Managerial Remuneration Provision- By CS Annu Sharma

In Today’s write-up we will get some extract from the section 197 and 198 of Companies Act, 2013 as practical implication of this section is really very different from the written language, even when organization has not incurred profits, managerial level is paid high remuneration irrespective of its burden on company financial conditions. Although there are many laws governing wages of blue collar workers, there is no specific law for remuneration or salary of top managerial level personnel.

Before Moving ahead –I would also explain what is Remuneration?

‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

The Managerial personnel are generally paid on the basis of their experience and their worth to management, so their remuneration package are generally high and consist of other perquisites also. There are many cases, where the top management have taken the advantaged of their place for their own personal benefit at the cost of company’s long run growth and functioning.

The Companies Act, 2013 has a provision to keep a tab on such type of malpractices under section 197 read with other applicable rules and schedule. Kindly note that this provision is applicable to only public companies. Now let us go through its important points to be noted and kept in mind while fixing a remuneration of managerial personnel: -

What Says Section 197(1) ?

The total managerial remuneration payable by a Public Company, to its:

i. Directors, and

ii. Managing Director and

iii. Whole-Time Director, and

iv. Manager

 in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

If the company has Profits during the Financial Year: -

(A)  The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent (11%). of the net profits of that company for that financial year computed in the manner laid down in section 198.

• While computing Net Profits under section 198 except that the remuneration of the directors shall not be deducted from the gross profits for the purpose of limit of eleven per cent (11%).
   
• (B) The company may by passing Special resolution in general meeting, the below given limits can be exceeded:-
   

• the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent (5%). of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together.
   
• the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,—
   
  (A) one per cent (1%) of the net profits of the company, if there is a managing or whole-time director or manager;
  (B) three per cent (1%) of the net profits in any other case.
  Note:– For the purpose of Point (B), the prior approval before General Meeting, is required if company has defaulted in payment of dues any bank or public financial institution or non-convertible debenture holders or any other secured creditor.
  (C)  The remuneration payable to managerial personnel as per point (A) and (B) shall exclude the remuneration paid for services rendered by them in professional capacity and then again it is approved by Nomination and Remuneration Committee, if any.
  (D) A director has to refund the sums of amount which he has received in excess of remuneration allowed under this provision within two years.
  Provided further that this amount can be waived off if company has passed special resolution and also received the prior approval from bank public financial institution concerned or the non-convertible debenture holders or other secured creditor, if any default exists.
  IN SIMPLE TERMS:-

Category	Maximum Permissible Managerial Remuneration
Whole-Time Director (One)	5%
Managing Director (One)	5%
Manager (One)	5%
Whole-Time Director (more than one)	10%
Managing Director (more than one)	10%
Managing Director, Manager with one or more Whole-Time Director	10%
Overall Limit for Total Managerial Remuneration to all Managerial Personnel	11%
Part Time Director with one or more Whole-Time Director or Managing Directors	1%
Part Time Director without Whole-Time Director or Managing Directors	3%

 

Further, if a public company defaults in payment of dues to any bank / public financial institution / non-convertible debenture holders / any other secured creditor, such company would be required to obtain prior approval of such bank / public financial institution / non-convertible debenture holders / any other secured creditor, as the case may be, before obtaining the shareholders’ approval.

 

If the company has no or inadequate Profits during the Financial Year:-

During a financial year, if a company has no or inadequate profits in that case company need to prior approval from members of the company by way of ordinary resolution as below for payment of remuneration: -

 

Where the effective capital is	Remuneration payable shall not exceed (Rupees)
Negative or less than 5 crores	60 Lakhs
5 crores and above but less than 100 crores	84 Lakhs
100 crores and above but less than 250 crores	120 Lakhs
250 crores and above	120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores

 

If a company wants to pay remuneration to managerial remuneration in excess of above limits given in table, it can by passing special resolution in general meeting and needs to be approved by Nomination and Remuneration Committee, if any.

Please Note:

These restrictions do not apply to the sitting fees of the directors (managing director, whole time director/manager).

 

PENALTY FOR THE AFOREMENTION SECTION’S  NON- COMPLIANCE: -

If any person makes any default in complying with the provisions of this section, he shall be liable to a penalty of one lakh rupees and where any default has been made by a company, the company shall be liable to a penalty of five lakh rupees

(The Author is Company Secretary providing varied array of services including secretarial, financial, intellectual property, start-ups, Drafting Vetting of Agreements and other ancillary advisory service and can be contacted through email id:- csannusharma123@gmail.com or Call - 7021848742)

Why DRHP is Important for Investors ?

During lockdown in India our economy was paused but not completely since the things are back to pace. Many companies will come out with their Initial Public offer specially the startups. In order to understand a firm fully, one of the most important tools is the Draft Red Herring Prospectus (DRHP). In this write up I am going share with you all that why DRHP is important for the companies coming out with public issue.

