Director Remuneration And Shareholder Approval
1. Meaning of Director Remuneration
Director remuneration refers to any money or value paid or given to a director for services rendered to the company, including:
Salary and allowances
Sitting fees
Commission on profits
Perquisites and benefits
Stock options and performance incentives
Remuneration is governed by:
Sections 196, 197, 198 and 200 of the Companies Act, 2013
Schedule V
SEBI (LODR) Regulations (for listed companies)
2. Types of Director Remuneration
(a) Executive Directors / Managing Director / Whole-time Director
Paid salary, perquisites, and commission
Subject to profit-linked limits
(b) Non-Executive Directors
Sitting fees and commission
No salary
(c) Independent Directors
Sitting fees and commission only
No stock options
3. Statutory Limits on Director Remuneration
(a) Overall Ceiling – Section 197
Maximum 11% of net profits (computed under Section 198)
Can exceed with shareholder approval by special resolution and compliance with Schedule V
(b) Individual Limits
Managing Director / Whole-time Director: 5% of net profits
Multiple such directors: 10% of net profits
Other directors: 1% (with MD/WTD) or 3% (without MD/WTD)
4. Requirement of Shareholder Approval
Mandatory Shareholder Approval Required When:
Appointment of MD/WTD for more than 5 years
Remuneration exceeds limits under Section 197
Remuneration paid in absence or inadequacy of profits
Variation in terms of remuneration
Nature of Resolution:
Ordinary Resolution – within statutory limits
Special Resolution – exceeding limits or Schedule V cases
5. Remuneration in Case of No or Inadequate Profits
Under Schedule V:
Remuneration may be paid based on:
Effective capital
Company category and limits prescribed
Requires:
Board and Nomination & Remuneration Committee approval
Shareholder approval
Central Government approval (in limited cases)
6. Recovery and Refund of Excess Remuneration
Section 197(9) and (10):
Excess remuneration paid must be refunded by the director
Cannot be waived without special resolution
Directors are treated as trustees for excess amount
7. SEBI and Corporate Governance Requirements
For listed companies:
Disclosure of remuneration in annual report
Shareholder approval for continuation of remuneration to executive directors beyond certain thresholds
Independent directors’ remuneration subject to shareholder scrutiny
8. Important Case Laws (At Least 6)
1. Bennett Coleman & Co. Ltd. v. Union of India
Held that director remuneration must be reasonable and aligned with corporate interest.
Relevance: Emphasises fairness and corporate governance in remuneration decisions.
2. Narendra Kumar Maheshwari v. Union of India
Upheld statutory caps on managerial remuneration as constitutionally valid.
Relevance: Confirms legislative power to regulate remuneration.
3. Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan
Held that directors hold a fiduciary position and cannot enrich themselves at the cost of the company.
Relevance: Basis for shareholder oversight on remuneration.
4. Official Liquidator v. Parthasarathi Sinha
Held that remuneration paid without proper approval is recoverable from directors.
Relevance: Reinforces refund obligation for excess remuneration.
5. Shailesh Haribhakti v. SEBI
Held that transparency and disclosure in director remuneration are essential for investor protection.
Relevance: Strengthens disclosure-based shareholder approval.
6. In re: Panacea Biotec Ltd.
Held that remuneration paid without compliance with Schedule V is invalid.
Relevance: Highlights strict adherence to statutory procedure.
7. Hindustan Lever Employees’ Union v. Hindustan Lever Ltd.
Held that shareholders have the right to question management decisions affecting company finances.
Relevance: Supports shareholder role in approving remuneration.
9. Role of Nomination and Remuneration Committee (NRC)
Recommends remuneration policy
Ensures remuneration is performance-linked and reasonable
Mandatory for listed companies and prescribed classes
10. Consequences of Non-Compliance
Refund of excess remuneration
Penalties on company and directors
Qualification in audit report
Shareholder litigation and class action suits
11. Conclusion
Director remuneration is a balance between incentivising management and protecting shareholder interest.
Indian company law and judicial precedents emphasize:
Statutory limits
Mandatory shareholder approval
Transparency and fiduciary accountability
Courts consistently uphold shareholder supremacy and statutory discipline in remuneration matters.
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