Fundamental Appointment Restrictions and Eligibility Criteria

• Mutual Exclusivity: No company shall appoint or employ simultaneously a managing director and a manager. Companies must choose one or the other, not both.
• Maximum Tenure: No company shall appoint or re-appoint any person as managing director, whole-time director, or manager for a term exceeding five years at a time. Re-appointment cannot be made earlier than one year before the expiry of the current term.
• Age Restrictions: No company shall appoint or continue employment of any person as managing director, whole-time director, or manager who:
  • Is below 21 years of age, OR
  • Has attained 70 years of age
• Exception for Age 70+: Appointment of persons aged 70 years or above requires passing a special resolution, with the explanatory statement justifying such appointment. Alternative: If special resolution is not passed but votes in favor exceed votes against, the company may seek Central Government approval upon demonstrating that the appointment is most beneficial to the company.
• Disqualifications: A person is disqualified if they:
  • Are an undischarged insolvent or have ever been adjudged insolvent
  • Have suspended payment to creditors or made/make a composition with creditors at any time
  • Have been convicted by a court of an offense and sentenced for more than six months at any time

Appointment Process and Approval Requirements

• Board Approval: The Board of Directors must, at a Board meeting:
  • Approve the appointment of managing director, whole-time director, or manager
  • Approve terms and conditions of appointment
  • Approve remuneration payable
• Shareholder Approval: The appointment and terms must be approved by resolution at the next general meeting of the company.
• Central Government Approval: Required when the appointment is at variance with conditions specified in Part I of Schedule V.
• Notice Requirements: Any notice convening Board or general meeting for considering such appointment must include:
  • Terms and conditions of appointment
  • Remuneration payable
  • Other relevant matters
  • Disclosure of interest of any director(s) in such appointment, if any
• Filing Requirement: A return in Form MR.1 must be filed with the Registrar within 60 days of appointment, along with prescribed fees. (Rule 3 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014)
• Validity of Acts: Where appointment is not approved by the company at general meeting, any act done by the appointee before such approval shall not be deemed invalid, ensuring business continuity.
• A company can seek approval from Central Government through ‘MR-2’ web form for approval of appointment of managing director or whole-time director or manager in certain special circumstances as mentioned in Schedule V of the Companies Act, 2013. (Approval is required where appointment is not in accordance with conditions stipulated in Schedule V) [Rule 7 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]

Overall Managerial Remuneration Framework

• Total Remuneration Ceiling for Public Companies: The total managerial remuneration payable by a public company to its directors (including managing director and whole-time director) and manager in any financial year shall not exceed 11% of the net profits for that financial year, computed per Section 198 (excluding directors’ remuneration from gross profits calculation).
• Exceeding 11% Limit: The company in general meeting may authorize payment exceeding 11% of net profits, subject to Schedule V provisions.
• Individual and Collective Limits (require special resolution to exceed):
  • Managing Director/Whole-Time Director/Manager (single position): Maximum 5% of net profits
  • Multiple such positions: Maximum 10% of net profits to all managing directors, whole-time directors, and manager taken together

• Non-Executive/Non-Whole-Time Directors:
  • Maximum 1% of net profits if there is a managing director, whole-time director, or manager
  • Maximum 3% of net profits in any other case

• Secured Creditor Approval: Where the company has defaulted on payments to banks, public financial institutions, non-convertible debenture holders, or other secured creditors, prior approval from such creditors must be obtained before seeking general meeting approval for remuneration exceeding limits.
• Exclusions: The percentage limits are exclusive of fees payable to directors under sub-section (5) for attending meetings.

Remuneration in Case of No Profits or Inadequate Profits

• Special Provisions: Notwithstanding the general remuneration limits, if in any financial year a company has no profits or inadequate profits, the company shall not pay remuneration to its directors (including managing director, whole-time director, manager, or non-executive/independent directors) except in accordance with Schedule V provisions. This is exclusive of fees payable for attending meetings.
• Schedule V Compliance: Companies facing no profits or inadequate profits must strictly adhere to Schedule V conditions for determining and paying managerial remuneration.