The document clarifies the reason why the company wants to raise money from the public, how the money will be used and risks involved in investing in the company. It does not contain details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.

1.     What is a DRHP?

A Draft Red Herring Prospectus, or offer document, is when a company that is planning to raise money from the public provides detailed information about its business operations and financials. This includes details about its promoters, reason for raising money, how the money will be used, risks involved with investing in the company and so on. Investors should bear in mind that it does not provide information about the price or size of the offering.

2.     How do companies prepare a DRHP?

The issuer company approaches a merchant banker to prepare the offer document. Merchant bankers take care of the legal compliance issues as well ensure that prospective investors are aware and kept in the loop of the public issue.

The Securities and Exchange Board of India, or SEBI, has made it mandatory for companies to file a DRHP before going to the Registrar of Companies (ROC’s). SEBI reviews the offer document and checks if adequate disclosures are made. SEBI’s observations or recommendations are given to the merchant banker, who makes the changes and files the final offer document with SEBI, the ROC) and stock exchanges. Again the document is reviewed and observations are given to be implemented. Once that is done, final approval is provided and the document then becomes a RHP (Red Herring Prospectus).

3.     Where can investors find a company’s DRHP?

Investors can access a company’s DRHP on various platforms — the company website, the merchant banker website, stock exchange websites or the SEBI website. Announcements are also made in newspapers in multiple languages as per the rules.

4.     Who Makes the DRHP?

One of the most questionable aspects of the DRHP is its genuineness. While it is drafted by a team of legal counsels who are hired (independently) by the merchant bankers/ underwriters entrusted with the job of selling the securities being offered, they are all (i.e. the legal counsels and the merchant bankers) remunerated by the company. So are the auditors who compute and give opinion on the financial statements. Naturally there is an omnipresent specter of bias in making of the DRHP and on the process of due diligence itself.

 “Making honest disclosures to reveal truth about company and the issue” towards – “Creative writing to make the truth look beautiful”.

5.     How is the DRHP useful to investors?

It is a very powerful tool that provides them with all the necessary information about the company in order to help make an informed decision. Investors must go through the document carefully and can go ahead and do some research on their own about performance of other companies in the space and so on. SEBI reviews the draft document and checks if adequate disclosures are made. It gives its observations to the merchant bankers, who make the required changes and file the final offer document with SEBI, the ROC and stock exchanges.

6.     What can investors do if they notice discrepancies?

If there is any inaccurate or incomplete information in the DRHP, investors can register a complaint either with the merchant banker or SEBI. The role of the merchant banker, in this case, is to take care of the legal compliance issues and ensure that prospective investors are aware and kept in the loop of public issue.

7.     How it named as Prospectus?

An issuer can state the issue size and the number of shares are determined later. An RHP for and FPO can be filed with the ROC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.

8.     What about Wrong Disclosures in the Prospectus?

Making untrue statements of facts or omitting to state material facts in the prospectus could lead to penalties ranging from monetary fines to the merchant banker’s license being revoked. Recently however SEBI has started taking actions in this regard. There was a case where, DLF was fined Rs. 85 crores for not disclosing certain material information and facts in its IPO document.

CONCLUDING TIPS:

There are good reasons to pay attention to some sections of the DRHP. In particular you should look at the management section which covers promoters, directors and other key people in the company. Lawyers have little room to pull the wool over your eyes about these aspects. An honest and competent management is one of the most important investment tenets you should be looking for. Similarly, pay close attention to the chapter – Use of Proceeds. This will tell you what the company intends to do with the money they raise.

A Comprehend on Disclosure of interest by Directors -BY CS Annu Sharma

Dear Professionals.

Hoping you all are well there!!!

In this write up I am going to share the quick review of a Compliance which is generally neglected by majority of the companies as the form is not deployed as E-form on MCA portal therefore many companies forget to keep the record of MBP-1 form specially in case of private companies.

Many of them do this compliance at the time of appointment of the director but later on couldn’t continue this on annual basis which results in heavy penalty as per Section 184 (4) i.e. Min. 50,000 and maximum upto 1 lac along with imprisonment upto 1 year or both. Let’s just understand the importance of compliance under section 184 of Companies Act, 2013.

This write up is a compilation and analysis of the relevant provisions relating to the disclosure of the interest of directors. There is also a reference to the exemptions to certain classes of companies.

1.      What Section 184 describes?

Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.

Section 184 Says every director after his appointment should disclose about his material interest he has in any body corporate, firm, company or any other entity in Form MBP-1 in his first board meeting which he attends after appointment and in the first board meeting of every financial year. Apart from this any time during the financial year he finds the change in interest, he should disclose about the change in interest in immediately succeeding board meeting.

