Conditions for appointment of managing/whole-time Director, etc. - Amendment of Schedule XIII with effect from 1-2-1994 - Certain Clarifications regarding - Companies Law - Circular : No. 2 of 1994,

Circular : No. 2 of 1994, dated 10-2-1994. Subject:- Conditions for appointment of managing/whole-time Director, etc. - Amendment of Schedule XIII with effect from 1-2-1994 - Certain Clarifications regarding I am directed to say that the Central Government have once again amended Schedule XIII to the Companies Act, 1956 (1 of 1956). The revised Schedule XIII has been notified by the Government of India in the Gazette of Notification Extraordinary on 1-2-1994 and has become effective from the date of notification. Copies of revised Schedule XIII and Press Note, dated 1-2-1994, are enclosed. 2. When Schedule XIII to the Companies Act, 1956, was last amended on 14-7-1993, it was hoped that the revision in the Schedule would lead to substantial reduction in the number of applications made to the Central Government under sections 269, 198, 309, 387, 388 and 310. However, it has been observed that there had been only marginal reduction in the number of such applications made by companies to the Central Government. It was also found that, in a large number of cases, applications were still being made by companies to the Central Government even where appointment had been made or remuneration has been fixed in conformity with the provisions of the revised schedule, leading to considerable wastage of time and effort. This could be attributed to lack of knowledge in some cases, over-cautiousness in others and also to certain misunderstanding of the true import of certain provisions of the schedule, especially the ones relating to payment of remuneration in the event of absence or inadequacy of net profits. In order to remove doubts on the subject, the following clarifications are issued which may please be brought to the notice of all your constituents for guidance: (i) With effect from 1-2-1994, remuneration payable by a company having adequate net profits to its managerial personnel shall be governed by section 1 of Part II of Schedule XIII. In other words, there would be no restriction on the nature or quantum of remuneration paid by a company to its managerial personnel as long as the remuneration paid during any financial year is within 5 per cent or 10 per cent of the net profits, as the case may be, of the financial year. (ii) Remuneration payable by a company to a managerial person in the event of absence or inadequacy of net profits during any financial year shall be governed by the provisions of section 2 of Part II of Schedule XIII. A company 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 section 2 of Part II. However, certain perquisites as specified in paragraphs 2 and 3 of section II of Part II shall not be taken into account for computing the ceiling on remuneration. (iii) The remuneration specified in section 2 of Part II of Schedule XIII is minimum remuneration for the purpose of section 198 of the Companies Act which would be admissible in the event of absence or inadequacy of net profits in any financial years, without the approval of the Central Government in individual cases. In other words, no separate approval of the Central Government would be required under sections 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 financial year is in accordance with the provisions of section 2 of Part II of Schedule XIII. (iv) Regardless of the fact that remuneration of a managerial person may have initially been fixed in accordance with the provisions of section 1 of Part II of Schedule XIII in view of availability of adequate net profits at the relevant time, the provisions of section 2 of Part II shall become automatically applicable to him in any financial year in which the company has no profits or its profits are inadequate. As a consequence thereof, his remuneration during such financial year will have to be refixed so as to conform to the provisions of section 2 of Part II of Schedule XIII unless, of course, it is already within the specified ceiling. Excess remuneration, if 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 provisions of section 2 of Part II of Schedule XIII notwithstanding anything in any agreement entered into with the concerned managerial person or in any resolution of the company or its Board. (v) In a case where section 2 of Part II of Schedule XIII is applicable, if the effective capital of a company is reduced in any financial year 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 that financial year no longer corresponds to the effective capital, the remuneration will have to be scaled down appropriately unless approval of the Central Government is obtained to payment of remuneration in excess of the limits specified in section 2 of Part II of Schedule XIII. (vi) Where a company 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 sections 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 company 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 company and draw remuneration from both the companies. 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. (vii) The provision for 10 per cent 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 2 of Part II of the 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 per cent reduction in salary in the event of loss or inadequacy of net profits in any financial year, the company may, if it so wishes, delete the said condition without obtaining the Central Government s approval, in accordance with the provisions of section 310. (viii) It has been observed that resolutions have been adopted in shareholders meeting of some companies 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 provisions of Part III of Schedule XIII. It is emphasized that the provisions of sub-section (1) of section 309 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.