New guidelines for approval of managerial remuneration ‑ Effective from April 1, 1983 in supersession of guidelines of 1978 as modified in 1979 - Companies Law - Letter : No. 6/6/CL‑VIII/83,

Letter : No. 6/6/CL ‑ VIII/83, dated 22 ‑ 11 ‑ 1983. Subject:- New guidelines for approval of managerial remuneration ‑ Effective from April 1, 1983 in supersession of guidelines of 1978 as modified in 1979 The revised guidelines on managerial remuneration were issued on 10‑8‑1983. The Department has since received a number of communications seeking clarifications on several points. The points raised and the clarifications are as follows : Point No. 1 ‑ Part 2 of the revised guidelines states that applications received on or after 1‑4‑1983 will be considered in accordance with revised guidelines. Applications received prior to this date but pending on that date will be considered for fixing remuneration for the period up to 31‑12‑1983 in accordance with the guidelines and the same for subsequent period in terms of the new guidelines. The question which arises in this behalf is as to whether the Department would necessitate/insist upon the fresh consent from the companies so as to be governed by the new guidelines? Can the earlier consent which related to the previous guidelines and was given at a time when the new guidelines were not even existent be technically treated as enough to cover the revised guidelines as well? Clarification ‑ The consent given earlier to the 1978 guidelines (as modified in 1979) cannot be treated as consent to the revised guidelines issued in August 1983 also. Consent in the revised format suggested by the Department (which includes consent to the revised guidelines also) will be necessary for fixation of managerial emoluments under the revised guidelines effective from 1‑4‑1983. Point No. 2 ‑ Many companies have given the consent to be governed by the old guidelines with a stipulation that if and when the present policy/guidelines are revised by the Central Government as a result of any judicial pronouncement or suo motu, they would be entitled to the benefit of the relaxation afforded by and/or to increase in managerial remuneration, if any, prescribed by the Central Government under its revised policy guidelines . Can such companies now come up to the Government asking it to reopen and reconsider their already decided cases, in the light of the revised guidelines instead of applying afresh under section 310 of the Companies Act for increase in remuneration. Clarification ‑ Any proposal for increase in remuneration in the light of the revised guidelines for the unexpired period of the existing sanction comes within the purview of section 310. An application under section 310 supported by a fresh resolution of the board of directors will, therefore, be necessary and the prescribed legal procedure (e.g., issue of a notice under section 640B) will also have to be followed in all such cases. Point No. 3 ‑ There are companies whose shareholders have approved the salaries for their managing/whole‑time directors at Rs. 7,500 per month, plus 50 per cent commission and perquisites (subject to the approval of the Central Government). They had perforce to give a consent to be governed by the old guidelines and accordingly the salaries in those cases have been fixed at a level of Rs. 5,000 per month or less. Will such companies be asked to apply afresh under section 310 of the Companies Act, or can they simply make a representation and request for enhancement of the remuneration in terms of the revised guidelines. Clarification ‑ In cases where although the shareholders had approved salaries of managing/whole‑time directors at more than Rs. 5,000 per month the company had given consent to the old guidelines and remuneration was accordingly fixed at a level of Rs. 5,000 per month or less also, an application under section 310 of the Companies Act will be necessary for an increase in remuneration for unexpired period of the existing sanction. This is so because the old application has already been disposed of in such cases necessitating a fresh application under the relevant provisions of the Companies Act for an increase in remuneration in the light of the revised guidelines. Point No. 4 ‑ One major change in the new guidelines, insofar as perquisites are concerned, is the one relating to gratuity. The ceiling thereof has now been raised to Rs. 75,000 (from Rs. 30,000 in the previous guidelines). Would a company have to apply formally under section 310 in case it wants that this particular perquisite (or, say, one or more others) to be in accordance with the new guidelines? Considering the fact that every company would like to avail of this liberalised benefit and the number of applications may thus be anticipated to be very large, can the Department find a via media and entertain a simple request rather than insisting on a regular application under section 310 which necessitates issue of public notices, passing of resolutions, etc.? Clarification ‑ Proposals for higher perquisites (in accordance with the revised guidelines) will also amount to proposals for increase in remuneration for which an application under section 310 will be necessary, and the prescribed legal procedure shall also have to be followed. Point No. 5 ‑ In case of payment of any fees or variable amount such as ex gratia, will such payment be treated as commission on net profits? Clarification ‑ No ex gratia payment is permissible under the guidelines. Point No. 6 ‑ Whether the ceiling of Rs. 45,000 applies to the perquisites mentioned in Part A of sub‑para III of the revised guidelines? Clarification ‑ The answer is in the affirmative. The ceiling of Rs. 45,000 per annum or an amount equal to the annual salary, whichever is less, applies to the perquisites mentioned in Part A of sub‑para III. These perquisites have been mentioned under the sub‑headings, Housing, Medical Reimbursement, Leave Travel Concession, Club Fees and Personal Accident Insurance. Part B of sub‑para III relates to terminal benefits like provident fund, superannuation fund, etc., to which the ceiling of Rs. 45,000 does not apply. Part C of sub‑para III mentions facilities which are not to be considered as perquisites. Point No. 7 ‑ Where a company has not hired accommodation and the managerial personnel make their own arrangements, it is presumed that the managerial personnel can be paid house rent allowance at the rates specified in guidelines. Clarification ‑ The presumption is confirmed. Point No. 8 ‑ Where a managerial personnel resides in his own house/flat it is presumed that house rent allowance will be payable to him as per guidelines. Clarification ‑ The presumption is confirmed. Point No. 9 ‑ It is presumed that the value of perquisites in case of a company owning accommodation and giving it to its managerial personnel will be as per the Income‑tax Rules as reduced by the amounts paid by the managerial personnel. Clarification ‑ The guidelines clearly provide that the expenditure incurred by companies on gas, electricity, water and furnishing will be valued as per the Income‑tax Rules, 1962. The value of these has, however, been subject to a ceiling of 10 per cent of the salary of the managerial personnel. Point No. 10 ‑ Will the term salary include commission also for the purpose of determining provident fund, pension fund, etc.? Clarification ‑ The term salary does not include commission for the purpose of determining the terminal benefits like provident fund, annuity, etc. Terminal benefits specified in para 1 of Part B are admissible only to those who are paid salary or both salary and commission. In the scheme of the revised guidelines, terminal benefits like provident fund, superannuation fund, annuity, etc., are the kind of perquisites which are not available to those falling in category II(b) mentioned in para 1 of the guidelines, i.e., those who get the entire remuneration in the form of commission on net profits alone.