1. Legal & Practical Aspects
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Remuneration to KMPs –
Legal & Practical Aspects
Siva Chandrasekaran Executive Vice President – Secretarial & Legal Rane Group, CHENNAI
September 13, 2019

2. SNEAK PEEK Regulatory Aspects Procedural Aspects Practical Aspects
Points to ponder

3. PROVISIONS At A GLANCE APPOINTMENT & REMUNERATION OF KMP
Chapter XIII- Appointment and Remuneration
Companies (Appt. & Remuneration of Managerial Personnel) Rules, 2014
Schedule V
Part I -Appointment
Part II – Remuneration
Section I –in case of profit
Section II – In case of no profit / inadequate profit
Section III- Rem. Spl. circumstance
Section IV-Perk not Rem.
Section V- Rem. by two cos.
Part III – Sh. holder approval
Part IV - Exemption
SEBI (LODR) Reg., 2015
SEBI (PIT) Reg., 2015

4. WHO IS A kmp?
As per Sec 2(51), “Key Managerial Personnel” in relation to a Company, means-
Chief Executive Officer
Managing Director or Whole-time Director or Manager
Company Secretary
Chief Financial Officer
Such other officer not more than one level below the directors who is in whole- time employment, designed as KMP by the Board;
Such other officer as may be prescribed

5. Class of Companies to appoint KMP (SEC. 203)
Listed Company
Public Company# having PUC* ₹10 crores or more
Whole-time KMP
MD / CEO / Manager; In their absence, a WTD
Company Secretary
Chief Financial Officer
# Including Pvt. Co. which is subsidiary of public co. (deemed public co.)
* Paid up Capital

6. SOME IMPORTANT DEFINITIONS
Managing director means a director who-
by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by BoD,
is entrusted with substantial powers of management of the affairs of the company &
includes director occupying the position of managing director, by whatever name called
Managing Director- 2(54)
Whole-time director includes a director in the whole time employment of the company
Whole-time Director- 2(94)
Manager means an individual who-
Subject to the superintendence, control or direction of the Board of Directors, has the management of the whole, or substantially the whole of the affairs of a company, and
includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not
Manager- 2(53)

7. APPOINTMENT OF MD / WTD / MGR (1/2) (Sec.196)
RESTRICTIONS
PROHIBITIONS
Company shall not appoint or re-appoint any person as its managing director, whole- time director or manager for a term exceeding five years at a time.
Re-appointment shall not be made earlier than one year before the expiry of his term.
No company shall appoint or employ at the same time a managing director and a manager.

8. APPOINTMENT OF MD / WTD / MGR (2/2)
CONDITIONS (Section 196 read with Schedule V)
Not an undischarged insolvent or has not at any time been adjudged as insolvent
Has not suspended payment to creditors or made any composition with them
Not convicted by a Court of an offence and sentenced for a period of more than 6 months
Has not been sentenced to imprisonment for any period or fine of > ₹ 1000 for conviction of offence under 19 prescribed Acts
Was not detained for any period under COFEPSA Act, 1974
Must be within the age limit of 21 to 70 years (In case >=70, pass S.R.)
He is a resident of
India
If criteria IV to VII not met, then approval of CG becomes mandatory.

9. LIMITS OF MANAGERIAL REMUNERATION- ADEQUATE PROFITS
Exceeding 11% of NP, subject to Sch. V
OVERALL MAXIMUM REMUNERATION- 11% of NP
(SEC. 197)
MD/WTD/Manager
5% of NP; if payable to any one MD/WTD/Manager
If within prescribed limits, pass B.R
10% of NP; if more than one such MD/WTD/Manager
Non Executive Directors
1% of NP, if there is a MD/ WTD/ Manager
If limits are breached, pass S.R. (Sch.V)
3% of NP, if not
Applicable only to public companies

10. REMUNERATION PAYABLE TO A MANAGERIAL PERSON- INADEQUATE PROFITS (1/2) (SCH. V)
Effective Capital
Max. limit of annual remuneration (₹)
Negative or < ₹ 5 Crores
60 lakhs
₹ 5 Crores or above but less than ₹ 100 Crores
84 lakhs
₹ 100 Crores or above but less than ₹ 250 Crores
120 lakhs
₹ 250 Crores and above
120 lakhs+ 0.01% of Effective capital > 250 Crores
Remuneration in excess of these limits allowed, if SR is passed.
Effective capital= PUC+ Reserves & surplus + Long term loans and deposits repayable > 1 year – Accumulated losses – Investments – Prelim. Exp. not written off.

