Section 197 of Companies Act 2013 Explained: Managerial Remuneration Limits

Section 197 of Companies Act 2013 Explained: Managerial Remuneration Limits

When a company decides how much to pay its managing director, whole-time directors, or manager, it cannot simply set any number it likes. Section 197 of the Companies Act, 2013 places an overall ceiling on managerial remuneration for public companies and lays down the approval process for paying beyond the normal limits.

This section frequently comes up as companies scale, bring in professional management, or restructure director compensation ahead of a funding round or IPO. Because the thresholds and approval routes involve both board and shareholder processes — and sometimes central government or special resolution routes — founders and CFOs need a working understanding of how Section 197 operates.

What Section 197 says

Section 197 of the Companies Act, 2013 lays down the overall limit on remuneration payable to the directors, including the managing director, whole-time director, and manager, of a public company, in respect of any financial year. The commonly understood structure is that the total managerial remuneration payable to all such managerial personnel put together, in respect of any financial year, should not exceed a prescribed percentage of the company's net profits computed in a specified manner (as laid down under Section 198), with a further sub-ceiling that applies where remuneration is paid to more than one such managerial person.

The section also prescribes that where a company has no profits or inadequate profits in a financial year, remuneration can still be paid to managerial personnel, but only in accordance with the conditions specified in Schedule V to the Act, or with the approval route prescribed for such situations. Because the specific percentage ceilings, the computation of "net profit" under Section 198, and the Schedule V conditions for no-profit/inadequate-profit situations are technical and have been revised over time (including changes brought in around 2018 relating to shareholder approval routes replacing certain central government approval requirements), companies should always verify the current figures and procedural route rather than relying on remembered percentages.

Approval-wise, remuneration within the prescribed overall limits set by the Act can generally be approved by the Board, while remuneration that needs to exceed those limits — or falls outside Schedule V conditions in a loss/inadequate-profit year — generally requires a special resolution of shareholders, and in some circumstances may also involve disclosures to, or in limited cases approval routes tied to, secured creditors or other stakeholders as prescribed.

Who it applies to

Section 197, in its core form, applies to public companies — including public companies that are subsidiaries of private companies in certain contexts — with respect to remuneration paid to their directors (including managing and whole-time directors) and managers. Private companies are generally not bound by the overall percentage ceiling under Section 197 in the same way, since the section's remuneration cap provisions are primarily directed at public companies, though private companies still need to follow related-party and other governance provisions when fixing director remuneration.

The section is especially relevant for:

• Public companies, and companies that anticipate going public, that are structuring managerial compensation packages.
• Companies bringing in professional CEOs, MDs, or whole-time directors on market-linked pay.
• Businesses going through a loss-making or low-profit year while still needing to retain and pay key managerial personnel.
• Companies preparing for IPO, where remuneration structuring and historical compliance with Section 197 is reviewed closely during due diligence.

Because private limited companies are generally outside the core percentage-cap regime (subject to other applicable provisions), founders of private companies should not assume the section is irrelevant forever — many private companies convert to public companies as they scale, at which point Section 197 compliance becomes directly applicable.

Key provisions

Key elements commonly associated with Section 197 include:

• Overall ceiling on aggregate managerial remuneration — total remuneration to all managerial personnel together is generally capped as a percentage of net profits computed under Section 198, with the exact percentage prescribed in the Act.
• Sub-limits for multiple managerial persons — where remuneration is paid to more than one managing/whole-time director or manager, an additional individual-level or aggregate sub-limit generally applies.
• Net profit computation under Section 198 — remuneration limits are based on net profits calculated in a specific manner under Section 198, which involves certain additions and deductions different from normal accounting profit, so companies should not simply use book profit for this calculation.
• No profit or inadequate profit situations — Schedule V lays down the conditions and limits under which remuneration can still be paid even when the company has no profits or inadequate profits, generally requiring compliance with specified conditions or shareholder special resolution.
• Special resolution requirement — remuneration exceeding the prescribed limits (or outside the ordinary Schedule V conditions) generally requires approval by a special resolution of the shareholders, replacing the earlier regime that in many cases required central government approval.
• Sitting fees and other exclusions — certain payments, such as sitting fees for attending board or committee meetings, are generally treated separately and are not counted within the managerial remuneration ceiling in the same way.
• Disclosure requirements — details of remuneration paid to directors and key managerial personnel are generally required to be disclosed in the company's financial statements and Board's Report, including in the prescribed format.

Practical example

Consider a public company that has a managing director and two whole-time directors. If the company has healthy net profits for the year (as computed under Section 198), the board may be able to approve remuneration for all three within the overall prescribed ceiling without needing further shareholder approval, provided the amounts stay within the applicable individual and aggregate sub-limits.

Now suppose the same company has a difficult year with inadequate profits, but the board wants to retain its managing director on the same remuneration package to avoid disruption during a critical growth phase. In that situation, the company would generally need to look at the conditions prescribed under Schedule V for no-profit/inadequate-profit years, and depending on which condition is met, may need shareholder approval by special resolution to continue the remuneration at that level. Skipping this step and simply continuing payment could expose the company and its officers to a requirement to refund the excess remuneration and other consequences.

