Section 197 under the Companies Act 2013 deals with the remuneration of managers–that means, it is the monetary compensation that directors receive, including whole-time directors, managing directors and managers of a business. This ensures that businesses maintain an open and transparent system of paying their top executives.
Let’s look at this in a an easy and clear manner to make it clear the importance of this section particularly for companies that are undergoing the Company Registration process or that are already operating in accordance with the Act.
What is Section 197 All About?
Section 197 places the maximum amount for the compensation that a public corporation can pay its directors. This ensures that the they are fair and do not influence the financial health of the business. The key is:
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A business is not able to pay its managers total rewards that exceed 11 percent percent of net profit.
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This 11% covers all the payments made to managing directors, full-time directors and managers.
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Remuneration is still able to be paid over this limit however, only with the approval of shareholders via an express resolution.
This regulation was put in place to protect against the fraudulent use of company funds as well as to protect the interests of shareholders particularly for publicly traded companies.
Key Limits and Breakup of Managerial Remuneration
The 11% is typically divided:
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Whole-Time Director or Managing Director The maximum amount is 5 percent in net earnings (if there is only one director).
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There is more than one director Remuneration for all directors cannot be more than 10 percent of net profit.
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Directors who are not executive directors (including independent directors): 1% of net profits (with MD/WTD) or 3.3% (without MD/WTD).
The limits are only exceeded with shareholders and board approval.
Approval Requirements Under Section 197
The approval process is essential prior to paying the following remuneration to managers:
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Board Aproval Board of Directors must be able to approve the compensation.
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Approval of Shareholders: If the limit exceeds the percentage required the shareholder must approve the shareholder must approve a specific resolution must be approved at the general meeting.
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Central Government Approval: According to the Companies (Amendment) Act 2017, this approval no longer required. Companies are now more autonomous when they have the necessary shareholder support.
The simplified structure allows for greater flexibility and yet manageable.
Remuneration in Case of No Profits or Inadequate Profits
Even if a business doesn’t generate profits or have insufficient profits, it may still be able to pay compensation. In these situations:
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The company has to comply to the Schedule V of the Companies Act.
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The amount of payments must be within the limitations set out in Schedule V.
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The need for a particular resolution is required if the amount of compensation is in excess of those bounds.
This allows companies in trouble to keep their experienced leaders in challenging times.
Penalties for Non-Compliance
Companies that do not adhere to Section 197 may face serious consequences. What could happen is:
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The director who receives excessive compensation must reimburse the amount in excess.
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A refund cannot be waived is allowed unless it is authorized by shareholders in an express resolution.
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In addition, the company and the individual responsible for it could be liable to penalties and fines pursuant to the Act.
Why Section 197 Matters for Your Business
For businesses that are growing or just starting out, that are undergoing the Company Registration knowing this section is important right from the start. It is helpful to:
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Create the foundation for a transparent and fair compensation system that is fair and transparent..
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Improve confidence of investors.
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Avoid legal sanctions due to insufficient payment.
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Maintain a balanced financial position between executive pay and profits.
If you’re unsure of how to negotiate these legal boundaries using an Best CA firm is the best option. They will ensure that your business is legal while providing strategic advice regarding structuring director remuneration efficiently.
Role of a Best CA Firm in Section 197 Compliance
If you choose to hire an the best CA company They will assist you with:
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Calculate net profit as per Section 198 (the base for Section 197 limits).
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Special resolutions.
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Help with Schedule V compliance if your company is experiencing little or no profit.
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Audits should be guided by a guideline and to make sure that audits are transparent.
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Make sure you have the proper documents to ensure board and shareholder approvals.
Their advice is particularly useful for businesses going through the process of restructuring, funding rounds or undergoing regulatory examination.
Section 197 Amendments You Should Know
In 2017, the 2017 Amendment to the Companies Act introduced a number of modifications to Section 197:
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Eliminated the requirement to seek Central Government approval to exceed the 11% limit.
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Increased the power of shareholders through special resolutions.
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Introduced tighter standards for excessive remuneration refunds.
The changes streamlined compliance, but increased the responsibility of the shareholders and the company.
Final Thoughts
Section 197 under the Companies Act 2013 ensures responsible and fair compensation practices for Indian businesses. For any business–whether you’re in the process of Company Registration or managing an established corporation–understanding and adhering to Section 197 is critical.
The proper compensation of directors improves morale in the business, helps retain the best talent and promotes accountability. But, overstepping the limits or ignoring formal approvals could result in the risk of a reputational blunder and compliance issues.
It’s the reason why having the Best CA firm can assist your business not only remain compliant but also thrive on solid corporate governance.
