Managerial Remuneration Limits Under Section 197 & Schedule V — A Practical Reference
How much can a company legally pay its managing director, whole-time directors, and non-executive directors? The answer is one of the more frequently mis-applied areas of the Companies Act, 2013 — partly because the limits change depending on whether the company is public or private, whether it is making profits, and whether shareholders have approved a special resolution. This reference consolidates the Section 197 caps and the Schedule V effective-capital table into one place.
Does Section 197 Apply to Your Company at All
Section 197 places an overall ceiling on managerial remuneration only for public companies. Private companies are not subject to the Section 197 percentage caps at all — remuneration to their managing/whole-time directors is a matter of the articles and shareholder approval, without a statutory ceiling tied to net profits.
The section also does not apply to:
- Government companies and specified IFSC public companies that have not defaulted in filing financial statements (Section 137) or annual returns (Section 92) — per notifications dated 5 June 2015 and 4 January 2015, and the conditionality added on 13 June 2017.
For every other public company, the limits below apply.
A. The Overall 11% Cap (Companies With Profits)
Under Section 197(1), the total managerial remuneration payable by a public company to all its directors (including MD/WTD) and its manager, in any financial year, cannot exceed 11% of net profits for that year — computed under Section 198, without deducting directors’ remuneration itself from gross profits.
Shareholders can authorise remuneration above 11% by ordinary resolution in general meeting, subject to Schedule V, without needing Central Government approval (this requirement was removed by the Companies (Amendment) Act, 2017).
Sub-Limits Within the 11% Cap
| Category | Limit (as % of net profit) | Approval Needed to Exceed |
|---|---|---|
| One managing director / whole-time director / manager | 5% | Shareholder approval (ordinary resolution; special resolution if relying on Schedule V for inadequate profits) |
| Two or more such managerial persons, taken together | 10% | Same as above |
| Non-executive directors, where the company has an MD/WTD/manager | 1% | Shareholder approval |
| Non-executive directors, where the company has no MD/WTD/manager | 3% | Shareholder approval |
These percentages are exclusive of sitting fees paid under Section 197(5).
Where the company has defaulted on dues to a bank, public financial institution, non-convertible debenture holders, or other secured creditor, that lender’s prior approval is required before the company seeks shareholder approval for remuneration exceeding the limits.
B. Schedule V — Remuneration Where Profits Are Nil or Inadequate
Where a company has no profits or inadequate profits in a financial year, Section 197(3) bars any remuneration to directors/manager except as permitted under Schedule V. Schedule V, Part II, Section II prescribes ceilings based on the company’s effective capital, payable without Central Government approval, subject to shareholder approval by resolution (special resolution required to draw the higher, doubled limit — see below):
| Effective Capital | Yearly Remuneration Ceiling (per managerial person) |
|---|---|
| Negative or less than ₹5 crore | ₹60 lakh |
| ₹5 crore and above but less than ₹100 crore | ₹84 lakh |
| ₹100 crore and above but less than ₹250 crore | ₹120 lakh |
| ₹250 crore and above | ₹120 lakh, plus 0.01% of the effective capital in excess of ₹250 crore |
If shareholders approve by special resolution, the company may pay up to twice the limits in the table above. For companies with a negative effective capital, a fixed ceiling (subject to the notified amount, ₹60 lakh as above) applies regardless, unless a special resolution is passed to draw a higher amount within the doubled cap.
“Effective capital” for this purpose is defined in Explanation IV to Schedule V and is broadly: paid-up share capital (excluding amounts for shares issued for consideration other than cash or bonus shares), plus share premium, plus reserves excluding revaluation reserve, plus long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest-bearing deposits repayable within a year, and other short-term arrangements), less accumulated losses and preliminary expenses not written off.
Additional Conditions Under Schedule V
- The company must not have defaulted in repayment of any of its debts (including public deposits) or debentures/interest for a continuous period of 30 days before the general meeting approving the remuneration.
- Where a special resolution is not passed but an ordinary resolution is, the lower (un-doubled) limit applies and, in certain cases, additional conditions under Schedule V Part II Section II(A) apply (such as not being a defaulter and the remuneration committee’s approval).
- A managerial person who is functioning in that capacity in more than one company can draw remuneration from each, subject to the ceiling for each such company; the total remuneration drawn from such companies is subject to a combined ceiling based on the criteria in Schedule V.
C. Sitting Fees (Outside the Percentage Caps)
Under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a company may pay directors a sitting fee for attending Board or committee meetings, decided by the Board, up to ₹1,00,000 per meeting. Sitting fees payable to independent directors and women directors cannot be less than the sitting fee payable to other directors — a safeguard against differential treatment. Sitting fees are excluded from the Section 197 percentage limits.
D. Auditor’s Reporting Obligation
The statutory auditor, in the audit report under Section 143, must state whether the remuneration paid to directors is in accordance with Section 197, flag any remuneration paid in excess of the prescribed limit, and give other prescribed details. This makes managerial remuneration one of the few compliance areas the auditor is statutorily required to independently verify and comment on.
E. Board’s Report Disclosures (Listed Companies)
Every listed company must disclose in its Board’s Report, among other things:
- The ratio of remuneration of each director to the median employee remuneration for the year
- The percentage increase in remuneration of each director, CFO, CEO, Company Secretary, or Manager
- The percentage increase in median employee remuneration
- The number of permanent employees on rolls
- A statement of employees drawing remuneration above the thresholds prescribed under Rule 5(2) of the Managerial Personnel Rules, filed with the Registrar along with the financial statements and Board’s Report where the threshold is crossed
Key Takeaways
- Section 197’s percentage caps apply only to public companies; private companies fix managerial remuneration through their articles and ordinary shareholder approval, without a Companies Act ceiling.
- The default cap is 11% of net profit overall, with 5%/10% sub-caps for MD/WTD/manager and 1%/3% sub-caps for non-executive directors.
- When profits are nil or inadequate, Schedule V’s effective-capital table — not the percentage caps — governs, and a special resolution doubles the otherwise applicable ceiling.
- Sitting fees (capped at ₹1 lakh per meeting) sit outside these percentage limits entirely.
- Central Government approval is no longer required to exceed the caps — shareholder approval by resolution (ordinary or special, as applicable) suffices since the 2017 amendment.
- The auditor must certify compliance with Section 197 in the audit report, and listed companies carry additional Board’s Report disclosure obligations.