Introduction:
The executive management of a company is responsible for the day-to-day management of a company. The companies Act, 2013 has used the term key management personnel to define executive management. The top management employees are the company’s initial point of contact with its stakeholders. While the Board of Directors is in charge of giving supervision, it is the key management professionals who are in charge of not only laying out the plans but also putting them into action.
For the first time, the Companies Act of 2013 acknowledged the notion of Key Managerial Personnel. As per section 2(51) “key managerial personnel”, in relation to a company, means—
- the Chief Executive Officer or the managing director or the manager;
- the company secretary;
- the whole-time director;
- the Chief Financial Officer; and
- such other officer as may be prescribed.
Section 203 of the Companies Act 2013 classifies a Managing Director and a Whole-time Director as Key Managerial Personnel. The Companies Act 2013 contains extensive rules pertaining to their appointment, compensation, duties, and liabilities, in addition to playing a significant role in the general growth and management of the business.[1]
Managing Director” means a director who is entrusted with substantial powers of management of the company’s affairs by virtue of the company’s articles, an agreement with the company, a resolution passed in its General Meeting, or by its Board of Directors, and includes a director occupying the position of managing director, by whatever name called.
WTD (Section 2(94): Whole-time Director) refers to a director who is employed full-time by the firm.
Appointment
Term Limits
- A maximum of 5 years.
- Only or after 1 year remaining in his tenure, he was reappointed.
Ineligibility for appointment or appointment continuation
- You are under the age of 21 or you are above the age of 70.
Note: A person above the age of 70 may be appointed bypassing SR, with an explanatory statement accompanying the notification stating the reason for the appointment; or, obtaining CG clearance and passing OR
- is an insolvent who has not been discharged or has been adjudicated insolvent at any time.
- has suspended payment to his creditors or has negotiated, or has made, a composition with them at any time.
- has ever been convicted of an offence by a court and sentenced to more than six months in prison.
- been convicted of a crime under any of the laws specified in Schedule V Part I and sentenced to any length of imprisonment or a fine exceeding one thousand rupees. (There are around 14 to 18 statutes that have been stated.)
- been held under the 1974 Conservation of Foreign Exchange and Prevention of Smuggling Activities Act for any amount of time.
- is not an Indian citizen.[2]
Additional justifications (as per Section 164)
- is mentally ill
- A court or tribunal has issued an order disqualifying him from being appointed as a director, and the order is in effect.
- has not paid any calls on any of the company’s shares that he owns, whether alone or jointly with others, and six months have passed since the call’s previous payment date.
- has been convicted of a crime involving related party transactions in the previous five years at any point.
- does not have a DIN
- The number of directorships held exceeds the statutory limit
Ineligibility for reappointment as a director of a company that: (a) has not filed financial statements or annual returns for three consecutive fiscal years; or (b) has failed to repay deposits accepted by it or pay interest thereon, or to redeem any debentures on the due date or pay the interest due thereon, or to pay any dividend declared, and such failure to pay or redeem continues for three consecutive fiscal years.
Limitations
- The company cannot appoint both an MD and a Manager at the same time.
- A person cannot be both Chairman and MD/CEO unless the company’s AOA states otherwise.
- The firm does not have multiple divisions.
- A person who is the MD of one firm can only be the MD/Manager of one other company.
Remuneration
Provisions that Apply
Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 Schedule V Section 197 and Section 198. Applied to the payment of salary to public company directors, including MD, WTD, and Manager
Limits
- Maximum limit: 11% of Net Profits (including Managing Director, Full-Time Directors, and Managers)
- Sub-limits:
- Executive Directors I One Executive Director (MD/ WTD/ Manager): 5% of net profits (ii) More than one Executive Director (MD/ WTD/ Manager): 10% of net profits (total)
- Non-Executive Directors I 1% of net earnings if the firm has an MD/WTD/Manager (ii) 3% of net profits if the company does not have an MD/WTD/Manager
Limit-breaching preconditions follow that prior consent is necessary if there is a default in payment of dues to a bank, a state financial institution, a holder of a non-convertible debenture, or a secured creditor.[3]
Matters not covered by the aforementioned restrictions
- Attendance fees for Board/Committee meetings.
- Insurance premiums paid by the firm to protect MD/ WTD/ CEO/ CFO/ Managers against liability arising from carelessness, default, misfeasance, breach of duty, or breach of trust.