11. REMUNERATION PAYABLE TO A MANAGERIAL PERSON- INADEQUATE PROFITS (2/2)
Payment in professional capacity based on Sch. V limits -
Should not have any interest in the capital* of the company or its holding company or subsidiaries directly or indirectly or through any other statutory structures
Should not have any direct or indirect interest in the company or its holding company or subsidiaries at any time during the last 2 years or related to the directors or promoters of the company
He is a graduate and specializes in the field in which company operates
(*Person holding of shares =< 0.5% of its PUC including ESOP shall be deemed to be a person not having any interest in the capital of the company)

12. Payment OF SITTING FEES (SEC.197(5))
Sitting fees not to be included as a part of remuneration
Quantum may be fixed at the discretion of the Board
Fees per Board/ Committee meeting can not exceed ₹ 1,00,000 per meeting
Fees paid to Woman Director and Independent Director shall not be less than what is being paid to the other directors

13. Treatment of insurance premium (SEC.197(13))
If D&O liability insurance is taken by a company on behalf of its Key Managerial Personnel for indemnifying against any liability owing to-
any negligence, default,
misfeasance,
breach of duty or trust
then the premium paid on such insurance shall not be treated as part of remuneration.
But if found guilty, then such insurance shall be treated as income part of remuneration.

14. Computation of profits U/S. 198 (1/2)
Allowed Credits
Allowed Debits
Bounties and Subsidies received from any Government or any public authority constituted or authorised in this behalf by any Govt., unless the Central Govt. otherwise directs
All usual working charges
Bonus/ Commission paid to staff
Interest on debentures, unsecured loans and advances
Expenses on repairs not in capital nature
Depreciation as allowed u/s. 123
Contributions to charitable funds u/s. 181
Compensation, damages paid out of legal liability
Bad debts written off

15. Computation of profits U/S. 198 (2/2)
Disallowed Credits
Disallowed Debits
Premium on issue of shares or debentures
Profit on sale of forfeited shares by Company
Profits of capital nature (Sale of undertaking, etc.)
Unrealised gains, notional or revaluation of assets gains
Profit from sale of immovable property/ fixed assets
However, cos. in the business of buying and selling of properties/ fixed assets -
E.g. Cost= 100, SP= 120, WDV= 40; Credit up to 60 allowed.
Income tax and super tax payable by the Company
Compensation, damages, payments made voluntarily
Remuneration to the directors

16. Components of Remuneration (PaRt II of Sch V)
In the event of adequacy of profits – the entire value of perquisites as per IT Act, 1961 and reimbursements of direct taxes to be considered (Section I)
In the event of inadequacy or absence of profits – Only the taxable amount of perquisites should be considered. Contribution to PF, Gratuity and leave encashment at the end of tenure to be excluded. (Section IV)
An expatriate managerial person shall be eligible for the following which shall not be considered in the definition of remuneration under Sch. V :-
a) Children’s education allowance
b) Holiday package studying outside India or family staying outside India
c) Leave travel concession

17. POINTS TO PONDER
Can a whole-time KMP be appointed in more than one company at the same time?
Section 203 (3)
A whole-time KMP cannot hold office in more than one company, except in its subsidiary company at the same time.

18. POINTS TO PONDER
How is the limit on Remuneration to a Managerial Person computed if he holds office in more than one company? Section V of Part II of Schedule V A Managerial Person shall draw remuneration from one or all companies not higher than the maximum limit that becomes applicable to any of those companies of which he acts as a Managerial Person.

19. POINTS TO PONDER
Will payment for services rendered in other capacity be covered in the limits of remuneration as referred to in office or place of profit u/s. 188? Section 188 read with Proviso to Section 197(4) If the services rendered are not covered under the conditions of service of the concerned director and the remuneration for rendering services is of professional nature, then such amount will not be covered in limits of remuneration. This payment shall be treated as RPT and undergo the test of “Arm’s length- ordinary course” rule and requisite approvals, if any.

20. POINTS TO PONDER
What happens if Remuneration drawn is in excess of prescribed limits?
Section 197 (9) & (10)
If director draws remuneration, directly or indirectly, in excess of prescribed limits, he shall refund the excess to the Company within two years or such lesser time allowed by the Company.
The Company may waive the recovery of the said sum by passing a S.R. within 2 years from the date it becomes due for refund.
Before seeking S.R., approval of Banks, PFI, NCD holders/ secured creditors in case of default in dues

21. REMUNERATION From SEBI (loDR) perspective
Board shall recommend all fees or compensation paid to NEDs and shall require approval of shareholders (except sitting fees). (R. 17(6)(a))
S.R. to be passed every year, in case remuneration p.a. payable to a single NED >50%of the total annual remuneration payable to all NEDs (R. 17(6)(ca))
Rem. to EDs who are promoters/ members of the promoter group, is subject to the approval of the shareholders by S.R., (R. 17(6)(e)), if-
(i) the annual remuneration payable to such ED> ₹5 crore
or 2.5% of the NP, whichever is higher; (or)
(ii) Where >1 ED, the total annual remuneration
to such directors exceeds 5% of NP
Approval valid only till the expiry of the term of such director

22. Disclosures in annual report (1/3)
A MD/WTD in receipt of any commission from Company may receive any Commission from its Holding or Subsidiary Company, provided it is disclosed in Board’s report (Section 197 (14))
Auditor shall under the Auditor’s report make a statement as to whether the Company complies with the provisions relating to payment of remuneration (Section 197(16))
The Notes to the accounts to include related party transactions showing the details of remuneration paid to KMPs
Listed Entities shall additionally disclose in Board’s report- (Rule 5)
the ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year
CTC of each directors inclusive of perks and all emoluments is taken
Remuneration is arranged in descending order based on value and median remuneration is found
Ratio of 1 & 2 now needs to be disclosed.