Compliance/filing implications

Practical steps generally associated with Section 197 compliance include:

• Computing net profit correctly under Section 198 before determining the applicable remuneration ceiling for the year, rather than using standard accounting profit.
• Checking whether remuneration to all managerial personnel, in aggregate, stays within the applicable overall percentage ceiling.
• Where remuneration is proposed to exceed the ceiling, or the company has inadequate profits, referring to Schedule V conditions and obtaining shareholder approval by special resolution where required.
• Disclosing remuneration details for directors and KMP in the financial statements, Board's Report, and, where applicable, the extract of annual return.
• For listed companies, aligning remuneration disclosures with SEBI LODR requirements, including remuneration policy disclosures via the Nomination and Remuneration Committee.
• Maintaining board and general meeting resolutions and minutes documenting the approval process, since these are commonly reviewed during statutory audits, ROC inspections, and IPO due diligence.

Penalties (hedged)

If managerial remuneration is paid in excess of the limits prescribed under Section 197 (or the conditions of Schedule V) without the requisite approval, the recipient director or manager is generally required to refund the excess amount to the company, and the company cannot waive this recovery without appropriate approval as specified under the Act. Directors and officers responsible for the contravention may also face penal consequences under the Act. The precise penalty structure — including whether it is framed as a monetary penalty, a requirement of refund, or another consequence — has been subject to legislative revision over recent years as part of the broader move toward decriminalising and rationalising company law defaults. Given this, companies should confirm the current penalty and refund mechanics with a professional before assuming any specific figure or treatment.

Recent changes to note (hedge)

A significant change in the managerial remuneration regime came through amendments (effective from 2018 onward) that replaced the earlier requirement of central government approval for remuneration beyond prescribed limits with a shareholder special resolution route in many cases, along with revisions to Schedule V conditions. There have also been broader reform trends around simplifying and, in some cases, decriminalising company law compliance defaults. Because remuneration ceilings, Schedule V conditions, and approval routes are technical and periodically refined, businesses should verify the current provisions — ideally with a qualified CA or CS — before finalising managerial compensation structures, rather than relying on older percentage figures.

Common mistakes

• Using standard accounting net profit instead of the specific net profit computation prescribed under Section 198 to check the remuneration ceiling.
• Assuming private companies are entirely outside Section 197's scope forever, without planning ahead for a future conversion to a public company.
• Continuing remuneration at pre-existing levels during a loss or low-profit year without checking Schedule V conditions or obtaining the required special resolution.
• Not accounting for the aggregate sub-limit when a company has more than one managing/whole-time director or manager.
• Treating sitting fees and other permitted payments as part of the remuneration ceiling when they may be treated separately.
• Failing to properly disclose director and KMP remuneration in the financial statements and Board's Report.
• Overlooking the need for Nomination and Remuneration Committee involvement in listed companies before finalising managerial pay.

FAQ

Does Section 197 apply to private limited companies?

The core overall percentage ceiling under Section 197 is primarily aimed at public companies. Private companies are generally not bound by this specific ceiling in the same way, though other governance and related-party provisions may still apply to director remuneration decisions.

What is the overall cap on managerial remuneration?

The Act prescribes an overall percentage of net profits (computed under Section 198) as the aggregate ceiling for managerial remuneration, with sub-limits when there are multiple managerial personnel. Because the exact percentage has been subject to amendment, it should be verified from the current Act and rules rather than assumed.

Can a company pay remuneration if it has no profits?

Yes, subject to conditions. Schedule V to the Companies Act lays down specific conditions and limits under which remuneration can be paid even when a company has no profits or inadequate profits, generally involving either meeting specified conditions or obtaining shareholder approval by special resolution.

Is central government approval still needed for excess remuneration?

Following amendments effective from 2018, many situations that previously required central government approval now generally require shareholder approval by special resolution instead. However, the exact scope of when government approval may still be relevant should be checked against the current provisions.

What happens if remuneration is paid in excess of the permitted limit?

The excess amount is generally required to be refunded by the recipient director or manager to the company, and the company is typically restricted from waiving this recovery without appropriate approval. Directors responsible may also face other consequences under the Act.

Are sitting fees included in the Section 197 ceiling?

Sitting fees paid for attending board or committee meetings are generally treated as a separate matter from the managerial remuneration ceiling, though the precise treatment can depend on specific facts and should be confirmed for exact compliance purposes.

Does listing on a stock exchange add extra remuneration requirements?

Yes. Listed companies must also align with SEBI LODR requirements on remuneration disclosures and Nomination and Remuneration Committee processes, which work alongside the Companies Act framework rather than replacing it.

How is "net profit" calculated for Section 197 purposes?

Net profit for managerial remuneration purposes is computed under Section 198 of the Act, which involves specific additions and deductions different from ordinary accounting profit — such as adjustments for certain provisions, capital profits, and other items — so this calculation should be done carefully, ideally by a qualified professional.

Legal Suvidha handles this end-to-end — from computing Section 198 net profit and structuring compliant remuneration packages to preparing the board and shareholder resolutions your specific case needs — so managerial pay stays defensible under scrutiny.

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