- A portion of the compensation will be withheld if a director, CFO, CEO, or CS is convicted of a crime.
Transparency in the Auditors’ Report
- Indicate if the directors’ pay is in compliance with Section 197.
- Whether any director receives pay that exceeds the restrictions.
FORM MR-2
The government takes significant efforts to enhance corporate affairs in the country by enacting a number of changes. In recent years, the government has eliminated numerous superfluous permissions for businesses. The Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules 2018 are one such example. As a result of these revisions, the form MR-2 has changed. The MCA is primarily responsible for enforcing the Companies Act 2013 and other statutes, rules, and regulations aimed at regulating the corporate sector and aligning it with the law.[4]
Sections 196, 197, 200, 201(1), and 203(1) of the Companies Act, 2013, as well as Rule 7 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, require the submission of E-Form MR-2 and have been enumerated hereunder:
Section 196 of Companies Act, 2013
(1) No firm shall hire or employ a managing director and a manager at the same time.
(2) No company shall appoint or re-appoint any individual as its managing director, whole-time director, or manager for a period of more than five years at a time:
Provided, however, that no reappointment shall be made less than one year before the expiration of his term.
(3) No firm shall appoint or retain as managing director, whole-time director, or manager any individual who — (a) is under the age of twenty-one years or has reached the age of seventy years:
Provided, however, that the appointment of a person who has reached the age of seventy years may be made by passing a special resolution, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person; (b) is an undischarged insolvent or has at any time been adjudged as an insolvent; or (c) has at any time suspended payment to his credit.
(4) Subject to the provisions of section 197 and Schedule V, a managing director, whole-time director, or manager shall be appointed, and the terms and conditions of such appointment and remuneration payable shall be approved by the Board of Directors at a meeting, which shall be subject to approval by a resolution at the company’s next general meeting and by the Central Government if such appointee is a foreign national.
Provided, however, that a notice calling a Board or general meeting to consider such appointment should contain the terms and circumstances of such appointment, compensation payable, and any other issues, including interest, of a director or directors in such appointments:
Furthermore, a return in the specified form must be made with the Registrar within sixty days after such appointment.
(5) Subject to the stipulations of this Act, if the company does not approve the appointment of a managing director, whole-time director, or manager at a general meeting, any act done by him prior to such approval is not deemed unlawful.[5]
Section 197of Companies Act, 2013
(1) The total managerial remuneration payable by a public company to its directors, including managing directors and full-time directors, and its manager in respect of any fiscal year shall not exceed 11% of that company’s net profits computed in the manner specified in section 198, except that the directors’ remuneration shall not be d
Provided, however, that the company in general meeting may, with the permission of the Central Government, allow the payment of remuneration in excess of 11% of the business’s net earnings, subject to the requirements of Schedule V:
Provided further that, except with the approval of the company in general meeting,— I the remuneration payable to any one managing director; or whole-time director or manager shall not exceed 5% of the company’s net profits, and if there is more than one such director, remuneration shall not exceed 10% of the net profits to all such directors and managers taken together; (ii) the remuneration payable to any one managing director; or whole-time director or manager shall not exceed
(2) The aforementioned percentages are exclusive of any fees payable to directors under sub-section (3) Notwithstanding anything contained in sub-sections (1) and (2), but subject to the provisions of Schedule V, if a company has no profits or its profits are insufficient in any financial year, the company shall not pay to its directors, including any managing or whole-time director or manager, by any means.
(4) The remuneration payable to a company’s directors, including any managing or whole-time director or manager, shall be determined in accordance with and subject to the provisions of this section, either by the company’s articles, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting, and the remuneration payable to a direct employee shall be determined in accordance with and subject to the provisions of this section. Provided, however, that any remuneration for services rendered by any such director in another capacity shall not be so included if— (a) the services rendered are of a professional nature; and (b) the director possesses the requisite qualifications in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, or the Board of Directors in other cases.
(5) A director may be compensated in the form of a fee for attending meetings of the Board or a Committee thereof, or for any other reason as determined by the Board:
Provided, however, that the amount of such fees does not exceed the amount prescribed:
Provided, however, that various fees for different kinds of corporations and fees for independent directors may be specified.
(6) A director or management may be given remuneration in the form of a monthly payment, a predetermined percentage of the company’s net earnings, or a combination of the two.
