Introduction This Article depicts elaborate analysis on Managerial Personnel appointment and remuneration under the domain of Companies Act
This Article depicts elaborate analysis on Managerial Personnel appointment and remuneration under the domain of Companies Act, 2013 including Companies (Amendment) Act of 2017. The Company Amendment Bill, 2017 passed by Lok Sabha on July 27, 2017; by Rajya Sabha on December 19, 2017, and got the consent of President on January 3, 2018. It has dependably been oppressive for the Corporate to pay the compensation (surpassing certain breaking points as endorsed under the 2013 Act) to the Managerial Personnel in the event of Company which has incurred loss or profits are inadequate. Presently arrangement under the 2017 Act has made it unmistakable, adaptable and liberal to make the payment after complying with its provisions without Central Government endorsement.
The Companies Amendment Act, 2017 (hereinafter referred to as the ‘Amendment Act’) has finally seen the sunshine of the day when an amount of prolonged hibernation lasting virtually 2 years. The amended provisions are being notified for application during a phased manner. The modification Act comes off as a breath of contemporary air therein it eases the trials of procedure on any matters, sets right the drafting anomalies that had crept in unknowingly within the original version of the Companies Act, 2013 (hereinafter ‘the Act’) and everyone told, facilitates the creation of a lot of friendly Eco-system.
Given the information measure of the changes caused by the Amendment Act, it’s nearly not possible to capture the nuances of all the changes within the restricted scope of a discussion paper. Thus during this exposition, we tend to propose to adopt a two-dimensional figure approach and appearance at the changes that are created to the realms of administrators and Board Management.
Changes to Section 149
Sub-section (3) within the Act has been amended to provide that each company shall have a minimum of one director who stays in India for a complete amount of not below 182 days in a very twelvemonth. The earlier requirement was that the period of stay shall be determined with reference to a calendar year. The modification is suitable since this may align the sub-section with the provisions of Section 6 of the Income Tax Act,1961 about the determination of residential standing.
A proviso has been inserted under Section 149(3) to stipulate that in case of a newly incorporated company, the requirement of a resident director as above will be relaxed and the period of stay in India shall apply proportionately at the end of the financial year in which the company is incorporated.
Relaxation of the requirements relating to Qualifications as Independent Directors
Clauses (c) and (d) in Section 149(6)in the present Act that commenced, inter alia, the attributes of Independent director are changed.
An independent director logically isn’t alleged to have any monetary relationship with the corporate with that he’s associated as a Director as this can vitiate his independence.
As per Clause (c) in Section 149(6), it stood before the change Act, a director was precluded from having a monetary relationship with the corporate, its holding, subsidiary or associate company or their promoters or administrators throughout the 2 forthwith preceding years or throughout this yr.
Clause (d) to Section 149(6) stipulated that monetary relationship shall exist wherever the director himself or his relatives have transactions the worth of that entered into by them with the corporate, its holding, Subsidiary or Associate Company or their promoters quantity to 2 % or additional of the Company’s gross turnover or total financial gain or fifty lacs or such higher quantity as could also be prescribed whichever is lower throughout the immediately preceding financial years or during the current financial year. Thus the litmus test for constituting pecuniary relationship was the two per cent benchmark as above.
In addition, pursuant to amended clause (d) under Section 149(6), the status of an Independent Director will stand vitiated in the following circumstances:
a) where the relatives of the Director have either during the current financial year or during the two immediately preceding financial years –
i) hold any security or interest in the company, its holding, subsidiary or associate company for a face value not exceeding Rupees fifty lacs or two per cent of the paid-up share capital of the company or such higher amount as may be prescribed.
ii) is indebted to the company or its holding/subsidiary/associate company or to the company’s promoters or directors in excess of an amount to be prescribed.
iii) has provided a guarantee or any security in connection with the indebtedness of any third person in the company, its holding/subsidiary/associate company or the Company’s promoters or directors of such holding company for such amount as may be prescribed.
iv) has any other pecuniary transaction or relationship with the company, its holding/subsidiary/Associate company for a value amounting to two percent or more of its gross turnover or total income either singly or in combination with the transactions referred to in clauses(i),(ii) or (iii) above.
A proviso is also being inserted after subclause(i) under clause(e)of Section 149(6)to the effect that where the director himself or any of his relatives hold or have held the position of a key managerial personnel(KMP) or is or has been an employee of the company or its holding/subsidiary/Associate company in any of the three financial years preceding his appointment as Independent director ,in case the relative of the concerned director is in the employment of the company , the director’s independence shall not be influenced or affected by the relative’s employment with the company during the preceding three financial years.
Amendment to Section 152(3)
As per the present law, no one will be appointed as a director of an organization unless he has been assigned a Director Identity Number (DIN) as per Section 154. The sub-section, therefore, has the result of debarring an individual from being appointed as a Director unless he has been assigned a DIN within the initial place.