Remuneration Determination and Professional Services Exception

• Determination Authority: Remuneration payable to directors (including managing director, whole-time director, or manager) shall be determined in accordance with Section 197, either by:
  • Articles of the company, OR
  • Resolution passed by the company in general meeting, OR
  • Special resolution (if articles so require)
• Inclusive Nature: Remuneration determined shall be inclusive of remuneration for services rendered in any other capacity.
• Professional Services Exception: Remuneration for services in other capacity need not be included if:
  • Services rendered are of professional nature, AND
  • In the opinion of the Nomination and Remuneration Committee (for companies under Section 178(1)) or Board of Directors (in other cases), the director possesses requisite qualification for practice of the profession

Meeting Fees and Payment Modes

• Meeting Fees: A director may receive remuneration by way of fee for:
  • Attending Board meetings
  • Attending Committee meetings
  • Any other purpose as decided by the Board
• Fee Limits: The amount of fees shall not exceed prescribed amounts, with different fees permissible for different classes of companies and for independent directors.
• Payment Modes: A director or manager may be paid remuneration:
  • By way of monthly payment, OR
  • As specified percentage of net profits, OR
  • Partly by monthly payment and partly by percentage of net profits

Excess Remuneration – Refund and Recovery Provisions

• Refund Obligation: If any director draws or receives (directly or indirectly) remuneration exceeding prescribed limits or without required approval, they shall refund such excess sums to the company within two years or such lesser period as allowed by the company. Until refunded, the director holds such sum in trust for the company.
• Waiver Restrictions: The company shall not waive recovery of refundable sums unless approved by special resolution within two years from the date the sum becomes refundable.
• Secured Creditor Approval for Waiver: Where the company has defaulted on payments to banks, public financial institutions, non-convertible debenture holders, or other secured creditors, prior approval from such creditors must be obtained before seeking shareholder approval for waiver.

Restrictions on Remuneration Increases

• Schedule V Applicability: In cases where Schedule V applies due to no profits or inadequate profits, any provision purporting to increase or having the effect of increasing director remuneration (whether in memorandum, articles, agreement, general meeting resolution, or Board resolution) shall have no effect unless such increase is in accordance with Schedule V conditions.
• Comprehensive Coverage: This restriction applies to all forms of remuneration arrangements across all corporate documents and resolutions.

Disclosure and Transparency Requirements

• Board’s Report Disclosure (Listed Companies): Every listed company must disclose in the Board’s report:
  • Ratio of remuneration of each director to median employee’s remuneration
  • Such other details as may be prescribed
• Auditor’s Certification: The auditor must, in their report under Section 143, make a statement regarding:
  • Whether remuneration paid to directors is in accordance with Section 197
  • Whether remuneration paid to any director exceeds prescribed limits
  • Such other details as may be prescribed
• Public Accountability: These disclosure requirements ensure transparency and enable shareholders and stakeholders to assess reasonableness of managerial remuneration.

Insurance Premium Treatment

• General Rule: Where a company takes insurance on behalf of managing director, whole-time director, manager, CEO, CFO, or Company Secretary for indemnifying against liability for negligence, default, misfeasance, breach of duty or breach of trust, the premium paid shall not be treated as part of remuneration.
• Exception: If such person is proved guilty, the premium paid on insurance shall be treated as part of remuneration.
• Risk Mitigation: This provision enables companies to provide insurance protection while ensuring accountability for proven misconduct.

Commission from Holding/Subsidiary Companies

• Dual Remuneration Permission: A managing director or whole-time director receiving commission from the company is not disqualified from receiving remuneration or commission from any holding company or subsidiary company, subject to disclosure in the Board’s report.
• Transparency Requirement: Such arrangements must be disclosed to ensure shareholders are aware of total remuneration across the corporate group.
• Intimation of appointment: Intimation of appointment of Managing Director/ Whole-time Director/Manager of the company through MGT -14 to be filed within 30 days of passing the resolution at Board and General meeting (Section117)