The provisions of the Companies Act, 1956 governing managerial remuneration are constantly re-examined by the Ministry of Corporate Affairs in keeping with the evolving economic and regulatory environment.

The primary purpose of imposing regulations on managers is to protect the interest of stakeholders and creditors, particularly for public limited companies, whether listed or unlisted.

The appointment of, and remuneration payable to managerial personnel is governed by the following sections of the Act:

Section 269 deals with the appointment of managerial personnel;

Section 198 prescribes the overall maximum limit for managerial remuneration and refers to Schedule XIII of the Act.

The Schedule comprises of two parts. Part I deals with the conditions to be fulfilled for the appointment of managerial personnel without the approval of the Central Government, while Part II of the Schedule deals with the limits of remuneration and is further sub-divided into two sections: Section 309 which lays down the individual limits for the remuneration; and Section 310 and section 311 of the Act which deal with the increase of remuneration and change in the terms of appointment of the personnel.

The Centre has relaxed the administrative provision of seeking approval in respect of managerial remuneration to reduce the hardship faced by companies in complying with the numerous provisions applicable to the appointment and remuneration of managerial personnel; to reduce its own administrative efforts by limiting the number of applications made by companies for obtaining approval; and to reduce the interference of the Centre in the operations of companies and encourage them to manage their internal operations in a more autonomous manner.

Despite the fact that administrative procedures have been smoothened, in the absence of comprehensive and clear guidelines companies keep applying to the Centre. This article provides an overview of relaxations granted by the Ministry through recent circulars/notifications.

Recent Developments

The relaxation from obtaining the Centre’s approval was first given to unlisted companies vide Notification GSR 70(E) dated February 8, 2011, which amended the Schedule and restricted the requirement of obtaining the approval under sub-section C of section II of Part II to the Schedule only to listed companies and subsidiaries of the listed companies.

Subsequently, the Ministry issued a notification G.S.R. 396 (E) dated May 23, 2011, relaxing norms for the subsidiaries of the listed companies, provided compliance with certain conditions are ensured.

Additionally, a general circular 46/2011 dated July 14, 2011 was issued by the Ministry, which provided that the approval will not be required by listed companies and their subsidiaries if their managerial personnel do not have any direct or indirect interest in the capital of the companies or their holding company or through any other statutory structures at any time during the past two years before or on the date of appointment; and have a graduate-level qualification with specialised knowledge in their profession.

Conclusion

In view of these amendments, there would be certain circumstances in which a company would still be required to obtain the Centre’s approval. For unlisted public companies: Where any conditions specified in either Part I or Part II of the Schedule, as applicable to such companies are not complied with.

For listed public companies: Where any conditions specified in either Part I or Part II of the Schedule are not complied with, including the following: The manager has any interest (direct/indirect) in the capital of the company or its holding company, direct or indirectly (determination of what would constitute direct or indirect interest is the subject matter of judgement, which may even necessitate seeking legal opinion for interpretation) or through any other statutory structures, at any time during the past two years before or on the date of appointment; and the person does not have a graduate-level qualification with specialised knowledge.

For subsidiaries of listed public companies: In addition to the conditions specified for the listed companies, where following conditions are not complied with:

The remuneration committee and board of directors of the holding company give their consent for the amount of such remuneration of the applicant and for the said amount to be deemed remuneration by the holding company for the purpose of Section 198 of the Act; a special resolution has been passed at the general meeting of the company for payment of remuneration of the applicant; the remuneration of the applicant is deemed to be remuneration paid by holding company; and all members of the subsidiary are bodies corporate.

Matter of concern

While companies have welcomed the changes with open arms, the rationale behind including a specific condition that all members of subsidiaries of listed companies should be bodies corporate is not understood.

Does this imply that a subsidiary of alisted company having public holding needs to mandatorily seek the Centre’s approval?

Harinderjit Singh is Partner, Price Waterhouse. With Inputs from Ridhima Dubey, Senior Manager.

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