Section 197 of CA 2013 : Section 197: Overall Maximum Managerial Remuneration And Managerial Remuneration In Case Of Absence Or Inadequacy Of Profits

Explanation using Example

Imagine a public company named "Tech Innovations Ltd." has a Managing Director (MD), two Whole-time Directors (WTDs), and four Non-executive Directors (NEDs). For the financial year 2023, the company reports net profits of ₹100 million. The company's Board proposes the following remuneration:

• MD: ₹8 million
• Each WTD: ₹4 million
• Each NED: ₹1 million

According to Section 197 of the Companies Act, 2013, the total managerial remuneration cannot exceed 11% of the net profits, which in this case is ₹11 million.

The proposed remuneration for the MD and WTDs alone adds up to ₹16 million (₹8 million + 2x₹4 million), which exceeds the 10% cap for all such directors together (₹10 million). Furthermore, the remuneration for NEDs totals ₹4 million, which exceeds the 1% cap (₹1 million) as there is a managing or whole-time director.

To comply with the Act, "Tech Innovations Ltd." needs to either:

1. Reduce the remuneration of the MD and WTDs to within the 10% limit and NEDs to within the 1% limit,
2. Or seek approval from the company's general meeting to exceed these limits, which may require a special resolution.

If the company has defaulted on any bank loans, they must also obtain approval from the concerned bank or financial institution before increasing managerial remuneration.

If the remuneration had been paid without adherence to these rules, the directors would be required to refund the excess to the company.