(7) Notwithstanding any other provision of this Act, but subject to the provisions of this section, an independent director shall not be entitled to any stock option and may receive remuneration in the form of fees provided in subsection (5), reimbursement of expenses for participation in the Board and other meetings, and profit-related commission as approved by the membership.
(8) For the purposes of this section, net profits are determined in the manner specified in section 198.
(9) If any director draws or receives, directly or indirectly, any such sums as remuneration in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where required, he shall refund such sums to the company and hold it in trust for the company until such sum is refunded.
(10) Unless approved by the Central Government, the firm shall not waive the recovery of any money refundable to it under sub-section (9)
(11) In cases where Schedule V applies due to a lack of profits or insufficient profits, any provision relating to the remuneration of any director that purports to increase or has the effect of increasing the amount thereof, whether contained in the company’s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general,
(12) In the Board’s report, each listed business must publish the ratio of each director’s pay to the median employee’s remuneration, as well as any additional information that may be required.
(13) Where a company obtains insurance on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer, or Company Secretary to indemnify any of them against any liability arising from any negligence, default, misfeasance, breach of duty, or breach of trust in relation to the company, the premium paid on success is deductible.
(14) Subject to the provisions of this section, any director who receives a commission from the company and is a managing or full-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company, subject to the disclosure of such remuneration or commission by the company in the Board’s report.
(15) Any person who violates the requirements of this section will be punished by a fine of not less than one lakh rupees but not less than five lakh rupees.[6]
Section 200 of Companies Act, 2013
Notwithstanding anything in this Chapter, the Central Government or a company may fix the remuneration within the limits specified in this Act, at such amount or percentage of the company’s profits, while giving its approval under section 196 to any appointment or remuneration under section 197 in cases where the company has insufficient or no profits.[7]
Section 201 of Companies Act, 2013
Section 201(1)
Every application to the Central Government under this Chapter must be made in the form prescribed by the Central Government.[8]
Section 203 (1)
Every company belonging to such class or classes of companies as may be prescribed must have the following full-time key management personnel: I managing director, Chief Executive Officer, or manager, and, in their absence, a whole-time director; (ii) company secretary; and (iii) Chief Financial Officer.
Provided, however, that after the date of commencement of this Act, an individual shall not be appointed or reappointed as the chairperson of the company, in accordance with the company’s articles, as well as the managing director or Chief Executive Officer of the company, unless: (a) the company’s articles provide otherwise; or (b) the company does not carry multiple businesses:
Furthermore, nothing in the first proviso shall apply to a class of firms that operate in numerous businesses and have nominated one or more Chief Executive Officers for each of those enterprises, as the Central Government may notify.[9]
Rule 7
(1) Every application filed to the Central Government under the provisions of Chapter XIII must be made in Form No. MR-2 and must be accompanied by a fee for the purposes of sub-section (1) of section 201.
(2) Companies other than listed companies and subsidiaries of a listed company may pay remuneration to its managerial person in the event of no profit or insufficient profit beyond the ceiling prescribed in section II, part II of Schedule V without the approval of the Central Government if the following conditions are met:
(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, by the Nomination and Remuneration Committee, if any, and while doing so, the company records in writing a clear reason and justification for payment of remuneration beyond the said limit; (ii) the company has not defaulted in repayment of any of its debentures; (iii)
(iii) Approval of shareholders at a general meeting of the firm by means of a special resolution for payment of remuneration for a term of not more than three years;
(iv) A statement, together with the notice convening the general meeting referred to in clause (iii) of sub-rule (2) above, shall contain the information set forth in sub clause (iv) of the second proviso to clause (B) of section II of part-II of Schedule V of the Act, including the reasons and justification for payment of remuneration in excess of the limit.
(v) the firm has filed the required Balance Sheet and Annual Return with the Registrar of Companies.
(3) Within ninety days after the date of the appointment, any such application for approval must be submitted to the Central Government.[10]
Purpose of Form MR-2
The purpose of E-form MR-2 is to seek Central Government permission for the appointment of a managing director/whole-time director/manager who does not conform with Part I of Schedule V of the Companies Act 2013. According to Section 197 of the Companies Act 2013, a business may not hire a person as a managing director/whole-time director/manager if he is under the age of 21 and over the age of 70. Moreover, the proviso says that the appointment of someone beyond the age of 70 may only be made by a special resolution. If no special resolution is approved, but the number of votes voted in favor of appointing such a person exceeds the number of votes cast against it, such an appointment may be made with the consent of the Central Government.[11]
Analysis
The Form MR-2 must be submitted within 90 days of the appointment or reappointment under the relevant provision of the Act along with the required fee.
