1. 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. 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:
Provided that: the company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V:
Provided further that: except with the approval of the company in general meeting,
i. the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent. 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;
ii. the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,
A. one per cent. of the net profits of the company, if there is a managing or whole-time director or manager;
B. three per cent. of the net profits in any other case.
2. The percentages aforesaid shall be exclusive of any fees payable to directors under sub-section (5 ).
3. Notwithstanding anything contained in sub-sections (1 ) and (2 ), but subject to the provisions of Schedule V, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (5 ) hereunder except in accordance with the provisions of Schedule V and if it is not able to comply with such provisions, with the previous approval of the Central Government.
4. The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined, in accordance with and subject to the provisions of this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting and the remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity:
Provided that: any remuneration for services rendered by any such director in other capacity shall not be so included if—
a. the services rendered are of a professional nature; and
b. in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1 ) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.
5. A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board:
Provided that: the amount of such fees shall not exceed the amount as may be prescribed:
Provided further that: different fees for different classes of companies and fees in respect of independent director may be such as may be prescribed.
6. A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.
7. Notwithstanding anything contained in any other provision of this Act but subject to the provisions of this section, an independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5 ), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.
8. The net profits for the purposes of this section shall be computed in the manner referred to in section 198.
9. If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.
10. The company shall not waive the recovery of any sum refundable to it under sub-section (9 ) unless permitted by the Central Government.
11. In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company's memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.
12. Every listed company shall disclose in the Board's report, the ratio of the remuneration of each director to the median employee's remuneration and such other details as may be prescribed.
13. Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel:
Provided that: if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.
14. Subject to the provisions of this section, any director who is in receipt of any commission from the company and who is a managing or whole-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to its disclosure by the company in the Board's report.
15. If any person contravenes the provisions of this section, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Legal Commentary & Landmark Judgments: Section 197
Section 197 prescribes the statutory ceiling on managerial remuneration (11% of net profits) in public companies, regulating executive compensation during profit inadequacy under Schedule V.
Sub-section (9) mandates that any director receiving excess remuneration holds it in trust for the company and must refund it within two years.
Section 197 underwent profound liberalization when the requirement for Central Government approval was replaced with shareholder special resolution approval. However, if a company has defaulted on bank loans, debentures, or deposits, prior approval of the lending institutions/creditors is an mandatory prerequisite before passing any resolution for enhanced remuneration under the third proviso to Section 197(1).