Given that there are sure problems related to getting the DIN especially for nonresident administrators, the Govt. is considering to introduce any positive identification except DIN which might be thought-about as resembling DIN.If the involved person has obtained such identification number, he will not be called upon to apply for DIN as is evident from the amendment proposed under Section 153.
Although each Section 152 and 153 are notified for application from February 9, 2018, the modalities related to the creating of an application for identification number which is able to be kind of like DIN haven’t however been finalized. thus in spite of the notification of the on top of provisions, as of now, the need of an individual having a DIN as a pre-requisite for his appointment as Director still continues.
Amendment to Section 160 (1)
Section 160(1) as it stood prior to its amendment provided for the requirement of a deposit of a fee of Rupees one lac or such higher amount to be prescribed for proposing the appointment of a Director at any general meeting apart from the requirement of either the candidate for the appointment or a member proposing the candidature serving upon the company a notice for the appointment within fourteen days from the date of the meeting. In the event of the election of the Director or upon the candidate obtaining twenty-five per cent of the votes cast, the deposit referred to above shall be refunded by the company.
The amendment to Section 160(1) which has been notified effective from February,9, 2018 takes away the requirement of the candidate or the member proposing the candidature making the above deposit in the case of appointment of an Independent Director or where the appointment of a director has been recommended by the Nomination and Remuneration Committee of the Board where the company has constituted such a Committee. Where the company does not have the above Committee, if the appointment bears the recommendation of the Board, the requirement of the deposit shall not arise.
The immediate fall-out of the amendment is that it will encourage the tendency, which was conspicuous during the regime of the 1956 Act , of unscrupulous persons or those with an axe to grind in proposing their candidatures for appointment as directors in reputed companies merely with the intention to embarrass the existing Board as there would now be on downside to such an endeavor in the form of the requirement of a security deposit and the risk of loss of 75% thereof if the candidate does not garner adequate support thereby imperiling forfeiture of the deposit.
Amendment to Section 161(2)
The sub-section in its original form provided that any person who is not holding the position of Alternate director in the company could act as an Alternate for any director during the period of his absence from India, subject to the provisions of the Company’s Articles. The scope of the subsection is being widened to provide that any person who is already holding directorship in the company shall not be considered for appointment as an Alternate for another.
Relaxation in disqualification provisions-Section 164(2) and (3)
Section 164 of the Act sets out the circumstances that lead to the disqualification of directors. Certain changes are proposed by the Amendment Act which is yet to be notified for enforcement.
A proviso has been added under Section 164(2) which has the effect of insulating a director from disqualification, albeit, for a temporary period.
Under the above provision any person who is or has been a director of a company which has not filed its financial statements or annual returns for any continuous period of three years or has failed to repay deposits accepted by a company or to pay interest thereon or to redeem any debentures or pay interest thereon or to pay any dividend which has been declared and such failure continues for one year or more is ineligible from being reappointed as director in the company or from being appointed in any other company for a period of five years from the date of occurrence of the default.
The newly added proviso under Section 164(2) states that where a person is being appointed as director in a company which has committed any default contemplated under clause (a) or (b)of Section 164(2), he shall not incur disqualification for a period of six months from the date of his appointment.
The existing proviso under Section 164(3) is being substituted by a new proviso which stipulates as under:
Where a director incurs disqualification for any one of the following reasons as envisaged in clauses ( c ), (d)and (e ) of Section 164(1) :
Conviction by a court of any offence whether involving moral turpitude or otherwise and he has been sentenced to imprisonment for a term which is not less than six months and a period of five years have not elapsed from the date of expiry of the sentence.
– any order passed by a court or Tribunal by which the person has been disqualified from the appointment and the order is still in force.
– a conviction for an offence dealing with related party transactions under Section 188 during the last preceding five years
– such disqualification shall apply even where the director concerned has filed an appeal or petition against the conviction or disqualification.
Vacation of office of Director-Changes made to Section 167
A proviso has been added under clause (a) in Section 167(1) to stipulate that if any director incurs disqualification under Section 164(2) he shall vacate office in all the companies in which he is a director except in the company in which the default under the said subsection has arisen. This change is in congruence with the proviso inserted under Section 164(2) which echoes the same sentiment.
In addition, the existing proviso under clause (f)of Section 167(1) has been substituted in the Amendment Act.
Managerial Personnel Remuneration
As per Section 2(78), Remuneration means any money or its equivalent given or passed to any person for services rendered for him and includes perquisites as defined under Income-tax Act, 1961.