Enter the information about the potential appointee or the individual for whom the application is being filed. If you’re a Managing Director or a Full-Time Director, you’ll need to enter an authorised DIN. In the event of a manager, enter an authorised DIN or a valid income tax PAN.
If option 1 of field 4 an is selected, the effective date of the appointment or reappointment must be entered. Enter the information of the proposal’s resolution by the Board of Directors. Enter the date of the board of directors’ resolution, the nomination and remuneration committee’s resolution (if applicable), and the shareholders’ resolution. Enter the net profit or loss as determined by section 198 of the Act.
If a profit is made under section 198, the system will automatically display 11% of the profit in the appropriate areas. Enter the information of the company’s pay paid to its director, managing director, or full-time director or manager during the last three financial years. Enter the total number of people who have received compensation.
Blocks for inputting data will be presented based on the number entered here. This eForm may hold the information of up to five people. If the total number exceeds five, the remaining person(s)’ information might be included as an optional attachment.
The names of all executive directors (if any) must be supplied first, followed by the names of non-executive directors.
If you’re a director, enter an approved DIN, and if you’re a manager, enter a DIN/PAN. When you press the Pre-fill button, the system will automatically show the name you provided in DIN. The name must be entered in the case of an income-tax PAN. Fill in any additional pertinent information, such as the director’s title and whether he or she is an executive or non-executive. The association of the individual (whose DIN or income-tax PAN is entered) with the firm must be verified. Enter the information of the company’s pay paid during the last three financial years.
If there is a loss under section 198, put zero in the entry for percent of net earnings under section 198. In the event that government permission is not obtained, list the reasons why. Enter the details of any other company’s compensation that the appointee or person in whose favor the application is filed is receiving. In the event of payment of remuneration in excess of the statutory limitations set out in Schedule V of the Act, the user must fill out this section if the firm has no profits or its earnings are insufficient. Enter the date of the board of directors’ resolution, the date of the compensation and nomination committees’ resolutions (if applicable), and the date of the shareholder’s resolution. Enter the SRN of eForm MGT.14 linked with CIN if a special resolution was passed. The field is required if compensation exceeds 11% of Net Profit. The proposed remuneration should be more than 11 percent of profit as determined under Section 198.
Enter the amount in rupees for the company’s effective capital based on the most recent audited balance sheet. The definition of effective capital is found in Schedule V of the Companies Act of 2013. Effective capital is defined as the sum of the paid-up share capital (excluding share application money or advances against shares); the amount, if any, currently standing to the credit of the share premium account; reserves and surplus (excluding revaluation reserve); and long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, and interest due on loans. Also, include a copy of the effective capital calculation form as an attachment.
Enter the proposed annual pay of the appointee or the person in whose favour the application is filed. If your commission, bonus, or performance-based incentive is expressed as a percentage, be sure to indicate it.
If the planned pay is for more than one year, account for each year or portion of a year for the entire duration of remuneration. Enter the information of excess compensation paid, total entitlement, excess remuneration to be waived off, and the circumstances under which such amount was paid in excess of the limitations if excess remuneration was waived.
Declaration
Enter the serial number of the board resolution as well as the date of the board meeting at which the individual signing the eForm was properly authorized.
Attachments
If Option 4 is selected in field 4, a copy of the effective capital calculation sheet is required (a) In all circumstances, a certified genuine copy of the Board of Directors’ resolution is required. If the date in 10(b) or 14 is entered, a copy of the nomination and remuneration committee’s resolution is required (b). If the date is entered in 10(c) or 14, a certified genuine copy of the shareholder(s) resolution, as well as notification.
In all situations, a certificate from the auditor or company secretary is required. If no option is selected in field 15, a certificate of no default in debt repayment will be issued. If no option is chosen in field 15, a certificate of no objection from the financial institution(s) or bank(s) is required. A copy of the BIFR or NCLT order, as well as a copy of a revival or rehabilitation program.
If option 1 in 4 is selected, a copy of the written agreement between the firm and the potential. Newspaper clippings with notifications If the recommended appointee is a foreign national, a copy of their employment visa/passport is required. Copies of certificates of education or professional competence.