IN CASE DIRECTOR IS INTERESTED IN ANY CONTRACT OR ARRANGEMENT ENTERED BY THE COMPANY

Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into—

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting:

Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

A contract or arrangement entered into by the company without disclosure under Aforementioned Paragraphs or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

PLACE OF MAINTENANCE OF THE NOTICES

All notices shall be kept at the registered office of the company. Such notices shall be preserved for a period of 8 years from the end of the financial year to which it relates and shall be kept in the custody of the Company Secretary of the company or any other person authorized by the Board of Directors for the purpose. If there is any other person authorized by the Board of Directors for the said purpose then such resolution shall be passed by the directors of the company (either in Board meeting or by circular resolution).

PENALTY UNDER COMPANIES ACT, 2013 AS PER SETION 184 (4)

If a director of the company contravenes the provisions of sub-section (1) or subsection (2), such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both.

LIMITED APPLICABILITY OF SECTION 184(2) OF THE ACT (IN CERTAIN CASES)—

The provisions of Section 184(2) of the Act shall have a limited application in certain cases. In case of private companies, Section 184(2) of the Act shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest [MCA Notification No. G.S.R. 464(E) dated 5-6-2015].

In case of Section 8 companies (company registered under the Companies Act, 2013 for charitable or not-for-profit purposes), Section 184(2) of the Act shall apply only if the transaction with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds Rs 1 lakh [MCA Notification No. G.S.R. 466(E) dated 5-6-2015]. I

n case of an unlisted public company which is licensed to operate by Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA) from the International Financial Services Centre located in an approved multi-services Special Economic Zones (SEZ) set-up under the Special Economic Zones Act, 2005 sub-section (2) of Section 184 of the Act shall apply with the exception that the interested director may participate in such meeting provided, the disclosure of his interest is made by the director concerned either prior or at the meeting. [Notification No. G.S.R. 8(E) dated 4-1-2017]. In all the cases, it is desirable that the limited applicability and necessary action taken is noted in the minutes of the meeting of the Board of Directors.

OVERRIDING ASPECTS OF THIS SECTION

Nothing in this section—

(a) shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company;

(b) shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold not more than two per cent. of the paid-up share capital in the other company.

DRAFT FORMAT OF MBP-1

FORM MBP – 1

Notice of interest by director

[Pursuant to section 184 (1) and rule 9(1)]

To

The Board of Directors

………………… Limited

Dear Sir(s)

I, …………. , son/daughter/spouse of……………… , resident of……… , being a director in the company hereby give notice of my interest or concern in the following company or companies, bodies corporate, firms or other association of individuals:-

Sl No.	Names of the Companies /bodies corporate/ firms/ association of individuals	Nature of interest or concern / Change in interest or concern	Shareholding	Date on which interest or concern arose / changed

Place:
Date:

Signature:
MD/Director/Secretary/Whole time Director

CONLUDING NOTE:

According to Section 167 of the Act, the office of the director shall become vacant if he acts in contravention of the provisions of Section 184 of the Act or if the director fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of Section 184 of the Act. Therefore, the compliance of the said provisions is very important from the perspective of director’s fiduciary duties and the consequences if not complied with.

Further, by making the necessary disclosure of concern or interest, the directors not only comply with the provisions of Section 184 of the Act but also with Section 166 of the Act (relating to “duties of directors”). According to Section 166(4) of the Act, a director shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

The Author is a Company Secretary based at Jaipur, Rajasthan and can be reached at csannusharma123@gmail.com and also can be contacted at 7021848742.

EVERY THING YOU NEED TO KNOW ABOUT “THE MATERNITY BENEFIT (AMENDMENT) ACT, 2017”

Women often feel left out or face biases during pregnancy or after childbirth in their workplace, it is important for them to know the benefits they can avail of and the rights under the law.

The Content am going to share with you all is something very important for our corporate universe either its small or large , loss making or profit making , Shop or an establishment irrespective of the capital , turnover etc. all of them are in its ambit having 10 or more employees.

In order to protect the rights of female employees during pregnancy and after childbirth, Indian law makes it mandatory for most establishments to offer maternity benefits to women employees. Maternity benefit in India is mainly governed by the Maternity Benefit Act, 1961 as amended in 2017 that applies to all shops and establishments with 10 or more employees. Those women who work in factories with 10 or more workers are given maternity benefits as available under the Employees’ State Insurance Act, 1948.

The applicability of the law is apparently stated in the aforementioned paragraphs perhaps for removal of doubt we again recall Every Shop or Establishment, Factory, Mine, Plantation or any establishment belonging to Government having 10 or more employees, Now we will understand mainly the benefits available to all the working women.