Section 197 deals with the Remuneration payable to Directors including Managerial Personnel. The Section applies only to Public Companies and hence private Companies are free to pay remuneration at any rate to such directors in case of adequacy or inadequacy of profits. The Company may pay the remuneration to the managerial personnel exceeding total limit of 11% of net profits (computed as per Sec 198 of the 2013 Act and Director’s remuneration deducted should be added back to the gross profit) with the approval of members at the general meeting. The proviso which required Central Government approval exceeding the said limit has omitted. But the new provision has been inserted through the third proviso to the section that if the company defaulted in the payment of dues to any bank or public financial institution or non-convertible debenture, their prior permission shall be obtained before getting the approval of members in the general meeting.
Relaxation In Managerial Remuneration for Certain Class of Companies
The 2013 Act read with Rule 7 of the respective rules has given relaxation to the companies other than listed companies and its subsidiaries for paying managerial remuneration without Central Government approval (ie., beyond ceiling limit in Section II, Part II of Schedule V) in the event of no profit or inadequate profit subject to the following conditions:
a. Approval of Nomination and Remuneration Committee (where Companies required to constitute such Committee under Section 178 of the Act) followed by Board resolution with clear reason recorded in writing for the payment of remuneration beyond the limit.
b. The company has not made any default in repayment of any of its debts including public deposit or debentures or interest payable thereon and dividend on preference shares for a continuous period of 30 days in the preceding financial year.
c. The shareholder’s approval by special resolution at its general meeting for managerial remuneration for a period not exceeding 3 years.
d. Explanatory Statement to the notice calling the general meeting shall contain information referred to in Sch V (ie., subclause (iv) of 2nd Proviso to Clause (B) of Section II of Part II of Sch V of the 2013 Act)
e. Has filed the financial statement and Annual Return which are due to be filed with Registrar of Companies.
Managerial remuneration in case of no profits/ profits are inadequate
The profit is considered as inadequate if remuneration paid to managerial personnel exceeding the limit as prescribed under Sec 197 (1) of the 2013 Act.
Section 197 of the 2013 Act prescribes that if there are no profits or inadequate profits, remuneration to managerial personnel should be as per Schedule V. Option for Central Government approval in the case of Companies which does not comply with Schedule V is eliminated through the 2017 Act. In the same situation, remuneration to Non-Executive Director can be made only through Member’s Special resolution. Section 197 (11) read with subsection (3), Increase in the remuneration on the grounds of no profit or inadequate profits where provisions contained in:
1. Memorandum of Association (MoA) or
2. Articles of Association (AoA) or
3. An agreement entered in with by Company or
4. The resolution passed in General meeting,
shall not have effect unless the increase is in accordance with Schedule V. Schedule V shall have overriding over MoA, AoA, agreement and general meeting resolution. Hence, if Company is unable to comply with provisions of Schedule V, then no remuneration can be paid to Managerial Personnel except sitting fee.
Following are the provisions governing Managerial Remuneration payable by the Companies having Nil or Inadequate profits (Section II of Part II of Schedule V)
The limit specified under items (A) and (B) above shall apply only if:
• The payment of remuneration is approved by Nomination and Remuneration Committee.
• The Company has not committed any default in repayment of any of any debts (including public deposits) or debentures or interest payable thereon for a continuous period of 30 days in the preceding financial year before the date of appointment of such managerial personnel.
• Special Resolution has been passed by the Company for payment of remuneration for a period not exceeding 3 years.
• Explanatory Statement along with Notice calling the general meeting shall contain prescribed information.
Section 197 (9) of the 2017 Act states that, if any director draws remuneration in excess of limitation prescribed under Sec 197 or without any approval, he shall refund sums to the Company within 2 years or such lesser period as may be allowed by the Company and until such time, he shall hold it in trust. The Company may renounce the excess remuneration paid if it passes the special resolution within 2 years from the date of sum becomes refundable. The Company should additionally get the prior permission of Bank/ public financial institutions/ non-convertible debenture holders or other secured creditors before getting approval for a waiver if it has defaulted in payment of such dues of such person.
Insurance taken by Company for Director is not treated as a part of Managerial remuneration but if such person is guilty of an offence, the premium shall be treated as a part of remuneration.
From the above discussion, one can conclude that the amendments brought about are salutary and welcome. The biggest takeaway from the Amendment Act as stated in the introductory remarks is that it softens in many areas a load of procedure, removes the ambiguity that existed in many provisions and also irons out the drafting anomalies that were profligate in the original version of the 2013 enactment. This augurs well for the future and one wishes that after the large-scale changes brought about by the Amendment Act, the law will stabilize and not subjected to the proliferation of knee-jerk changes brought about through the maze of Rules and notifications in the last three years or so. What is also irksome is the fact there is considerable delay in enforcing the changes made by the Amendment Act. As of February 9, 2018, only 44 Sections have been notified. Some of the notified provisions need subordinate legislation in the form of Rules which are yet to be announced.