in the fourth slab, but the excess component is zero. The base limit remains Rs. 120 lakh for a managerial person and Rs. 24 lakh for another director.

Part II - Section II(B)

Managerial person functioning in a professional capacity

The professional-capacity route is not a generic "highly qualified employee" exemption. It requires a tightly documented independence and expertise profile:

No interest in the capital of the company, holding company or subsidiaries, directly, indirectly or through statutory structures.
No direct/indirect interest in, or relation to, directors or promoters during the two years before appointment, on appointment or thereafter.
Graduate-level qualification with expertise and specialised knowledge in the company's field.
Employee shares not exceeding 0.5% of paid-up share capital under an employee scheme/qualification route are deemed not to create capital interest for this test.

Documentation: Obtain a detailed interest/relationship declaration, group-capital search, promoter/director relationship confirmation, qualification evidence and Board/NRC analysis.

Approval conditions

Board, NRC, creditors and shareholders

Gate	Requirement	Evidence
Board	Board resolution at a meeting.	Agenda paper, draft contract and resolution.
NRC	Approval/recommendation where section 178 applies.	NRC minutes addressing financial position, industry trend, qualification, experience, performance and past remuneration.
Creditors	If there is default to a bank, PFI, NCD holder or other secured creditor, obtain prior approval before member approval.	Default certificate and creditor no-objection/approval.
Members	Ordinary or special resolution depending on amount/route; Schedule V Section II approval is for a period not exceeding three years.	Notice, explanatory statement, voting result and filed resolution where applicable.
Certification	Auditor/secretary/PCS certificate under Part III and special-circumstance certifications where relevant.	Signed certificate attached to prescribed return.

Member notice

Information that must accompany the approval

General information

Nature of industry
Commercial production date
New-company project start date
Financial performance
Foreign investment/collaboration

Appointee

Background and past remuneration
Recognition/awards
Job profile and suitability
Proposed remuneration
Industry comparison
Pecuniary/relationship disclosures

Loss and recovery plan

Reasons for loss/inadequate profit
Improvement measures
Expected productivity/profit increase in measurable terms

Board report / corporate governance disclosures

All elements of the remuneration package, including salary, benefits, bonus, stock options and pension.
Fixed and performance-linked components with performance criteria.
Service contracts, notice periods and severance fees.
Stock-option details and vesting/exercise period.

Part II - Section III

Special circumstances for remuneration above Section II amounts

Circumstance	Permitted route	Additional controls
Remuneration is also paid by another company, and that company is foreign or has member approval for the payment.	Treat the payment as managerial remuneration and keep the other company's total within section 197 limits.	Trace group payments, member approval and consolidated cap.
Newly incorporated company (seven years), qualifying sick company (five years) or company with NCLT-approved IBC resolution plan (five years).	Special statutory circumstance permits remuneration beyond the normal Section II amount.	Meet creditor no-objection/no-default certifications and all specified conditions.
Remuneration fixed by BIFR/NCLT.	Amount may exceed Section II subject to the stated conditions.	Retain order and professional certificate.

Do not assume: "Special circumstance" does not mean documentation-free. Creditor, deposit-holder and certification conditions are central to the route.

Part II - Section IV

Perquisites excluded from the remuneration ceiling

General managerial person	Additional expatriate items
PF, superannuation fund or annuity fund contribution to the extent not taxable under the Income-tax Act. Gratuity not exceeding half month's salary for each completed year of service. Leave encashment at the end of tenure.	Children's education allowance up to Rs. 12,000 per month per child or actual, whichever is less, for up to two children. Holiday passage for children/family abroad on the stated frequency and travel class. Leave travel concession for self and family where leave is proposed in the home country.

Part II - Section V

Managerial person in two companies

A managerial person may draw remuneration from one or both companies, but the total must not exceed the higher maximum limit admissible from any one of the companies.

Example: Company A permits Rs. 84 lakh and Company B permits Rs. 120 lakh. Combined remuneration from A and B cannot exceed Rs. 120 lakh under this provision, subject to the separate approvals of each company.

Excess and recovery controls

Section 197 and section 199 consequences

A director receiving remuneration beyond the statutory/approved amount must refund the excess within two years or a shorter permitted period and hold it in trust until refund.
Waiver of recovery requires the statutory member-approval route; creditor approval is a prior gate where default exists.
Where accounts are restated due to fraud or non-compliance, section 199 provides for recovery from past or present MD/WTD/manager/CEO who received excess remuneration on the basis of misstated figures.
Auditors must report whether remuneration is in accordance with section 197 and whether any director received remuneration in excess of the limit.

Year-end control: Re-perform the remuneration test after final section 198 profit, effective capital, term of service and all group-company remuneration are known.

