Section 197 of Companies Act 2013: Managerial Remuneration Limits and Inadequate Profits
Section 197 of the Companies Act, 2013 regulates the overall managerial remuneration payable by a public company to its directors, including managing directors and whole-time directors, and its manager. It also governs remuneration where a company has no profits or inadequate profits, read with Schedule V.
Meaning and scope of Section 197
The provision is part of Chapter XIII of the Companies Act, 2013. For this purpose, net profits are calculated under Section 198. Where profits are absent or inadequate, remuneration is governed by Section 197(3) together with Schedule V.
Overall ceiling on managerial remuneration
Under Section 197(1), total managerial remuneration payable by a public company to its directors and manager generally cannot exceed 11% of net profits for the financial year. The company may authorise remuneration exceeding 11% in general meeting, subject to Schedule V.
| Category | Ordinary ceiling based on net profits |
|---|---|
| One managing director, whole-time director or manager | 5% |
| More than one managing director, whole-time director or manager, taken together | 10% |
| Directors who are neither managing directors nor whole-time directors, where there is an MD, WTD or manager | 1% |
| Such non-executive directors in any other case | 3% |
Exceeding the category-specific limits requires approval of the company in general meeting by special resolution. If the company has defaulted in payment of dues to a bank, public financial institution, non-convertible debenture holders or another secured creditor, the creditor's prior approval must be obtained before seeking approval in general meeting.
No profits or inadequate profits: Section 197(3) and Schedule V
If a company has no profits or its profits are inadequate, remuneration to directors, including a managing director, whole-time director, manager and other non-executive directors including independent directors, must comply with Schedule V, apart from sitting fees permitted under Section 197(5).
Schedule V sets remuneration ceilings by reference to the company's effective capital. It also permits remuneration above the specified limits where the prescribed shareholder approval and other Schedule V conditions are satisfied. Because Schedule V contains detailed conditions and may be amended by notification, the current official text should be checked before approving remuneration.
Sitting fees and modes of payment
Section 197(5) permits a director to receive fees for attending Board or committee meetings or for other purposes decided by the Board, subject to the prescribed ceiling. Section 197(6) allows remuneration to be paid as a monthly amount, as a specified percentage of net profits, or partly by each method.
Professional services rendered in another capacity
Remuneration determined for a director generally includes remuneration for services rendered in another capacity. It is excluded where the services are professional in nature and the Nomination and Remuneration Committee, where applicable under Section 178(1), or otherwise the Board, is of the opinion that the director has the requisite professional qualification.
Excess remuneration: refund and waiver
Under Section 197(9), a director who receives remuneration above the statutory limit or without the required approval must refund the excess to the company within two years, or within a shorter period allowed by the company, and holds the amount in trust until it is refunded. Under Section 197(10), recovery cannot be waived unless approved by special resolution within two years from the date the amount becomes refundable. Where the company has defaulted on specified secured dues, prior creditor approval is also required before the waiver is approved.
Board's report, insurance and commission
Every listed company must make the remuneration disclosures prescribed under Section 197(12), including the ratio of each director's remuneration to median employee remuneration. Premium paid for qualifying directors' and officers' liability insurance is ordinarily excluded from remuneration, but is treated as remuneration if the insured person is proved guilty in the circumstances stated in Section 197(13). Section 197(14) also addresses remuneration or commission received from a holding or subsidiary company and requires disclosure in the Board's report.
Penalty and auditor reporting
Section 197(15) provides a penalty of Rs. 1 lakh for a person who defaults in complying with the section and Rs. 5 lakh where the default is by the company. Under Section 197(16), the company's auditor must report whether remuneration paid to directors complies with Section 197, whether any director was paid in excess of the statutory limit, and other prescribed particulars.
Important amendments reflected in the current provision
The Companies (Amendment) Act, 2017 removed several requirements for Central Government approval and substituted shareholder and creditor approval mechanisms. The Companies (Amendment) Act, 2020 extended the inadequate-profit framework to other non-executive directors, including independent directors. Sub-section (7) has been omitted.
Related provisions
Section 197 should be read with Section 196 on appointment of managing director, whole-time director or manager, Section 198 on calculation of profits, Sections 199 and 200, Schedule V, and the applicable Companies rules.
Official legal resources
For the authoritative and updated text, consult the official India Code text of the Companies Act, 2013 and the Ministry of Corporate Affairs portal for Acts, Rules and notifications.
This article is a general legal reference. For a transaction, appointment or remuneration approval, verify the current Act, Schedule V, applicable rules, listing requirements and company-specific approvals.