On March 31 2011 the Ministry of Corporate Affairs amended the Companies (Particulars of Employees) Rules 1975 with the notification of the Companies (Particulars of Employees) Amendment Rules 2011. The new rules raise the limit for the employee salaries that must be disclosed in a directors' report.
Under the rules, companies in the public sector must disclose their employees' particulars in their annual report, as well as providing an annual balance sheet of profits and losses. The primary purpose of such regulations on managerial remuneration is to protect stakeholders, particularly shareholders and creditors.
The principal rules were published in the Official Gazette on June 10 1988 and subsequently amended on April 17 2002 and March 24 2004. The 2004 amendment raised the applicable employee salary limit as follows:
- Under Rule 1A(a), for employees who work throughout the financial year, the regulations were amended to apply to those whose remuneration is greater than Rs2.4 million per annum (instead of the earlier limit of Rs1.2 million).
- Under Rule 1A(b), for employees who work for part of the financial year only, the regulations were amended to apply to those whose remuneration is greater than Rs200,000 per annum (instead of the earlier limit of Rs100,000).
In the 2011 amendment, the ministry further raised the applicable salary limit by way of the following amendments:
- Under Rule 1A(a), the limit was raised from Rs2.4 million to Rs6 million.
- Under Rule 1A(b), the limit was raised from Rs200,000 to Rs500,000.
This revision was completed in line with the February 8 2011 amendment to Schedule XIII of the Companies Act 1956, whereby unlisted companies that are not subsidiaries of listed companies were exempted from the need to obtain government approval for managerial remuneration in cases where they have no profits (or inadequate profits), provided that they meet the other conditions stipulated in the schedule.
The amendment is also in line with the central government's policy of rationalising the corporate governance norms for Indian companies in light of increased managerial payouts. It represents a welcome change for companies that were previously compelled to disclose the pay package of a large number of employees on their payroll, thus increasing both the paperwork and the risk of non-compliance. It also reflects the change in managers' pay structures over the last few years, in light of the evolving economic and regulatory environment.
In its Circular 23/2011 (of June 3 2011), the ministry further clarified that under Section 217 of the act, the new amendment will apply to all directors' reports that have been approved by the board of directors on or after April 1 2011, irrespective of the year of the annual accounts being approved by the board.
For further information on this topic please contact Vikas Goel or Neha Goyal at Singhania & Partners LLP by telephone (+91 11 4153 1000), fax (+91 11 4153 1001) or email ([email protected] or [email protected]).