Section 197 of the Companies Act, 2013
Section 197 of the Companies Act, 2013 deals with the overall maximum managerial remuneration payable by a public company to its directors, including managing director (MD), whole-time director (WTD), and manager.
🔹 Section 197 – Overall Maximum Managerial Remuneration and Managerial Remuneration in Case of Absence or Inadequacy of Profits
✅ 1. Applicability:
Applies to public companies.
Governs payment of remuneration to:
Managing Director (MD)
Whole-Time Director (WTD)
Manager
Non-executive directors (including independent directors)
✅ 2. Maximum Remuneration Limits:
| Category | Limit (As % of Net Profits) |
|---|---|
| Overall managerial remuneration to all directors and manager | 11% of net profits |
| Remuneration to any one MD, WTD or manager | 5% of net profits |
| If there is more than one MD/WTD/Manager | 10% collectively |
| Non-executive directors (if there is MD/WTD/Manager) | 1% |
| Non-executive directors (if there is NO MD/WTD/Manager) | 3% |
Note: These limits are calculated as per Section 198 of the Companies Act (method to calculate net profits).
✅ 3. Exceeding the Limits:
Companies can exceed the above limits with the approval of shareholders by special resolution in a general meeting.
No Central Government approval is required (after Companies Amendment Act, 2017).
✅ 4. Inadequacy of Profits:
In case of no profit or inadequate profit, remuneration can be paid as per Schedule V of the Act.
If not as per Schedule V, prior approval of Central Government is needed.
✅ 5. Refund of Excess Remuneration (Section 197(9) & (10)):
If any director receives excess remuneration than permitted, he must refund the excess amount within 2 years or a lesser period allowed by the company.
No waiver of this refund is allowed unless approved by shareholders via special resolution.
✅ 6. Disclosure Requirements (Section 197(12)):
The company must disclose the ratio of remuneration of each director to the median employee’s remuneration and other prescribed details in the Board's Report.
🔸 Penalty for Contravention:
The company and every defaulting officer may be liable for a penalty of ₹1 lakh for the company and ₹50,000 for each officer.
📌 Purpose:
To ensure transparency and fairness in remuneration practices, especially where directors and top management are concerned, and to protect shareholder interests.
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