PROVISIONS FOR MANAGERIAL REMUNERATION

Provisions for Managerial Remuneration

1.         As per section 197 Of Companies Act, 2013, maximum overall (Total) managerial remuneration (for concerned financial year) that can be payable by public companies (having sufficient profits) = 11% of profit calculated as per section 198 of Companies Act, 2013.

2.         Here remuneration term includes remuneration available to managerial persons (Whole Time Director, Managing Director & Manager) & Part Time Directors (other directors) in the nature of salary, bonus, commission, perquisites, allowances etc.

3.         If public companies having sufficient profits may want to give excess managerial remuneration (i.e. more than 11%) then prior approval of C.G. shall be required to obtain.

4.         Profit under section 198 can be calculated as under.

Net Profit as per P & L (after all appropriations)                                                 üü

Add : Disallowable Expenses (for the purpose of  managerial remuneration) üü

Less : Disallowable Incomes (for the purpose of  managerial remuneration)  (xx)

Net Profit under section 198 of Companies Act, 2013                                         üü

OR

Gross Profit during the year                                                                                    üü

Add : Allowable incomes (for the purpose of managerial remuneration)         üü

Less : Allowable expenses (for the purpose of  managerial remuneration)     (xx)

            Net Profit under section 198 of Companies Act, 2013                                         üü     

If Public co. wants to give excess remuneration (more than above mentioned percentages) then previous approval of C.G. shall be required to obtain.

List of Disallowable incomes and expenses for the purpose of calculating profit u/s 198 (it means for the purpose of calculating managerial remuneration as per Companies Act) (we assume that all elements are already recorded in P & L) :

1.         Profit on sale of Non-depreciable assets

(Like profit on sale of land

= Total profit shall be considered as capital profit

= Disallowable income)

2.         Capital profit on sale of depreciable assets (disallowable income)

For ex. - Information regarding sale of machinery

Cost price                                                                                                          1,00,000

Less: Depreciation upto sale                                                                          (60,000)

WDV (Net value / Book value)                                                                          40,000

Add : Profit on sale of Machinery                                                                     70,000

Selling price                                                                                                      1,10,000

Analysis 1 :

(i)        Selling price>Cost Price                                (ii)       Total profit on

1,10,000 > 1,00,000                                      sale of machinery i.e. 70,000

Difference is

Capital profit = 10,000                                 10,000                                    (?) 60,000

(Disallowable income)                                  Capital Profit              Revenue Profit

                                                                         (Disallowable income)         (Allowable income)

Analysis 2 :

(i)        Total profit on sale of machinery i.e. 70,000

60,000            (?)                                                       (?) 10,000     

Revenue profit (Depreciation upto sale     Capital profit

= due to non cash revenue expense)         (disallowable income)

(allowable income)

3.         Profit on sale of investment [credited to P & L] & Loss on sale of investment

[charged to P & LJ

[Disallowable incomes & disallowable expenses respectively by considering non-trade investment]

4.         Tax provided [charged to P & L]

[Disallowable expense]

5.         Managerial remuneration charged to P & L [Disallowable expense]

6.         Any appropriations [Like interim dividend] as well as any amount transferred to reserve [other than if any legal claim] [Disallowable Exp.]

7.         Securities premium credited to P & L [Capital income = Disallowable income]

8.         Profit on sale of forfeited shares [credited to P & L] [due to capital profit it shall be considered as disallowable income]

9.         Intangible assets & fictitious assets write off [charged to P & L]

            [Disallowable expense]

10.       Special depreciation charged to P & L [Disallowable expense]

11.       Ex-gratia payment to an employee [charged to P & L] [Disallowable expense]

12.       Capital Expenditure charged to P & L [Disallowable expense]

List of allowable incomes & allowable Exps. for the purpose of calculating profit u/s 198 (it means for the purpose of calculating managerial remuneration as per Companies Act) (we assume that all elements are already recorded in P & L] :

1.         Revenue profit on sale of Fixed Asset [Allowable Income]

2.         Loss on sale of Fixed Asset [Allowable Expense].

3.         Grant or subsidies received from Government [credited to P & L] [Allowable income] .

4.         Certain miscellaneous incomes credited to P & L like interest received on investments [by considering trade Investments ) & transfer fees received [Allowable incomes].

5.         Depreciation as per Companies Act, 2013 (it means as per schedule II /Sec. 123)

[Allowable expense]

6.         Donation charged to P & L (in good faith) [Allowable expense]

7.         Directors fees charged to P & L [by considering that directors’ fees were available to directors as per professional capacity]. [Allowable expense]

8.         Legal incomes & expenses recorded in P & L

            [Allowable income &Expenses  respectively]          

9.         Certain expenses charged to P & L like salary & wages expenses [it means available to other employees], staff welfare expenses, repairs & maintenance expenses, rent & rates expenses, miscellaneous expenses (general expenses), interest expenses on borrowing (on Long Term & Short Term borrowings i.e. on secured loans & on unsecured loans) [Allowable expenses]

10.       Multiple shift allowances debited to P & L [Allowable expenses]

Provisions regarding Managerial Remuneration (Maximum yearly Remuneration payable to managerial person) in case of inadequate profits or loss : (Part II of schedule V):

(i)        In above mentioned situation maximum yearly remuneration payable to managerial person shall be calculated on the basis of “Effective capital” of company. (As calculated from latest Balance Sheet).

Effective capital = Paid-up share capital (paid up Equity share capital & Preference share capital) + All Reserves (other than revaluation Reserve) + Long term borrowings (Like debentures, term loans, public deposits etc. but short term borrowings likes Bank Over draft, cash credit, working capital loans etc. shall not be added.) - All fictitious assets (like preliminary expense, P & L Dr. balance etc.) – Non trade investments (if nature of investments may not be given then investments = Non Trade Investments)

(ii)       As per schedule V maximum remuneration payable to managerial person shall be as follows :

Where Effective capital is :                           Maximum yearly remuneration

                                                                                    (p.a.) payable to managerial person(Rs.)

            Negative or less than 5 crores                    60 lakhs

5 crores or more but

less than 100 crores                                                 84 lakhs

100 crores or more but

less than 250 crores                                                 120 lakhs

250 crores or more                                      120 lakhs + 0.01% of effective capital in

                                                                        excess of Rs.250 crores.

Provided that the above limit shall be doubled if the resolution passed by the shareholders is a special resolution.