If option 4 is selected in 4, a statement as per item (IV) of the third proviso. Turnover and net profit forecasts over the next three years. In all situations except choice 1 of 4, calculating anticipated profit under section 198 of the Act. If option 1 in 4 is selected, an auditor’s certificate is required under Section 164 of the Companies.
If no option is selected in field 4, an application for a delay condonation under Section 460 of the Act. In all situations, a complete and adequate rationale in favor of the plan is required.
If option 1 in 4 is selected, documented verification of conformity with the requirements. A certificate from the company secretary or a CA/CS in full-time practice must be notified previously. If the applicant company is a subsidiary of a listed corporation, provide further information.
The eForm will be processed by the Headquarters office (Non-STP). An acknowledgment of approval/rejection letter, together with any associated documents if any, is delivered to the user in the form of an email to the company’s email id after an eForm is approved/rejected by the authority involved. When an email is not an option, a printout is created and mailed to the applicant. Dealing Hand produces an official approval/rejection order and sends it to the user after the final decision is made.
Section 201 of the Companies Act, 2013 states that before a company makes an application to the Central Government under any of the aforementioned sections, a general notice to the members describing the nature of the proposed application must be published at least once in a newspaper in the principal language of the district in which the company is registered.[12]
Copies of the notifications, as well as a certificate from the firm attesting to their timely publication, must be submitted to the application. It also stipulated that, in the event of no profit or insufficient profit beyond the ceiling prescribed in section II, part II of Schedule V, companies other than listed companies and subsidiaries of a listed company may pay remuneration to their managerial person without the approval of the Central Government, subject to the payment of remuneration is approved by a resolution of the Board of Directors.
Conclusion
The new Act has significantly liberalized the regulations governing executive remuneration, subject to sufficient shareholder reporting. The need to seek clearance from the federal government has been significantly reduced. The Central Government is not obligated to pay Non-Executive Directors’ salaries in monthly installments as long as they stay within the established limitations.
In place of the existing requirement of section 317 of the 1956 Act, re-appointment of a managing person cannot be made more than one year before their tenure expires.
Any Director who receives a commission from the firm and is a Managing Director or Whole-time Director of the company can also earn pay or commission from any Holding Company or Subsidiary Company of the company, provided that the company discloses it in the Board’s Report. This is a deviation from the Companies Act of 1956’s clause. The directors, on the other hand, are prohibited from accepting payment or commissions from any other company, including Associate Companies. Independent Directors may be compensated differently from other directors. Stock options are not available to independent directors. They may only be compensated in the form of sitting fees, reimbursement of expenses for attending Board and other meetings, or profit-related commissions, as determined by the company’s members. Every Listed Company will be required to publish the ratio of each Director’s compensation to the median employee’s remuneration in the Board’s report, as well as any other information required by the Central Government through the Rules.
Given the national and international controversy about excessive executive compensation, the objective of enacting this clause appears to be to inform shareholders about the degree of pay disparities between employees and directors. The premium paid by a Company on behalf of its Managing Director, Whole-Time Director, Manager, Chief Executive Officer, Chief Financial Officer, or Company Secretary to indemnify any of them against any liability arising out of any negligence, default, misfeasance, breach of duty, or breach of trust for which they may be responsible in relation to the Company shall not be deductible. No approval of the Central Government is required for remuneration payable to any Director in any other capacity if such services are professional if the Nomination and Remuneration Committee or Board of Directors is of the opinion that the person possesses the necessary qualification for the practice of the profession. The criteria under which the Company can pay payment to managerial personnel have been modified in the event of no or insufficient profit.
References:
[1] Appointment and Remuneration of Key Managerial Personnel, The Institute of Company Secretary of India.
[2] Turab Chimthanawala, July 2020, Appointment and Remuneration of Managing and Whole-time Directors-Companies Act, 2013, TaxGuru.
[3] Ibid.
[4] July, 2021, MR2 E-Form, Cleartax
[5] Section 196, Companies Act, 2013
[6] Section 197, Companies Act, 2013
[7] Section 200, Companies Act, 2013
[8] Section 201(1), Companies Act, 2013
[9] Section 203(1), Companies Act, 2013
[10] Rule 7, Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
[11] Instruction Kit for E-Form MR-2.
[12] Supra Note 1.
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