Increasing Managerial Remuneration over and above ceiling limits in Listed Companies

CG Approval for Increasing Managerial Remuneration Over And Above Ceiling Limit

In the article below we will discuss about the provisions in respect of compliances in respect of increasing the managerial remuneration to the overall limit as per the provisions of Companies Act, 2013 and also that as amended by the Companies (Amendment) Act, 2017

·         Prior to the Companies Amendment Act 2017, the company was required to take the approval of central government in case where it wanted to exceed the overall ceiling of remuneration of 11% of the net profits of the company, which is now with the amendment act waived off.

Interpretation: The company is not at all required to take approval of central government if it wants’ to pay remuneration in excess of 11% of net profit of the company.

·         Prior to the Companies Amendment Act 2017, it was further required to take approval from shareholders through Ordinary resolution in case where the remuneration limits for the following was to be raised above given limits

S.No	Designation	Limit
1.	Any One MD/WTD/Manager	5%
2.	More than one MD/WTD/Manager	10% taken together
3.	Other than MD/WTD when there is managing or whole-time director or manager	1%
4.	Other cases	3%

 Post the assent by President on Companies Amendment Act 2017, you are required to take approval from shareholders through special resolution

·         It is further added that if the company is in default for payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, then the company is required to take prior approval of those stakeholders before taking approval in general meeting

Interpretation: if you have a default of non-payment of dues with banks and other institutions then first take their approval and then you may take approval of the shareholders in the general meeting through special resolution.

·         Earlier the company was allowed to pay remuneration to its director in case of loss or inadequate profits in accordance with Schedule V or Central government as the case may be. But now the approval from Central Government is omitted.

Interpretation: Now if a company incurs Losses or has Inadequate Profits then it can pay remuneration to its directors ONLY in accordance with the provisions of Schedule V.

·         If a director draws excess salary then he was required to refund such sum to company or until refunded, hold such sum in Trust for the company.

But the amendment act has given the director a relief of refunding such amount within TWO YEARS or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.

·         The company was not allowed to waive off the refundable amount without the prior approval of Central Government, but now the company need not take CG approval, with the amendment act the Company is allowed to waive such refundable amount by passing a Special Resolution within TWO YEARS from the date the sum becomes refundable.

·         It is further added that if the company is in default for payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, then the company is required to take prior approval of those stakeholders before taking approval for waiver.

Interpretation: if you have a default of non-payment of dues with banks and other institutions then first take their approval and then you may take approval for waiver.

·         The auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed

·         It is also proposed to provide relief to the company whose application is pending for approval before the Central Government under section 197 by making a provision under which on and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of this section as it stood before such commencement, which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended.

CRUX

S.No	Compliance with reference to sections	Prior to amendment	Post amendment
1.	Proviso to sub section 1 of section 197_ Approval of CG to remunerate directors over and above ceiling of 11%	Required to take CG approval before remunerating directors over and above 11%	Not required to take approval from CG
2.	Second proviso_ Approval from shareholders for remunerating over and above ceiling	Through Ordinary resolution	Through Special Resolution
3.	New proviso for NOC from Financial Institution (in case of default of dues)	-	Mandatory to take before passing SR
4.	Sub section 3 of section 197 Remuneration to directors in case of loss or inadequate profit	As per Schedule V and/or Central government approval	Only Schedule V
5.	Sub section 9 of section 197 Refund of excess salary withdrawn	refund such sum to company or until refunded, hold such sum in Trust for the company	Refund within 2 yrs or such lesser period as prescribed by company, or hold such amount in trust for the company.
6.	Sub section 10 of section 197 waive off the refundable amount	With approval of Central Government	Only by passing a Special Resolution within TWO YEARS from the date the sum becomes refundable
7.	New proviso for NOC from Financial Institution (in case of default of dues)	-	Mandatory to take before passing SR
8.	New sub section 16_ Audit report for compliance	-	Mandatory
9.	Newly added_ relief to the company whose application is pending for approval before the Central Government under section 197	-	Such application shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended

How to draft Business Agreements in India?

DRAFTING OF BUSINESS AGREEMENTS

INTRODUCTION

Importance of drafting and conveyancing for a company could be well imagined as the company has to enter into various types of agreements with different parties and have to execute various types of documents in favour of its clients, banks, financial institutions, employees and other constituents.

Various Business Agreements like;

Term Sheet/Letter of Intent	Gift Deed
Memorandum of Understanding	Exchange Deed
Agreement to Sell	Mortgage Deed
Sale Deed	Development Agreement
Deed of Transfer	Joint Development Agreement
Deed of Assignment	Power of Attorney
Deed of Declaration	Built to Suit Agreement
Conveyance Deed	Property Management Agreement
Deed of Apartment	Due diligence / Title Report
Lease Deed	Inspection Note
Leave and License Agreement	Public Notice
Release Deed	Letters / Notices
Non-Disclosure Agreement	Fit out Agreement
Confidentiality Agreement	Employment Agreement
Indemnity Bond	Consultant / Retainership Agreement
Brokerage Agreement	Facility Management Agreement
Service Agreement	LLP Deed
Sale and Purchase Agreement / Vendor Agreement	Partnership Deed

WHY KNOWLEGDE OF DRAFTING IS IMPORTANT?

(i) For obtaining legal consultations;

 (ii) For carrying out documentation departmentally;

(iii) For interpretation of the documents.

With the knowledge of drafting and conveyancing, better interaction could be had by the corporates while seeking legal advice from the legal experts in regard to the matters to be incorporated in the documents, to decide upon the coverage and laying down rights and obligations of the parties therein.

