Section 196 of the Companies Act 2013 establishes a process for selecting Managing Directors, Whole Time Directors, and Managers. This system has been implemented to provide an equitable environment for high-level company management positions; and has proven itself valuable over time.
The first clause of this section states that total managerial remuneration cannot exceed 11% of net profits and must be calculated accordingly.
Appointment of Managing Director
Success for any company lies within its management team, so it is of vital importance that its appointment process of Managing Directors (MD), Whole Time Directors (WTD), and Managers is carried out efficiently and correctly in order to protect all stakeholder interests while helping your business flourish.
Section 196 of the Companies Act 2013 establishes rules and procedures for the appointment of managing directors, WTDs, or managers, as well as setting maximum tenure periods and the remuneration payable.
Under the Act, companies cannot appoint more than one MD at once, and any existing term cannot exceed one year at a time. Any MD who expires may only be reappointed once before expiry in an annual general meeting and only with approval from members present at such meeting.
Prior to making its appointment, a company should issue a seven-day notice to all directors for holding a board meeting to discuss terms and conditions related to appointing a Managing Director, WTD, or Manager. Once resolutions are passed by all board members present at such meetings, filing an MR-1 return within sixty days is mandatory; additionally, entries need to be made in its register of directors and key managerial personnel.
Appointment of Whole Time Director
As its name implies, a full-time director is defined as an individual who dedicates full-time effort to their company with substantial management powers. Their position is governed by several statutes and regulations, including the Companies Act 2013 and SEBI’s Listing Obligations and Disclosure Requirements Regulations 2015.
Regulations provide guidelines for both the appointment and remuneration of managerial personnel in private limited companies. Their purpose is to ensure a company has a competent team of managers capable of running their business effectively while meeting its goals.
To be considered a full-time director, an individual must meet specific requirements; these include serving on the Board of Directors and owning significant shares in their company’s finances; furthermore, sufficient time and energy must be devoted to this role.
Notably, whole-time directors cannot be appointed for more than five years at one time, and re-appointments can only take place after at least one year has elapsed from their last term expires – this ensures they can fully dedicate themselves to serving the company in its best interest.
Appointment of Manager
Managing directors and whole-time directors are integral members of a company’s management team, responsible for making critical decisions and overseeing employees. Their duties require special requirements that must be fulfilled by strict compliance; to hire such personnel, the company board must carefully consider all relevant factors, circumstances, and whether their employer can afford their remuneration.
The company should also ensure their manager has an impressive background and experience and is in good health. Furthermore, the company must maintain a record of the manager’s past and current health status, in addition to any medication or treatments prescribed to him/her.
To successfully appoint a manager, companies must comply with section 196 of the Companies Act 2013. This section requires them to file Form MR-1 within 60 days after making their appointment detailing terms and conditions (such as remuneration) along with shareholder approval at an upcoming general meeting of their company.
Section 196 applies equally to private and public companies; however, the definition of “manager” differs between them. A manager in either type is defined as an individual who has been granted significant powers by virtue of an agreement with their company, its articles, or resolution from either its general meeting or board of directors.
Remuneration
Money drives everything we do these days; therefore, the remuneration of managerial personnel is an integral component of their performance and success in any company. Consequently, the policy regarding executive compensation must be fair, equitable, and in line with Section 197 of the Companies Act 2013.
This section’s first clause states that, during each financial year, public companies shall limit total managerial remuneration paid out to shareholders to no more than 11 percent of net profit as calculated using the formula provided herein. Shareholders could grant an exception through a special resolution, agreement, or an ordinary resolution passed at a general meeting.
However, any director drawing or receiving any sum in excess of this limit must repay it within two years and hold any unrecovered sum in trust for the company until such time that repayment can take place. Any recoverable sums must not be waived; an application should be filed with the Central Government along with its prescribed fee in form MR-2 to claim them back.
Section 196 mandates that no company may appoint more than one managing director or manager simultaneously, with a maximum single term of office not exceeding five years for either position. Furthermore, companies must ensure their appointments comply with Section 197 and Schedule V provisions when making them.