Measuring the Ritchie Rich in public companies

Remuneration refers to money or its equivalent given for services rendered, and includes perquisites as defined under Income tax Act, 1961. The remuneration payable to a managing director or whole-time director shall not exceed 5 per cent of the company’s net profit, and if there are more than one MD/ WTD, the remuneration payable totally shall not exceed 10 per cent. These limits can be breached by a general body resolution.

However, the total managerial remuneration payable by a public company shall not exceed 11 per cent of the net profit. The Central Government’s approval is needed to breach this, or else the company has to ensure that the remuneration complies with Schedule V. Private companies do not have statutory ceilings.

Schedule V has stringent conditions for the appointment of an MD/ WTD. He/she should not have undergone imprisonment or fined under specified legislations. He/she should be at least 21 years of age and not above 70. However, the 70-year limit can be breached through a special resolution at the general meeting. All other Schedule V conditions can be breached only with the Government’s approval.

Under Schedule V, the remuneration of an MD/ WTD does not need Government approval, provided it is within the specified limits. The limits are based on the effective capital of the company, as under the erstwhile Schedule XIII, but have been streamlined significantly. Yearly remuneration can range from Rs 30 lakh to 60 lakh plus 0.01 per cent of the effective capital exceeding Rs 250 crore. These limits can be doubled if shareholders pass a special resolution. They are also doubled for a newly-incorporated company for the first seven years, and for a sick company for five years from scheme’s sanction. Also, subject to conditions, some dispensation is available for companies in an SEZ, and where a foreign company or one that has shareholders’ approval makes the managerial remuneration on behalf of another company.

Under Schedule V, certain perquisites (such as provident fund, gratuity, and leave encashment) will not be counted for the limits, with an expatriate allowed more perquisites (such as children education allowance, holiday and return passage for children, and so on).

In determining the managerial remuneration limits, services of a professional nature will not be counted. However, the services will be considered professional only if, in the opinion of the Board/ Nomination and Remuneration Committee, the director has the requisite qualification.

Where insurance is taken by a company on behalf of the MD/ WTD for indemnifying against negligence or breach of trust/ duty, the premium paid shall not be treated as part of remuneration. However, if the MD/ WTD is proven guilty, the premium paid shall be treated as remuneration.

Where a company’s financial statement has to be restated due to fraud or non-compliance with accounting standards, the MD/ WTD will receive remuneration (including stock options) based on the revised statements for the relevant period. Thus, any excess remuneration received fraudulently or otherwise should be refunded. Interestingly, the reverse is not applicable.

Regarding independent directors, the draft rules impose a limit of Rs 1 lakh for each meeting attended. Further, an independent director is not entitled to stock options. This restriction, interestingly, does not exist under SEBI rules. However, in case of conflicting legislations, the worse of the two would prevail. Approval of the general meeting is required where remuneration payable to directors other than MD/ WTD exceeds 1 per cent of net profit if there is an MD/ WTD, or 3 per cent in other cases.

The disclosure requirements for managerial remuneration are onerous compared to the old Companies Act. However, they are in line with global developments, such as the Dodd Frank requirement in the US and the changes to Company Law in the UK. In its Board report, every listed company shall disclose the ratio of the remuneration of each director to the median employee’s remuneration. According to the draft rules, the company should also disclose the percentage increase in remuneration of each director, percentage increase in the median remuneration of employees, and the comparison of the remuneration against the performance of the company. The ratio of the highest-paid director’s remuneration to that of employees who are not directors but receive more will bring into focus the real decision-makers.

(The author is Partner in a member firm of Ernst & Young Global)

COMMENT NOW