Knowledge in advance on the subject matter facilitates better communication, extraction of more information, arriving on workable solutions, and facilitates settlement of the draft documents, engrossment and execution thereof. Knowledge of drafting and conveyancing for the corporates is also essential for doing documentation departmentally. Only a Business man/ Entreprenuer can find out the purpose behind such drafting with all facts known and judging the relevance and importance of all aspects to be covered therein.

A BRIEF VIEW OF WHAT IS DRAFTING?

Drafting may be defined as the synthesis of law and fact in a language form

The process of drafting operates in two planes: the conceptual and the verbal. Besides seeking the right words, the draftsman seeks the right concepts.

Drafting, therefore, is first thinking and second composing.

Drafting, in legal sense, means an act of preparing the legal documents like agreements, contracts, deeds etc.

Drafting of legal documents is a skilled job. A draftsman, in the first instance, must ascertain the names, description and addresses of the parties to the instrument. He must obtain particulars about all necessary matters which are required to form part of the instrument. He must also note down with provision any particular directions or stipulations which are to be kept in view and to be incorporated in the instrument. The duty of a draftsman is to express the intention of the parties clearly and concisely in technical language. With this end in view, he should first form a clear idea of what these intentions are.

When the draftsman has digested the facts, he should next consider as to whether those intentions can be given effect to without offending against any provision of law. He must, therefore, read the introductory note, or, if time permits, the literature on the subject of the instrument. A corporate executive, therefore, must note down the most important requirements of law which must be fulfilled while drafting complete instrument on the subject. Validity of document in the eye of law cannot be ignored and at the same time the facts which should be disclosed in the document cannot be suppressed. Nothing is to be omitted or admitted at random. Therefore, knowledge of law of the land in general and knowledge of the special enactments applicable in a particular situation is an essential requirement for a draftsman to ensure that the provisions of the applicable law are not violated or avoided. For example, in cases where a deed to be executed by a limited company, it is necessary to go into the question as to whether the company has got power or authority under its memorandum to enter into the transaction. A limited company can do only that much which it is authorized by its memorandum. Further, a company being a legal entity, must necessarily acts through its authorized agents. A deed, therefore, should be executed by a person duly authorized by the directors by their resolution or by their power of attorney

DRAFTING OF BUSINESS AGGREMENTS:

Business agreements include:

1.       Share Purchase Agreement

2.       LLP agreements like registration of LLP or conversion of an entity into LLP, and many more

Going step wise, we need to first understand that what the meaning of business agreement is;

“A negotiated and usually legally enforceable understanding between two or more legally competent parties”

In other words Business Agreements is a legal contract binding two or more parties.

We encounter various agreements in our daily business; the business environment is full of agreements between businesses and individuals. While oral agreements can be used, most businesses use formal written contracts when engaging in operations. Written contracts provide individuals and businesses with a legal document stating the expectations of both parties and how negative situations will be resolved. Contracts also are legally enforceable in a court of law. Contracts often represent a tool that companies use to safeguard their resources.

The content of an agreement may be Mandatory or Discretionary,

Agreements can be classified as; A level, B level and C level,

Comment: This Pyramid represents the Quantity of agreements formed, which is inversely proportion to the Quality of such agreements.

A Level Agreement: They are entered into the least and thus in terms of quality they should be “THE BEST”

B Level Agreement: They are entered into more that A Level and thus their quality should be “BEST”

C Level Agreement: They are entered into the maximum of rest and their quality should be “MODERATE”

Examples of:

A Level Agreement: Share Purchase Agreement, Joint Venture Agreement, Etc.

B Level Agreement: Letter of Appointment, Service agreements, Rent Agreements, Etc.

C Level Agreement: Invoice (GST invoice), Etc.

WHY WE MAKE THIS ABC ANALYSIS?

ABC classification is required to structure the agreement in standard manner, so that execution becomes simple, moreover, internal control can be framed and utilized. This also helps to observe the Monitoring in an effective manner.

PROCESS OF DRAFTING

This tree depicts the procedure to followed while to start drafting,

Beginning with the roots first check whether you have the authority to sign agreements or not

This involves:-

1.       Objective of agreement

2.       Process/ flow/ major work involved

3.       Major operative steps

4.       Flow chart timeline wise

Branches have risks like “What is the delivered work be not be compensated?”

NOTE THAT: Often, people interchange the words Contract with Agreements or Vice-versa, but they both differ in following manner:-

S.No.	Basis	Contract	Agreement
1.	Enforceable by law	Yes	No
2.	Legal requirements	Mandatory	Not mandatory
3.	Issues involved	Important issues where a promise cannot suffice	Generally made over small things

Further all Contracts are Agreements but all agreements are not contract.

SOME DO’S

1. Reduce the group of words to single word;

2. Use simple verb for a group of words;

3. Avoid round-about construction;

4. Avoid unnecessary repetition;

5. Write shorter sentences;

6. Express the ideas in fewer words;

7. Prefer the active to the passive voice sentences;

8. Choose the right word;

9. Know exactly the meaning of the words and sentences you are writing; and

10. Put yourself in the place of reader, read the document and satisfy yourself about the content, interpretation and the sense it carries.

THE UTMOST IMPORTANT RULE OF DRAFTING

“CLEAR WRITING BEGINS WITH CLEAR THINKING”

For that:

1.       Know the subject matter

2.       Indulge in bundle of research

3.       Understand the objective of parties

4.       Analyze the implication of each contractual term

5.       Use simple and clear language

And never forget to review your work,

The types of review are

1.       Colleagues and supervisors review

2.       Management review

3.       Opposing counsel review

CRUX:

1.       Listen to your management

2.       Understand the deal

3.       Use your knowledge wisely

4.       Draft the best document that you can

5.       Read it once or twice and then get it review by your seniors

6.       Openly welcome the feedbacks and improve your work