Appointment and Remuneration of Managerial Personnel (Sections 196–205) of Companies Act

Managerial personnel generally refers to the top-level executives of a firm or company who play a vital role in regulating its day-to-day functioning and management. Managerial personnel include Managing Director (MD), Key Managerial Personnel (KMP), Whole-Time Director (WTD), etc. The above-mentioned entities are quite essential for the smooth functioning of a company, and their appointment and remuneration are dealt with under Chapter XIII of the Companies Act, 2013. And it is important to monitor them for professional accountability as well as to uphold corporate integrity and shareholder trust.

Section 196: Appointment of managing director, whole-time director or manager.

Section 196 of the Companies Act of 2013 deals with the reappointment of important managerial staff, particularly the manager, whole-time director, or managing director (MD). Section 196(1) clearly states that a company cannot appoint a manager and a managing director simultaneously, as both roles involve substantial management powers, and dual appointments could lead to overlapping authority and governance confusion.

By virtue of Section 196(2), these appointments cannot exceed a term of five years at a time. In order to maintain continuity without undue overlap, reappointment is allowed, but not before the current term ends, which is one year in advance.

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Section 196(3) specially deals with who cannot be appointed to the posts mentioned in this section, and the disqualifications are as follows:

• A person below the age of 21 years and above the age of 70
• is an undischarged insolvent or has at any time been adjudged as an insolvent
• has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or
• Has been convicted by the court and sentenced for a period of more than 6 months

Section 197: Overall Maximum Managerial Remuneration

Section 197 of the Comapanies Act, 2013, puts a cap on how much a public company can pay its top decision-makers—the Managing Director (MD), Whole-Time Director (WTD), and Manager. According to Section 197 of the Companies Act, The entire remuneration for directors, including the Managing Director (MD), Whole-Time Director (WTD), and Manager, must not exceed 11% of the company's net earnings, as computed under Section 198. Within this, remuneration to an individual MD, WTD, or Manager is limited to 5%, and where there is more than one such managing person, the aggregate limit is 10%. The cap for non-executive directors is 1% if the company has an MD/WTD/Manager, and 3% otherwise.

It is to be noted that the remuneration exceeding these limits can be paid if approved by a special resolution of the shareholders and/or with the approval of the Central Government. (Section 200).

Section 198: Defining Net Profit—The Backbone of Remuneration

Section 198 directs the companies as to the computation of net profits for any financial year for the purpose of deciding the remuneration of those covered under Section 196 of the Act. One thing to keep in mind is that the profit calculation under Section 198 is not the same as what's represented in the company’s financial statements. This calculation excludes some types of income, such as capital profits, revaluation reserves, premiums on shares or debentures, and unrealised gains.Specific deductions are permitted, including labour expenses, directors' fees, bonuses, taxes (except income tax), depreciation, and other regular operational expenditures.

Section 202: Exit Payments and When Are They Not Required to Be Paid?

Section 202 of the Companies Act is regarding the compensation for loss of office of a managing or whole-time director or manager.

Section 202(1) states that ‘A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.’

There are certain situations where this exit payment need not be made, and they include wilful misconduct, resignation due to mergers/amalgamations and when they vacate the office due to one of the disqualifications specified under Section 196(3) of the Act.

Section 204 of the Act lays down the criteria for secretarial audits for bigger companies. The functions of a company secretary are explained under Section 205 of the Act.

Sections 196 to 205 of the Companies Act, 2013, help to promote transparent, reliable and ethical leadership at the top levels of corporate governance. To conclude, we could say that these provisions protect the integrity of leadership and promote long-term, sustainable corporate governance.

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