PROVISIONS APPLICABLE TO PARTS I AND II OF THIS SCHEDULE
The appointment and remuneration referred to in Parts I and
II of this Schedule shall be subject to approval by a resolution of the
shareholders in general meeting.
The auditor or the secretary of the co. or where the co. has not appointed a secretary, a secretary in wholetime practice shall certify that the requirements of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar u/s. 269(2).
Clarifications regarding amendments made vide Circular Nos. 1/94 and 2/94 dated 1.2.94 & 10.2.94 issued by the Department of Company Affairs, Government of India
W.e.f. 1/2/1994, remuneration payable by a co. having adequate net profits to its managerial personnel shall be governed by S. I of Part II of Schedule XIII. In other words, there would be no restriction in the nature/quantum of remuneration paid by a co. to its managerial personnel as long as the remuneration paid during any F.Y. is within 5% or 10% of the net profits, as the case may be, of the F.Y.
Remuneration payable by a co. to a managerial person in the event of absence or inadequacy of net profits during any F.Y. shall be governed by the provisions of section II of Part II of Schedule XIII. A co. would have full freedom to work out a suitable remuneration package for its managerial personnel within the limit on remuneration as specified in para 1 of S. II of Part II. However, certain perquisites as specified in paras 2 & 3 of S. II of Part II shall not be taken into account for computing the ceiling on remuneration.
The remuneration specified in section II of Part II the Schedule XIII is "minimum remuneration" for the purpose of sec. 198 of the Companies Act which would be admissible in the event of absence or inadequacy of net profits in any F.Ys, without the approval of the Central Government in individual cases. In other words, no separate approval of the Central Government would be required u/ss. 198(4) and 309(3) of the Companies Act provided the remuneration paid to a managerial person in the event of absence or inadequacy of net profits in any F.Y. is in accordance with the provisions of S. II of Part II of Schedule XIII.
Regardless of the fact that remuneration of a managerial person may have initially been fixed in accordance with the provision of S. 1 of Part II of Schedule XIII in view of availability of adequate net profits at the relevant time, the provision of S. II of Part II shall become automatically applicable to him in any F.Y. in which the co. has no profits or its profits are inadequate. As a consequence thereof, his remuneration during such F.Y. will have to be refixed so as to conform to the provision of S. II of Part II of Schedule XIII unless, of course, it is already within the specified ceiling. Excess remuneration of the already paid, will have to be recovered from the managerial person in such cases or the approval of the Central Government will have to be obtained for payment of remuneration in excess of the provision of S. II of Part II of Schedule XIII notwithstanding anything in any agreement entered into with the concerned managerial person or in any resolution of the co. or its Board.
In a case where S. II of Part II of Schedule XIII is applicable, if the effective capital of a co. is reduced in any F.Y. subsequent to the year of appointment (due to repayment of long-term loans, further accumulation of losses or for any other reason), with the result that the remuneration payable in the F.Y. no longer corresponds to the effective capital, the remuneration will have to scale down appropriately unless approval of the Central Government is obtained to payment of remuneration in excess of the limits specified in S. II of Part II of Schedule XIII.
Where a co. intends to increase or otherwise vary remuneration of its managerial person already in position on the date of the notification, it may do so from a date not earlier than the date of the notification, subject to the provisions of the revised Schedule read with the provisions of Ss. 198, 309, 310, 311, 387 and 388 of the Companies Act, without the approval of the Central Government even where the earlier appointment/remuneration had been approved by the Central Government except in those cases where the Central Government had accorded conditional approval to the appointment. For example, in some cases the Central Government approves appointment of a person subject to the condition that the co. would not increase or vary his remuneration without obtaining approval of the Central Government or that the remuneration of a managerial person shall not exceed a specified ceiling if he has been permitted to work as a managerial person in more than one co. and draw remuneration from both the cos. Where such specific or special conditions have been imposed by the Central Government while approving appointment/remuneration, these conditions would still have to be complied with unless varied by the Central Government.
The provision for 10% reduction in salary of a managerial person had been deleted from the revised Schedule XIII effective from 14/7/1993. In fact the remuneration specified in Part II of the Schedule as amended on 14/7/1993 and in section II of Part II of Schedule as further amended on 1/2/1994 is itself the "minimum remuneration". Hence, where a managerial person had been appointed (with or without Central Government approval) on a specified salary with a provision for 10% reduction in salary in the event of loss or inadequacy of net profits in any F.Y., the co. may, if it so wishes, delete the said condition without obtaining the Central Government’s approval, in accordance with the provision of S. 310.
