A company bears its existence distinguished from its members working towards the common objective of maximizing profits. Although having an independent legal identity, it requires effective organization of its affairs by a meticulous and experienced management which acts as its brain.
The Ministry of Corporate Affairs (hereinafter referred to as the “Ministry”) is the branch of the Government dealing exclusively with administration of legal framework governing the business corporations such as companies, limited liability partnerships in India. The control of the conduct and affairs of the companies are governed under the provisions of the Companies Act, 2013 (hereinafter referred to as the “Act”) which monitors the transactions related thereto. The enforced Act works towards strengthening governance, management, compliance and enforcement of responsibilities of the management of the company.
Compensation to the Executives
Management of the companies providing their contributions in the form of skill, labour and efforts for its benefit makes them entitled for remuneration of their services.
In furtherance to the aspect of remuneration, it has been informed, vide notification of the Ministry dated September 12, 2018, that remuneration in excess of individual limits laid down for managerial persons i.e. 11% of the net profit shall no longer seek the approval of the Government (hereinafter referred to as the “notification”). Some of the notable aspects of the said notification are provided below:
- Establishing the supremacy of the shareholders, the said notification empowers the shareholders to approve the payment of the managerial remuneration beyond the prescribed threshold, through a special resolution. The Companies are required to get such approval at the general meeting as per Section 197 of the Act;
- However, in case a company has committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the Government makes it mandatory to seek prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, before obtaining the approval in the general meeting;
- Having retrospective applicability, all pending applications submitted for Government approval of proposals in respect of payment of managerial remuneration in excess of the limits laid down would automatically abate and companies are free to obtain requisite approvals for those proposals, from the shareholders within one year.
- For companies running loss or with inadequate profit, remuneration can be paid in accordance with prescribed limits in the law and no Government approval would be required.
Facilitating ease in doing business, the notification enables the shareholders with higher degree of control to being vested with them for running the company and paying adequately to the managerial persons.