NUMBER OF PAID LEAVES AVAILABLE

The Maternity Benefit Act originally provided maternity benefit of 12 weeks, out of which up to six weeks could be claimed before delivery. In 2017, the law was amended to extend the period to 26 weeks. Out of the 26 weeks, up to eight weeks can be claimed before delivery. However, you need not structure your leaves in this manner—you can instead take the entire 26 weeks of leave after the delivery. Also, these are maximum periods of claim and you can claim the benefit for a smaller period as well.

In Present Scenario 26 weeks paid leaves are available to the working women which can be elaborated by following assumption.

Merry a Pregnant woman having expected date of delivery on 01/10/2020 as per her medical reports, she has 2 options as per her health or doctor advises.

Option :1	She may take leaves from 01/10/2020 till the completion of 26 weeks. (i.e. entire leaves can be taken after due date of delivery)
Option :2	She may take leaves from 01/08/2020 till the completion of 26 weeks. (i.e. 8 weeks before the date of delivery and remaining paid leaves after due date of delivery)

Note: Dates will be tentative as per your health and condition. It’s all based on your medical advice.

If the woman has more than two surviving children, the maternity benefit is for 12 weeks only. The law was also amended to extend maternity benefits to commissioning and adoptive mothers who are now entitled to 12 weeks of leave from the date the mother receives the child.

Women undergoing a tubectomy operation (a medical procedure to stop future pregnancies) also get a paid leave of two weeks following the operation. In case of miscarriage or medical termination of pregnancy, the law permits women six weeks’ leave after the procedure. In case of an illness after delivery, miscarriage, medical termination of pregnancy or tubectomy, a woman can claim a leave with wages for a further period of one month, over and above what is allowed.

INTIMATION REGARDING EXPECTED DATE OF DELIVERY TO YOUR EMPLOYER.

The Expecting working woman should intimate regarding her intentions for paid maternity leaves in between 4^th to 6^th month of pregnancy (it could be before 4^th month as per the circumstances allow)

ELIGIBILTY OF A WORKING WOMAN TO TAKE MATERNITY BENEFITS FROM HER EMPLOYER.

As per the Act, to be eligible for maternity benefit, a woman must have been working as an employee in an establishment for a period of at least 80 days within the past 12 months before the expected date of delivery. Payment during the leave period is based on the average daily wage for the period of actual absence.

An employer cannot dismiss a woman for taking maternity leave and cannot serve a termination notice to a woman on maternity leave which expires before the maternity leave ends.

BENEFITS IN ADDITION TO PAID MATERNITY LEAVES POST DELIVERY OF A CHILD

Work from Home & Crèche for Child.

1.    The Maternity Benefit Amendment Act has also introduced an enabling provision relating to "work from home" for women, which may be exercised after the expiry of the 26 weeks' leave period. Depending upon the nature of work, women employees may be able to avail this benefit on terms that are mutually agreed with the employer.

2.    The law was further amended in 2017 to make it mandatory for establishments with more than 50 workers to establish crèches. Mothers are entitled to visit the crèches up to four times a day and to two nursing breaks per day in addition to any other breaks that are available as a matter of course, until the child attains the age of 15 months.

RIGHTS AVAILABLE TO WOMAN EMPLOYEE

An employer cannot dismiss a woman for taking maternity leave and cannot serve a termination notice to a woman on maternity leave which expires before the maternity leave ends. Also, an employer can’t change the terms of service to the woman’s disadvantage during her maternity leave.

Further, maternity benefit and medical bonus will have to be paid to a woman who is discharged or dismissed during pregnancy unless it is for gross misconduct.

DUTIES OF EMPLOYER

Remember that employers are required to inform women in writing and electronically about the maternity benefits available under the Maternity Benefit Act upon their joining the workforce.

LEAVE FOR ILLNESS ARISING OUT OF PREGNANCY, DELIVERY, PREMATURE BIRTH OF CHILD, OR MISCARRIAGE:

 A woman suffering from illness arising out of pregnancy, delivery, premature birth of child or miscarriage shall, on production of such proof as may be prescribed, be entitled, in addition to the period of absence allowed to her under section 6, or, as the case may be, under section 9, to leave with wages at the rate of maternity benefit for a maximum period of one month.

DOWNSIDES OF THE ACT.

1.    Adverse impact on the job opportunities for women as the increased maternity period has also increased the employment expenses which have to be borne by the employers. Therefore, they will be reluctant to hire women employees.

2.    As per the Act, the expenses on maternity leave is to be borne by the employers which are a huge expense for them. It has been stated by the International Labour Organisation (ILO) Maternity Protection Convention that employers should not be solely liable for the cost of providing maternity benefits to their women employees and it has recommended that the benefits should be provided through compulsory social insurance or public funds.

Any Query or Comment is specially request at : csannusharma123@gmail.com or call at +91-7021848742