It has been observed that resolutions have been adopted in shareholders’ meeting of some cos. authorising respective board of directors to revise remuneration of managerial personnel in accordance with such amendments as have been made or may be made in Schedule XIII, and such resolutions of shareholders are being treated as compliance with the provision of Part III of Schedule XIII. It is emphasized that the provision of S. 309(1) and Part III, Schedule XIII, do not contemplate any blanket approval of the shareholders and the same must be specific as to the terms and conditions of appointment and remuneration. Incidentally Part III of the Schedule does not envisage prior approval or approval within 90 days. All that is required is an approval of the shareholders in a general meeting. It would, therefore, be appropriate if such approval is obtained in the first general meeting held immediately after fixation of remuneration.
Sick companies can appoint managerial personnel without approval of Central Government.
Clarification on approval of reimbursement of medical expenses incurred beyond the ceiling mentioned in the total managerial remuneration package vide circular No. 2/10 /CL-VII/99 dt. 28.10.99.
Circular No. 2/31/CL-VII/95 dated 7-11-96, issued by the
Department of Company Affairs
Under Part II of Schedule XIII no separate ceiling has been prescribed for expenses incurred on medical treatment. The Central Government has been receiving proposals for reimbursement of expenditure incurred on specialized medical treatment abroad of managing director/whole-time director/manager of public ltd. cos. over and above the ceiling laid down in the managerial remuneration package. Any proposal for reimbursement of medical expenses incurred by managerial personnel on a specialized medical treatment abroad in excess of the limits mentioned in total managerial remuneration package requires the approval of Central Government u/s. 310 of the Companies Act. Therefore, an application for this purpose should be preferred with Central Government after complying with the required formalities. Such proposals are normally considered by the Central Government within the framework of the policy as stated below :
Having regard to the improved medical facilities available in India, the managerial personnel should obtain specialized treatment abroad only in exceptional and deserving cases. All proposals for reimbursement of specialised medical treatment abroad must be accompanied by an essential certificate issued and signed by Dir. General of Health Services of the concerned State Government/Union Territory.
The ceiling on reimbursement of medical expenses on specialised medical treatment abroad (inclusive of air fare, boarding/lodging for the patient and attendant, where the Dir. General of Health Services considers it necessary that attendant should accompany the patient) is Rs. 9 lakhs only.
Proposal for increase in remuneration by way of reimbursement of medical exp. on specialised treatment abroad is considered in respect of managerial personnel himself/herself and not his/her family members or dependants.
It should be noted that any claim for an amount in excess of Rs. 9 lakhs would not be entertained by the Central Government
The application u/s. 310 of the Companies Act, in this regard, should be preferred within the currency of the tenure of the managerial personnel concerned.
Appointment of Managerial Personnel and payment of
Managerial Remuneration in case of companies having no profit or
inadequate profit — Rationalization thereof
[Issued by the Ministry of Law, Justice and Company Affairs, Department of Company Affairs, vide File No. 12-7-2000 CL. VII dated 27-12-2000].
Cases are coming to the Department of Company Affairs wherein Public Companies or Private Companies which are subsidiaries of Public Companies are submitting applications to the Department of Company Affairs for approval of the Central Government for appointment of and/or payment of remuneration to managerial personnel in excess of the limits prescribed in sections 269, 310, 311 and 387 and in terms of section 198(4) read with Schedule XIII to the Companies Act, 1956, which provides scales of remuneration (salary, dearness allowance, perquisites and any other allowance).
The scales of monthly remuneration prescribed in para 1 of section II of part II of Schedule XIII have since been revised vide notification GSR No. 215(E) dated 2-3-2000. The revised scales are as under:
Where a particular company intends to pay a remuneration higher than that prescribed in the Companies Act read with the necessary Schedule, an application may be made to the Department of Company Affairs giving in details the justification along with a copy of the resolution passed by the Board/AGM as the case may be.
In order to reduce subjectivity and to bring in an element of greater transparency and objectivity, the Company which submits an application for a remuneration which is higher than the prescribed limit must take into consideration the following factors (detailed note on each as applicable be furnished) and give a detailed justification. The application for increase in the remuneration should not be submitted in a mechanical way:
Reasons for loss/inadequacy of profit.
Steps taken to improve the performance of the company.
Financial health/performance of the Company as may be reflected by effective capital, Net worth, Turnover, Profit/loss, dividend declared, etc.
Nature of industry — high technology area, core sector, infrastructure field, etc.
Export performance and net foreign exchange earned.
Performance of the Company in socio-economic activities.