Forms and filings

Practical MCA workflow

Document/form	Typical purpose	Timing/control
MR-1	Return of appointment of MD, WTD or manager under section 196(4).	Prescribed filing is generally made within 60 days of appointment; verify current MCA portal schema, attachments and certification.
MGT-14	Filing of resolutions/agreements where section 117 applies, including relevant special resolutions.	Test company-specific exemptions before assuming filing is or is not required.
DIR-12	Appointment/change in director/KMP particulars where applicable.	Coordinate effective date and linked filings.
Contract/terms	Written terms of employment, remuneration and service conditions.	Align Board, NRC and member approvals exactly.
Part III certificate	Confirms compliance with Schedule V.	Include with the prescribed section 196(4) return.

Portal caution: Forms, web-form architecture and attachment validations can change. The legal due date and current MCA V3 technical requirements should both be checked at filing time.

Practical cases

Eight professional scenarios

Case 1 - Effective capital Rs. 4 crore: Managerial person, full year, no profit. Base ordinary-resolution slab: Rs. 60 lakh. A higher amount requires the special-resolution route and all other conditions.

Case 2 - Effective capital Rs. 350 crore: Managerial-person limit = Rs. 120 lakh + 0.01% of Rs. 100 crore = Rs. 121 lakh.

Case 3 - Six-month tenure: Effective capital Rs. 40 crore. Annual managerial limit Rs. 84 lakh; six-month pro-rated amount Rs. 42 lakh.

Case 4 - Independent director: Effective capital Rs. 140 crore. Other-director annual base limit Rs. 24 lakh; stock options remain prohibited for an independent director.

Case 5 - Bank default: The company has lender arrears but obtains member approval first. The sequence is defective because specified creditor approval must be obtained before the general meeting.

Case 6 - Seventy-two-year-old appointee: Appointment can proceed only through the statutory special-resolution route with justification and other Part I compliance.

Case 7 - Professional capacity: A technical expert owns 0.4% through an eligible employee scheme. Shareholding up to 0.5% in the stated circumstances is deemed not to create capital interest, but all other independence and expertise tests remain.

Case 8 - Two companies: Maximum permissible amounts are Rs. 84 lakh and Rs. 120 lakh. Combined remuneration cannot exceed Rs. 120 lakh under Part II Section V.

Audit and secretarial controls

Year-end evidence checklist

Appointment file

Age, residence, conviction/detention declarations
DIN/KYC and interest/relationship records
Board/NRC papers and signed contract
Member notice, explanatory statement and voting evidence
Creditor approvals where default exists

Remuneration file

Section 198 profit reconciliation
Effective-capital calculation with ledger support
Pro-rata computation
Group-company remuneration confirmation
Perquisite classification and tax support
Recovery/waiver assessment

Top audit traps

Trap	Why it fails	Control
Using net profit after tax as section 198 profit	Statutory profit computation contains specific inclusions/exclusions.	Maintain a section 198 reconciliation.
Treating special resolution as curing every defect	Eligibility, Board/NRC, creditor, notice, certificate and filing conditions remain.	Use a route-based checklist.
Ignoring other-director limit	Schedule V expressly includes non-executive and independent directors.	Classify all recipients.
Using current-year closing capital automatically	Timing rule generally uses preceding-year-end capital except a new company.	Lock calculation date.
Not re-testing after audit adjustments	Final profits and accumulated losses may change the route or limit.	Final audit close re-performance.

Exam and interview bank

High-value questions

Why is section 198 profit different from accounting profit?
Can a special resolution authorise remuneration above the Section II(A) table?
How is effective capital determined for a newly incorporated company?
What is the difference between a managerial person and an "other director"?
What approvals are needed when the company has defaulted to a secured creditor?
When can an appointee aged 70 or more be appointed?
Which perquisites are outside the Schedule V ceiling?
How does the two-company remuneration limit work?

Finin2min Q&A

Quick answers

Is Rs. 60 lakh always the maximum when effective capital is negative?
No. It is the base Section II(A) annual amount for a managerial person. The special-resolution route may permit an amount above the table, subject to all conditions.

Can lender approval be obtained after the general meeting?
Where the statutory default condition applies, prior approval is required before member approval.

Does an independent director fall outside Schedule V?
No. The current Schedule treats a non-executive or independent director as an "other director" for the relevant provisions.

Does a company need to test Schedule V only at appointment?
No. Profit, effective capital, period, approvals and actual payments should be re-tested during each relevant financial year.

Primary sources

Source register

1. Companies Act, 2013 - consolidated India Code text, especially sections 196-202 and Schedule V: https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf

2. Ministry of Corporate Affairs - current Acts, Rules, notifications and MCA V3 forms: https://www.mca.gov.in/

3. Current Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 and prescribed forms should be verified on the MCA portal immediately before a live filing.

Professional-use note: This guide is educational. Company type, exemptions, listing status, lender covenants, articles, employment law, tax treatment, SEBI requirements and later notifications may change the conclusion.