The s.197 limits
| Who | Limit, % of s.198 net profit |
|---|---|
| All directors and the manager together | 11% |
| One MD, WTD or manager | 5% |
| All MDs, WTDs and managers, if more than one | 10% |
| Non-executive directors, where there is an MD, WTD or manager | 1% |
| Non-executive directors, where there is none | 3% |
Since the 2017 amendment (in force 12 September 2018), a public company can pay above these limits with a special resolution of members. If the company has defaulted on dues to a bank, public financial institution, debenture holders or secured creditors, it needs their prior approval first. Sitting fees for board and committee meetings are outside the limits but capped at ₹1 lakh per meeting (Rule 4). Section 197 does not apply to private companies.
Net profit under s.198
Start from profit before tax. Add back the remuneration to directors and the manager, and leave out capital profits, profit on sale of fixed assets above cost, and fair-value changes recognised in profit or loss. Deduct the usual business expenses and depreciation under s.123. The result is often materially different from book profit, so work it out properly before relying on the percentages.
No profit or inadequate profit: Schedule V
If the company has no profit or its profit is inadequate, Section II of Part II of Schedule V caps yearly remuneration by effective capital:
| Effective capital | Managerial person | Other director |
|---|---|---|
| Negative or below ₹5 crore | ₹60 lakh | ₹12 lakh |
| ₹5 crore to below ₹100 crore | ₹84 lakh | ₹17 lakh |
| ₹100 crore to below ₹250 crore | ₹120 lakh | ₹24 lakh |
| ₹250 crore and above | ₹120 lakh + 0.01% of effective capital above ₹250 crore | ₹24 lakh + 0.01% above ₹250 crore |
Higher amounts can be paid with a special resolution. Conditions apply: board and nomination and remuneration committee approval, no default to lenders (or their approval), and the disclosure statement in the notice. Effective capital means paid-up capital, plus share premium, reserves and long-term loans, less investments and accumulated losses, as at the end of the previous year.
Common questions
Do the s.197 limits apply to a private company?
No. Section 197 applies only to public companies, so private companies fix remuneration under their articles and a board or members' resolution.
What happens if remuneration paid is more than the limit?
Excess paid without the required approval is held in trust for the company and must be refunded within two years or a shorter period set by the company (s.197(9)). It cannot be waived unless approved by special resolution within two years.
Are sitting fees counted in the 11%?
No. Sitting fees for attending board and committee meetings are excluded, but each fee is capped at ₹1 lakh per meeting.
Is the Schedule V limit per person or for all directors?
It is a yearly limit for each managerial person, and for each other director in the second column.