Now, firms no longer need govt approval to hike top executives' salary

The Ministry of Corporate Affairs has said that government approval will no longer be needed for remuneration to those in top managerial positions, according to a notification issued on Thursday. 

This exemption is for remuneration of over 11 per cent of the net profit of a firm. 

“In a move designed to empower common shareholders of a company, the government has notified that remuneration in excess of individual limits laid down for executive and non-executive directors shall henceforth be approved by shareholders through a special resolution,” said a statement issued by the ministry. This can be implemented by getting shareholders’ approval. 

 

Changes, as necessary, have been made to Schedule-V of the Companies Act, and have been simultaneously notified. Also, in the case of loss or inadequacy of profits, remuneration can be paid only in accordance with provisions of Schedule-V and no approval of the Centre would be required for it, on a case-to-case basis.

This amendment will be implemented with retrospective effect. 

All pending applications submitted to the ministry — on remuneration to managerial personnel in excess of the limits laid down — will be free to seek shareholders’ approval. They do not require the ministry’s nod.

Now, such payments can be approved by a firm's shareholders through a special resolution. In case a company has defaulted in payment of dues to any bank, financial institution or non-convertible debenture holder, approval of the entity concerned would be required before the proposal for remuneration is put up before shareholders.

The Registrar of Companies has about 1 million firms registered. This move by the ministry intends to ease doing business. Prior to this notification, companies had to seek the ministry’s approval if they wanted to pay its management more than 11 per cent of the net profit.

“In a welcome and long-awaited move, the Ministry of Corporate Affairs has notified the changes to Section 197, and Schedule-V of the Companies Act 2013, wherein the requirement of seeking approval of the Central Government for payment of managerial remuneration in excess of 11 per cent of the net profit of a company, and now any such company should only be required to take shareholders’ approval for payment of excess remuneration. This move has been long-awaited, considering the compliances involved in seeking government approval. It is clearly in line with the Centre’s aim to ease the doing of business, while ensuring that shareholders’ interests are duly safeguarded,” says Atul Pandey, Partner at Khaitan and Co.