Managerial Remuneration Under Companies Act, 2013: Limits, Rules & Calculation Guide

Managerial remuneration is a critical element of corporate governance, reflecting how a company rewards its leadership while maintaining accountability to shareholders. An effective remuneration structure not only motivates executives but also ensures alignment with the company’s long–term objectives. The legal framework under the Companies Act, 2013, provides a structured approach to regulate such payments. This article offers a comprehensive understanding of the Companies Act 2013 on managerial remuneration, including statutory limits, governing provisions, and the process of managerial remuneration calculation.

Legal Framework Governing Managerial Remuneration

The provisions relating to remuneration to directors under the Companies Act 2013 are primarily governed by Section 197 of the Companies Act 2013, Section 198, and Schedule V of the Companies Act 2013. These sections collectively establish the rules for determining, approving, and paying managerial remuneration.

While Section 197 prescribes the maximum permissible limits and approval mechanisms, Section 198 provides the method for computing net profits for remuneration purposes. Schedule V becomes particularly relevant when companies do not have sufficient profits but still intend to compensate managerial personnel.

Section 197: Regulatory Limits and Controls

Under section 197 of the Companies Act 2013, the total managerial remuneration payable by a public company is capped at 11% of its net profits for a given financial year. This limit ensures that excessive payouts do not erode shareholder value.

Within this overall ceiling, the law further distributes limits among different categories of directors. A managing director or wholetime director is entitled to a maximum of 5% of net profits if there is only one such director, or 10% collectively if there are multiple. For directors who are not involved in executive functions, the limit is comparatively lower1% where the company has executive directors and 3% where it does not.

A company may exceed these limits, but only after obtaining approval from shareholders through a general meeting and ensuring compliance with Schedule V of the Companies Act 2013. In certain situations, regulatory approval may also be required. These layered approvals ensure that remuneration decisions are subject to checks and balances.

Another important aspect is that in cases of no profit or inadequate profit, remuneration cannot be determined freely. Instead, it must strictly comply with Schedule V provisions. Any excess remuneration paid without proper approval must be refunded by the director, reinforcing accountability.

Section 198: Basis For Managerial Remuneration Calculation

A key aspect of managerial remuneration calculation is that the profit figure used is not the same as the profit reported in financial statements. Instead, companies are required to compute net profit as per Section 198.

This adjusted profit ensures that remuneration is based on operational performance rather than extraordinary or non-recurring items. For instance, capital profits such as gains from the sale of fixed assets or undertakings are excluded. Similarly, unrealized gains arising from fair value adjustments are not considered.

At the same time, certain incomes like government subsidies are included unless specifically excluded. On the expense side, usual business expenditures such as depreciation, interest, employee costs, and repairs are deducted. However, income tax and voluntary payments are not deducted while computing profits under this section.

Understanding these adjustments is essential when learning how to calculate managerial remuneration, as they directly impact the permissible limits under Section 197.

Calculation Of Net Profit As Per Section 198 With Example

To clearly understand the calculation of net profit as per section 198, with an example, consider a practical scenario.

Suppose a company reports a profit of ₹10,00,000 in its Profit and Loss Statement. During the year, it receives a government subsidy of ₹1,00,000. It also earns ₹2,00,000 from the sale of machinery, which is a capital profit. The company incurs depreciation of ₹1,50,000 and pays ₹50,000 as interest on loans.

For Section 198 purposes, the capital profit from the sale of machinery must be excluded, while the subsidy is included. The allowable expenses, such as depreciation and interest, are deducted.

The calculation would therefore be:

Adjusted Net Profit = ₹10,00,000 + ₹1,00,000 – ₹2,00,000 – ₹1,50,000 – ₹50,000

Adjusted Net Profit = ₹7,00,000

Based on this, the maximum permissible managerial remuneration at 11% would be ₹77,000. This figure becomes the benchmark for applying limits under Section 197 of the Companies Act 2013.

This example highlights why it is essential to correctly compute profits under Section 198 rather than relying on accounting profits.

Schedule V: Remuneration In Case Of No Or Inadequate Profits

Schedule V of the Companies Act 2013 provides an alternative mechanism for paying remuneration when companies do not have sufficient profits. Instead of linking remuneration strictly to profits, it allows payments based on the company’s effective capital, subject to prescribed limits.