23. Disclosures in annual report (2/3)
the percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year;
the percentage increase in the median remuneration of employees in the financial year
the number of permanent employees on the rolls of company;
average percentile increase already made in the salaries of employees other than the managerial personnel in the last FY and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration
affirmation that the remuneration is as per the remuneration policy of the company.

24. Disclosures in annual report (2/3)
Board’s report shall include a statement showing the names of the top ten employees in terms of remuneration drawn and the name of every employee, who-
(i) If employed throughout the financial year, whose aggregate Rem is ₹ 1.02 Crores p.a;
(ii) Else, whose aggregate Rem was not less than  ₹ 8.5 Lakhs p.m;
(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in excess of that drawn by the MD/WTD/Manager and holds by himself or along with his spouse and dependent children, not less than 2% of the equity shares of the company.

25. Procedure for appointment AND PAYMENT of remuneration- adequate profits
Recommendation by NRC u/s. 178 for approval of remuneration
Approval by AC,
if not in arm’s length and ordinary course (or) in case payments are made in any other capacity
Approval by Board of Directors
u/s. 196
Shareholders approval
CG approval for appointment, if conditions specified under Sch. V are not met

26. Procedure for appointment AND PAYMENT of remuneration- Inadequate profits
Recommen-dation and Approval by NRC
Approval of the Board of Directors
Approval of Banks, PFI, NCD holders/ secured creditors in case of default in dues
Approval of shareholders by way of S.R.

27. PROCEDURAL ASPECTS oF Appointment of KMP (1/2)
NRC while recommending appointment of managerial personnel, shall have regard to appointment criteria fixed by the company.
NRC shall also consider the Company’s policy on remuneration while recommending to the Board the remuneration that may be payable.
Filing with various authorities-
E-form MGT-14- Within 30 days of passing of Board/ Members’ resolution
E-form DIR-12- Within 30 days of appt. by Board/ Members
E-form MR-1- Return of appointment of MD/WTD/Manager within 60 days of appointment by the Board
Intimation to SEs within 30 mins. of the closure of Board meeting

28. PROCEDURAL ASPECTS of Appointment of KMP (2/2)
The notice convening the General Meeting shall contain detailed disclosures on Nature of Industry, Financial performance, Foreign Investments, Information about the appointee, Reasons for loss/ inadequate profits, etc.
Application to CG in E-form MR-2, if any within 90 days of appointment, if any one of the conditions as laid down in Sch. V is not met.

29. Basis FOR fixing OF Remuneration (1/3)
Parameters to be taken into consideration while fixing remuneration –
Academic achievements
Number of years of experience
Fitness for the position
Quality of experience in terms of functional and behavioural competencies
The position company has and the proposed budget for this position
Current CTC of the incumbent
Corresponding market comparison for that position in similarly profiled companies
Industry to which the company belongs
The profitability of the organization

30. Basis FOR fixing OF Remuneration (2/3)
Market surveys based on performance / experience scale
Compensation and benefits surveys conducted by
 Mercer  Hay  Aon Hewitt
Company can also commission HR & compensation consultants for fixing the remuneration
Industry comparison survey is also conducted by the Industry associations and shared with their constituents.
Discussions at HR Forums

31. Basis FOR fixing OF Remuneration (3/3)
Fixed pay is fixed in line with general inflation / market related
Variable pay is fixed on achievement in the following criteria:
Leadership criteria such as succession planning, customer satisfaction, operational excellence, compliance with audit observations, etc.
Financial parameters like Sales, Profitability improvement, ROCE, etc. with differential weightage to each parameter and a minimum threshold level for achievement

32. QUESTIONS??

33. ThaNK YOU!!

34. CrITERIA FOR APPOINTMENT
The appointment, re appointment, determining qualifications, positive attributes could be based on the following criteria:
Academic accomplishments & Professional experience
Industry relevance and experience, Technical / functional domain expertise
Diversity
Global exposure
Professional network, Association with professional forums / academic institutions
Independence & Innovation
Cultural fit

35. Remuneration POLICY
Remuneration policy shall be posted on the website of the company.
The remuneration policy will consists of –
Criteria of appointment of KMP
Criteria of payment of remuneration to Directors & KMPs –
Non-Executive Directors
Executive Directors (Managing Director / Whole Time Directors),
Chief Executive Officers (CEOs) and Manager under Companies Act,2013)
Key Managerial Personnel (KMP) and
Senior Management Personnel (SMP)
Disclosure requirements in board’s report and in the website of the company.