Company law amendments - Series V

In the fifth series of company law amendments, I am posting some more sections which includes Director amendments. You can read these amendments both in paragraph and tabular form. However, most of these amended sections have not been notified by the ICAI for the November, 2014 attempt.

Appointment and remuneration of managerial personnel

The 2013 Act brings important modifications to the existing requirement of the 1956 Act with respect to appointment and remuneration of managerial personnel. One of the main changes that could be identified is in respect of the applicability of these provisions. The provisions for appointment of managing director, whole time director or manager are no longer restricted to the public companies and the private companies which are subsidiaries of public companies and now applicable to all companies. The overall ceiling regarding the payment of managerial remuneration by a public company remains at 11% of the profit for the financial year computed in the manner laid down in the 2013 Act.

Appointment of managing director, whole time director or manager [section 196 of 2013 Act].

The re-appointment of a managerial person cannot be made earlier than one year before the expiry of the term instead of two years according to the existing provision of section 317 of the 1956 Act, though, the term for which managerial personnel can be appointed remains as five years.

The eligibility criteria for the age limit has been revised to 21 years as against the existing requirement of 25 years. Further, the 2013 Act removes the upper slab for age limit and thus an individual above the age of 70 years can be appointed as key managerial personnel by way of special resolution.

Provisions regarding the appointment of the managerial personnel has been specified in section 196 and Schedule V to the 2013 Act.

Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits [section 197 of 2013 Act].

As against the existing requirement of section 198 of the 1956 Act, which specially provides that the provisions of managerial remuneration would be applicable to both public companies and private companies which are subsidiaries of public companies; the 2013 Act mentions that such provisions would be applicable only to public limited companies.

Listed companies have been mandated to make a disclosure in their board report, the ratio of remuneration of every director to median employee’s remuneration and such other details which are pretty extensive as proposed in the draft rules.

The existing 1956 Act under section 309 states that a managing director or a whole time director of a subsidiary company who is in receipt of commission from the holding company cannot receive any commission or remuneration from the subsidiary company. The said restriction has been lifted by the 2013 Act, though, such receipt must be disclosed in the Board’s report [section 197(14) of

2013 Act].

The provisions of existing Schedule XIII of the 1956 Act have been included in Schedule V of the 2013 Act and the requirements have been structured around the similar rules, with revised remuneration limits and certain additional requirements, for example, the

managerial personnel should not have been convicted of an offence under the Prevention of Money Laundering Act, 2002.

The 2013 Act has liberalised the administrative process by relaxing the requirement of obtaining the central government approval provided the company complies with certain requirements including seeking approval by way of special resolution for payment of managerial remuneration. Same relaxation norms as envisaged in the 2013 Act had been included in Schedule XIII of the 1956 Act

by virtue of the latest circulars issued by MCA.

Remuneration’s definition has undergone some alterations in the 2013 Act. The 2013 Act in section 2(78), defines remuneration as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income-tax Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to managerial personnel. The 1956 Act defined remuneration under section 198 by way of an explanation and provided for the certain specific inclusions that would be interpreted as remuneration. Section 200 of the 1956 Act specifically prohibited tax free payments. The 2013 Act has indirectly incorporated the same requirement by clarifying that the term remuneration includes any reimbursement of direct taxes.

The 2013 Act mentions that premium paid by a company for any insurance taken by a company on behalf of its managing director, whole time director, manager, chief executive officer, chief financial officer or company secretary for indemnifying any of them against any liability regarding any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company would not be treated as part of remuneration except for the cases where person is proved to be guilty. The provisions cited above are same as the existing provisions of section 201 of the 1956 Act.

Calculation of profits [section 198 of 2013 Act]

The 2013 Act puts out in detail about the allowances and deductions that a company should include while calculating the profits for the objective of computing the managerial remuneration. To illustrate, the 2013 Act mentions that while computing its profits, credit should not be given for any change in the carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.

Recovery of remuneration in certain cases [section 199 of 2013 Act]

The 2013 Act has strict provisions in case the company is required to restate its financial statements pursuant to fraud or non-compliance with any requirement under the 2013 Act and the Rules made there under. As against the existing requirement of section 309 of the 1956 Act which only refers to the fact that excess remuneration paid to managerial personnel cannot be waived except with the previous approval of the central government, the 2013 Act moves a step forward and facilitates the company to recover the excess remuneration paid (including stock options) from any past or present managing director or whole time director or manager or chief executive officer who, during the period for which the financial statements have been reaffirmed, has acted in such capacity.

Appointment of key managerial personnel [section 203]

 The 2013 Act provides for compulsory appointment of following whole time key managerial personnel for each listed company and every

other company which has a paid-up share capital of five crore INR or more

(i) Managing director, or chief executive officer or manager and in their absence, a whole-time director

(ii) Company secretary

(iii) Chief financial officer

In addition, the 2013 Act also mentions that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise

or the company not having numerous businesses.

Key Points

S.No.	Particulars	As per Companies Act 1956	As per Companies Act 2013
1	Applicability of provisions for appointment of Managing Director	Applicable to public companies and the private companies which are subsidaries of public companies	Applicable to all the companies
2	Re-appointment of a managerial person	Re-appointment cannot be made two years before the expiry of term	Re-appointment cannot be made one year before the expiry of term
3	Minimum and maximum age for appointment of managerial personnel	Minimum age - 25, maximum age - 70	Minimum age - 21, maximum age - new Companies Act has removed the upper slab for age limit
4	Applicability of provisions of managerial remuneration	Applicable to public companies and the private companies which are subsidaries of public companies	Applicable to public limited companies only
5	Disclosure in board report	No requirement of disclosure for listed companies	Listed companies have been mandated to make a disclosure in their board report, the ratio of remuneration of every director to median employee’s remuneration and such other details which are pretty extensive as proposed in the draft rules.
6	Commission or remuneration	Managing director or a whole time director of a subsidiary company who is in receipt of commission from the holding company cannot receive any commission or remuneration from the subsidiary company	Managing director or a whole time director of a subsidiary company who is in receipt of commission from the holding company can receive any commission or remuneration from the subsidiary company but disclosure of such receipt must be made in the board report
7	Definition of remuneration	The 1956 act defined remuneration u/s 198 by way of an explanation and provided for the certain specific inclusion that would be construed as remuneration. Section 200 of the 1956 Act specifically prohibited tax free payments.	Remuneration’s definition has undergone some alterations in the 2013 Act. The 2013 Act in section 2(78), defines remuneration as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income-tax Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to managerial personnel.
8	Recovery of remuneration in certain cases	The 1956 Act refers to the fact that excess remuneration paid to managerial personnel cannot be waived except with the previous approval of the central government	The 2013 Act moves a step forward and enables the company to recover the excess remuneration paid (including stock options) from any past or present managing director or whole time director or manager or chief executive officer who, during the period for which the financial statements have been restated, has acted in such capacity.