Appointment of Managerial Personnel and payment of Managerial Remuneration in case of Companies having no profit or inadequate profit - rationalization thereof. - Companies Law - 12/7/2000 CL.VII

File No. 12/7/2000 CL.VII GOVERNMENT OF INDIA MINISTRY OF LAW JUSTICE AND COMPANY AFFAIRS DEPARTMENT OF COMPANY AFFAIRS ..... Shastri Bhawan, 5th floor, 'A' Wing, Dr. R.P. Road, New Delhi-110001 Dated: 27.12.2000 Subject: - Appointment of Managerial Personnel and payment of Managerial Remuneration in case of Companies having no profit or inadequate profit - rationalization thereof.... 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 Govt. for appointment of and/or payment of remuneration to managerial personnel in excess of the limits prescribed in sections 269, 310 , 311 387 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). 2. 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 02.03.2000. The revised scales are as under: - Where the effective capital of the company is Monthly remuneration payable shall not exceed ------------------------------------------------------------------------------------------------------------------------------ (i) less than rupees 1 crore rupees 75,000 (ii) rupees 1 crore or more but less than rupees 1,00,000 rupees 5 crores (iii) rupees 5 crores or more but less than rupees 1,25,000 rupees 25 crores (iv) rupees 25 crores or more but less than rupees 1,50,000 rupees 100 crores. (v) rupees 100 crores or more rupees 2,00,000 ------------------------------------------------------------------------------------------------------------------------------ 3. 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 detail the justification alongwith a copy of the resolution passed by the Board/AGM as the case may be. 4. 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: (i) Reasons for loss/inadequacy of profit. (ii) Steps taken to improve the performance of the company. (iii) Financial health/performance of the Company as may be reflected by effective capital, Net worth, Turnover, Profit/loss, dividend declared, etc. (iv) Nature of industry - high technology area, core sector, infrastructure field, etc. (v) Export performance and net foreign exchange earned. (vi) Performance of the Company in socio-economic activities. (vii) General performance of Industry in the relevant sector (viii) Foreign investment and foreign collaborations (ix) Expansion/Diversification/Modernisation/Technology upgradation (x) Qualification, experience, period of association and contribution of the proposed appointee. (xi) Requirement of personal skill and challenges ahead (xii) Past remuneration of the proposed appointee. (xiii) Creativity/innovativeness of the proposed appointee/company. (xiv) Recognition/Award obtained by the proposed appointee/company. (xv) 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. (xvi) Any other factors relevant to the proposal, which the company may like to bring to the notice of the Govt. justifying their proposal. 5. Deficiencies generally observed in respect of the applications on the above subject are listed below: - (i) Application fee is not paid in proper manner. Sometimes the Demand draft is not for the full amount of application fee and some-times the demand draft is not payable in favor of Pay 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 06.07.1999. (ii) 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'. (iii) Applications are submitted after remuneration in excess of Schedule III has already been paid to the managerial person. (iv) 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. (v) 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. (vi) In case of foreign collaboration, certified copy of the FIPB approval letter(s) is not furnished. (vii) 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. (viii) Requirements of section 316(2)/(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. (ix) 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 26) in respect of new Companies. (x) 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. (xi) 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 part I 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. (xii) Papers/documents attached with the application are not authenticated and seal of the company is not put on each paper. 6. 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. (i) 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). (ii) In providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid; (iii) 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 (iv) 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 05.11.99) . 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. 7. 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. 8. Copy of this circular is also available at the Web Site of the Department of Company Affairs at the following address: http/www.nic.in/dca. 9. 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 To, As per mailing list attached. CHECK LIST Please ensure before submitting the application that the following information/ documents have been furnished: - (i) Proper application fee in the manner provided vide GSR No. 501(E) dtd. 6.7.99. (ii) Copies of public notices in English and in local newspaper in local language. (iii) Monetary value of each of the perquisites and allowances and total remuneration package (in the form of statement annexed) valued as per actual cost. (iv) Appropriate and clear resolution in support of the proposal. (v) In case of appointment as Managerial personnel in two or more companies the manner in which compliance of section 316(2)/(4) has been made. (vi) Reasons for loss/inadequacy of profit, steps taken to improve the financial performance and future projections. (vii) Full proper justification for proposed appointment/ remuneration. (viii) The manner in which compliance of section 269(2) of the Companies Act was met at the time of appointment/ reappointment of the managerial person where mid term increase in remuneration is proposed. (ix) Application for condonation of delay under section 637B along with justification and requisite application fee where the application was not submitted within 90 days of date of appointment/ reappointment. (x) Monetary value of total remuneration in Rupees or Rupees equivalent drawn by the proposed appointee during last three years from the applicant company or any other company. (xi) Copy of the Directors report and the audited accounts of the company for each of the last five financial years of the company. (xii) Each column of the application is filled up. (xiii) Copies of FIPB approvals, in case of foreign collaboration/ investment. (xiv) Each page of application and documents attached is authenticated under the seal of the applicant company. STATEMENT OF REMUNERATION PROPOSED In Rupees/Rupees equivalent per month A. SALARY Basic Salary Bonus Gratuity (Non taxable) Contribution to Provident fund (Non taxable) Contribution to Superannuation fund/ Annuity fund (Non taxable) B. ALLOWANCES Entertainment allowance Special allowance C. PERQUISTIES Accommodation Gas/Electricity/Water expenses Children education Transport and driver Leave Travel concession (Non taxable) Medical reimbursement (Non taxable) Insurance (a) Personal effect (b) Medical (Non taxable) Servant, mail, cook Security Telephone Club fee Total Note 1 Any other item(s), which the company wants to indicate, may be added in the appropriate group above. Note 2 As per explanation given under section 198 of the Companies Act, 1956 , the salary and perquisites included in the total remuneration should be valued as per actual cost. Note 3 Income tax liability be indicated on a separate sheet to be attached. STATEMENT OF INCOME TAX LIABILITY W.R.T. REMUNERATION PROPOSAL **********************