The Schedule also sets out eligibility criteria for managerial personnel, including age, professional competence, and a clean legal record. It ensures that only qualified individuals are appointed to key managerial positions.

An important feature of Schedule V is that certain components of compensation are excluded from remuneration limits. These include contributions to the provident fund, gratuity, and leave encashment. This provides companies with the flexibility to structure compensation packages without breaching statutory ceilings.

Additionally, companies must ensure that they have not defaulted on any financial obligations and must obtain necessary approvals from shareholders. Proper disclosures in the Board’s report are also mandatory, reinforcing transparency.

Remuneration Committee In Corporate Governance

The remuneration committee in corporate governance, formally known as the Nomination and Remuneration Committee, plays a central role in designing and overseeing compensation policies.

This committee is typically composed of independent directors who are not involved in the day-to-day management of the company. Their independence ensures objectivity in decision-making and minimizes the risk of conflicts of interest.

The committee evaluates the performance of managerial personnel, recommends remuneration structures, and ensures that compensation is aligned with the company’s financial performance and long-term goals. It also ensures compliance with legal provisions and promotes transparency in disclosures.

Practical Approach To Managerial Remuneration

In practical terms, how to calculate managerial remuneration involves a combination of legal compliance and financial analysis. Companies must begin by accurately computing net profits as per Section 198. Once this is done, the limits under Section 197 are applied to determine the maximum permissible remuneration.

If profits are inadequate, the company must refer to Schedule V and ensure that all conditions are met before making payments. Documentation, approvals, and disclosures form an integral part of this process.

Given the complexity of these provisions, professional assistance can be extremely valuable. TMWala supports businesses in navigating managerial remuneration companies act 2013, ensuring that all calculations and approvals are handled correctly.

TMWala also provides expert guidance on managerial remuneration calculation, helping companies interpret the provisions of Section 197 of the Companies Act 2013 and apply them accurately. From preparing detailed workings for the calculation of net profit as per section 198 with an example to ensuring compliance with Schedule V of the Companies Act 2013, TMWala offers end-to-end support.

Conclusion

Managerial remuneration under the Companies Act, 2013, is carefully regulated to maintain a balance between rewarding leadership and protecting shareholder interests. By adhering to the provisions of section 197 of the Companies Act 2013, accurately performing managerial remuneration calculation, and following the guidelines under Schedule V of the Companies Act 2013, companies can ensure both compliance and effective governance.

Understanding how to calculate managerial remuneration is essential for avoiding penalties and ensuring transparency. With expert assistance from TMWala, businesses can confidently design remuneration policies that are compliant, fair, and aligned with organizational goals.

FAQs

1. What is managerial remuneration under the Companies Act, 2013?
   Managerial remuneration refers to the compensation paid to directors and key managerial personnel, governed by the provisions of the Companies Act, 2013.
2. What is the maximum limit of managerial remuneration?
   As per Section 197 of the Companies Act 2013, total remuneration cannot exceed 11% of net profits calculated under Section 198.
3. What is the limit for a managing director or whole-time director?
   A managing or whole-time director can receive up to 5% of net profits, or 10% collectively if there are multiple such directors.
4. What is Section 198 used for?
   Section 198 is used for managerial remuneration calculation, specifically for computing net profits for determining permissible remuneration.
5. Can companies use P&L profits for remuneration calculation?
   No, companies must compute profits as per Section 198 and not rely directly on profits shown in the financial statements.
6. What happens if a company has no or inadequate profits?
   In such cases, remuneration must be paid according to Schedule V of the Companies Act 2013, subject to prescribed limits and conditions.
7. What incomes are excluded while calculating net profit under Section 198?
   Capital profits like gains from the sale of fixed assets and share premiums are generally excluded.
8. What expenses are deducted while calculating net profit?
   Expenses such as depreciation, interest, employee costs, and repairs are deducted under Section 198.
9. What is the role of the remuneration committee in corporate governance?
   The remuneration committee in corporate governance recommends and oversees compensation policies to ensure fairness and compliance.
10. How to calculate managerial remuneration?
    To understand how to calculate managerial remuneration, first compute net profit under Section 198, then apply the limits specified under Section 197.