General performance of industry in the relevant sector.
Foreign investment and foreign collaborations.
Qualification, experience, period of association and contribution of the proposed appointee.
Requirement of personal skill and challenges ahead.
Past remuneration of the proposed appointee.
Creativity/innovativeness of the proposed appointee/company.
Recognition/Award obtained by the proposed appointee/company.
The amount of remuneration proposed to be paid including salary, allowances, perquisites and whether it will have any effect on the overall financial health of the Company.
Any other factors relevant to the proposal, which the company may like to bring to the notice of the Government justifying their proposal.
Deficiencies generally observed in respect of the applications on the above subject are listed below:—
Application fee is not paid in proper manner. Sometimes the demand draft is not for the full amount of application fee and sometimes the demand draft is not payable in favour of Pay and Accounts Officer, Department of Company Affairs, New Delhi as prescribed in rule 2 of the Companies (Fees for application rules, 1961) as amended vide GSR No. 501(E) dated 6-7-1999.
Application is not filled in properly and completely in respect of all the columns. If a column is left blank, the letters N.A. should be filled up implying 'Not Applicable'.
Applications are submitted after remuneration in excess of Schedule III has already been paid to the managerial person.
Certified copies of newspaper clippings of notices, in original, published in the newspaper in English and in local newspaper in local language as required in terms of section 640-B of the Companies Act are not furnished.
Certified copies of Directors report and audited accounts of the company for each of the last 5 financial years of the company are not enclosed.
In case of foreign collaboration, certified copy of the FIPB approval letter(s) is not furnished.
Remuneration drawn by the proposed appointee from the applicant company or from any other company during the past 3 years prior to the proposed date of appointment is not indicated in terms of monetary package.
Requirements of section 316(20)/(4) of the Companies Act are not followed where the proposal is for appointment as managerial person in two or more than two companies and resolution is not passed by all the companies concerned.
Estimated project cost and source of finance together with projected equity, position regarding growth in effective capital, projection of turnover and net profit as computed under section 198 of the Companies Act, 1956 for the next five years is not given as required in col. 4 of the application (Form 25A and 26) in respect of new companies.
Figure of turnover, net profit as computed under section 198 of the Companies Act, as projected/unaudited for the year in which the application is made, is not given even if the application is made towards the end of financial year/after the end of financial year, unaudited figures of working results are not furnished.
In case of proposal for mid-term increase for remaining period, it is not indicated how the requirement of section 269(2) of the Companies Act, 1956 read with Parts I and II of Schedule XIII was met at the time of appointment of MD/WTD/Manager and how the mid-term increase in remuneration is justified in terms of working results of the company.
Papers/documents attached with the application are not authenticated and seal of the company is not put on each paper.
Attention is also invited to explanation to section 198 of the Companies Act, 1956 which states that 'Remuneration' includes any expenditure incurred by the Company giving benefit to its directors/managers on items mentioned at (a) to (d) of the said explanation; i.e.,
In providing any rent free accommodation or any other benefit or amenity in respect of accommodation free of charge, to any of the persons specified in sub-section (1).
In providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid;
In respect of any obligation or service which but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and
To effect any insurance on the life, or to provide any pension, annuity or gratuity for any of the person aforesaid or his spouse or child.
The term 'Salary' under the provisions of the Income-tax Act has been defined to include all payments received by a person in employment and includes wages, fees, commission, perquisites, profits in lieu of or in addition to salary, advance salary, pension, gratuity, encashment of leave etc. Certain items of perquisites are, however, excluded, to the extent permissible for the purpose of payment of Income-tax as per Central Board of Direct Taxes circular No. 781 (F.No. 275/192/99-IT (B) dated 5-11-1999). It has been observed that companies sometimes indicate the value of perks stating that the same is as per Income-tax Act. This is not the correct position and value of perquisites included in the total remuneration under section 198 of the Companies Act, 1956 is to be indicated as per actual cost. Income-tax liability as per CBDT circular is to be indicated separately.
The applicant companies should therefore, hereafter also ensure that the prescribed forms are completely and properly filled in regard to all the details so that the applications submitted are complete and proper at the time of submission itself. This will result in quicker and faster disposal. In this regard a checklist is also enclosed to facilitate proper filing of the applications. It is hoped that with filing of complete application disposal would be quicker.
Copy of this circular is also available at the website of the Department of Company Affairs at the following address: http://www.nic.in/dca.
Please cooperate by furnishing all the above requirements to facilitate expeditious clearance of your proposal.
(B. N. Prasad)
Under Secretary to the Government of India