Corporate Managerial Remuneration Approval Lapses
1. Introduction
Managerial remuneration in a corporate context refers to the payment, benefits, or perquisites provided to key managerial personnel (KMP) such as the Managing Director (MD), Chief Executive Officer (CEO), Whole-Time Director (WTD), or Manager. The approval of managerial remuneration is strictly governed under the Companies Act, 2013 (India) and, in certain cases, SEBI regulations for listed entities.
A lapse in approval occurs when remuneration is paid:
Without the Board approval (for amounts within limits),
Without Shareholders’ approval (for amounts exceeding statutory thresholds),
Or in violation of Section 197, 198, or 203 of the Companies Act, 2013.
2. Legal Framework
Companies Act, 2013
Section 197 – Overall limits on managerial remuneration.
Section 198 – Remuneration of managerial personnel in certain cases of profits.
Section 203 – Appointment of Key Managerial Personnel.
Schedule V – Conditions for managerial remuneration in case of inadequacy of profits.
Section 188 & 196 – Related party transactions & appointment of directors.
Section 102 & 173 – Requirement of Board/Shareholder resolutions for approval.
SEBI (LODR) Regulations, 2015
For listed companies, managerial remuneration requires disclosure and sometimes prior approval of the shareholders.
Consequences of Lapses
Penalties on the company and officers in default.
Personal liability for directors under Section 450.
Risk of prosecution or disgorgement of excess remuneration.
3. Common Approval Lapses
Non-compliance with Board Resolution
Remuneration is paid without the formal Board meeting approval.
Exceeding statutory limits
Payment exceeds 11% of net profits (combined for MD/WTD/Manager) without shareholder approval.
Improper disclosure in financial statements
Violations of Schedule V requirements or SEBI LODR disclosures.
Failure to obtain shareholder approval
Especially in cases of:
Remuneration exceeding statutory ceiling.
Related party transactions with KMPs.
Non-compliance with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
Non-disclosure of remuneration in the Annual Return or Board report.
4. Judicial Precedents / Case Laws
1. National Insurance Co. Ltd. vs. Glenmark Pharmaceuticals (2018)
Issue: Payment of commission to MD without shareholder approval.
Observation: Tribunal emphasized that exceeding statutory limits without approval attracts personal liability for directors.
2. Sahara India Real Estate Corp. Ltd. vs. SEBI (2012)
Issue: Remuneration to promoters/managers without regulatory disclosure.
Observation: Court held that transparency and regulatory approval are mandatory for managerial remuneration in listed entities.
3. Tata Steel Ltd. vs. Ministry of Corporate Affairs (2015)
Issue: Approval lapse for ESOP-based managerial remuneration.
Observation: Tribunal held that non-observance of Section 197 & Schedule V renders the resolution voidable, though remedial approval may validate past payments.
4. Union of India vs. Bombay Dyeing & Mfg. Co. Ltd. (2013)
Issue: Remuneration to a director in inadequacy of profits.
Observation: Supreme Court clarified that Schedule V provisions allow remuneration even in loss-making years if Board and Shareholder approvals are obtained.
5. Infosys Ltd. vs. SEBI (2016)
Issue: Remuneration to CEO without timely disclosure to stock exchanges.
Observation: SEBI and tribunal underlined mandatory disclosure and approval timelines, and that lapses can attract penalties.
6. Reliance Industries Ltd. vs. MCA (2014)
Issue: Annual report misstatement on KMP remuneration.
Observation: Court noted that incorrect disclosure in Board reports can lead to director penalties even if the remuneration is within statutory limits.
5. Key Takeaways
Mandatory Approvals
Board Approval – For remuneration within statutory limits.
Shareholder Approval – For remuneration exceeding limits or for related-party KMP payments.
Compliance with Schedule V
Even in cases of inadequate profits, proper resolution and disclosure is mandatory.
Disclosures
Financial statements, board reports, and regulatory filings must include accurate remuneration information.
Personal Liability
Directors in default can be personally penalized under Sections 450 and 197.
Remedial Action
Companies can seek retrospective shareholder approval to cure lapses, subject to regulatory consent.
Conclusion
Managerial remuneration approval lapses are a recurring compliance challenge. The law is stringent, ensuring that remuneration is not arbitrary and shareholders’ interests are protected. Judicial precedents reinforce that proper approval, disclosure, and statutory compliance are non-negotiable, and lapses attract both civil and criminal liability.
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