Q.What is meant by remuneration of directors? Briefly explain the statutory limits on managerial remuneration under the Companies Act, 2013.

Because directors control the very company that pays them, the law does not leave director remuneration to unrestricted private negotiation — it fixes outer ceilings the company cannot exceed without following a defined process.

Remuneration of directors refers to the payment a company makes to its directors in return for the services they render to it — a payment which can take several forms, including a fixed salary (for directors in whole-time executive roles), perquisites and benefits, sitting fees for attending Board and committee meetings, and commission calculated as a percentage of the company's profits.

Because directors, sitting on the very Board that decides how much they themselves are paid, are in an obvious position of potential conflict of interest, the Companies Act, 2013 does not leave the quantum of remuneration to unrestricted private negotiation between the company and its directors. Section 197 fixes outer limits on the total managerial remuneration a public company may pay. Specifically, the total remuneration payable by a public company to its directors, including any Managing Director and Whole-time Director, and to its manager, in respect of any financial year, must not exceed eleven per cent of the net profits of the company for that year, computed in the manner Section 198 of the Act prescribes. Within this overall ceiling, the section also fixes narrower individual and aggregate sub-limits depending on how many Managing Directors, Whole-time Directors, or managers the company has, ensuring the remuneration pool is not concentrated disproportionately even within the overall cap.

Where a company has inadequate profits, or no profits at all, in a particular financial year, strictly applying a percentage-of-profits ceiling would leave the company unable to pay its managerial personnel anything at all — an outcome that could make it impossible to retain capable management precisely when the company most needs it. To address this, Schedule V to the Companies Act, 2013 lays down specific conditions and monetary limits within which a company may still pay remuneration to its managerial personnel even in a year of inadequate or no profits, without needing separate government approval, provided the company satisfies the conditions the Schedule specifies (such as the absence of a default in repaying secured creditors or debenture holders). …