Director Remuneration in Public Limited Companies: Navigating Section 197 and Statutory Compliance

Overview : Public companies can't just write any cheque they want when it comes to paying directors. Section 197 of the Companies Act 2013 puts a tight leash on director pay - and for good reason. Since public companies raise money from ordinary investors, the law ensures directors aren't helping themselves to excessive salaries while shareholders get left behind. Unlike private companies with much more freedom, public companies must stick to percentage limits based on profits, get multiple approvals, and follow Schedule V guidelines. There are also tax rules to navigate, especially with foreign directors. We'll explain what companies must do to stay compliant without legal trouble.

Statutory Framework Under Section 197

Section 197 of the Companies Act 2013 deals with the regulatory framework for director remuneration in public limited companies. This provision aims to ensure transparency and accountability in compensation decisions while preventing excessive payouts to managerial personnel. The core principle of Section 197 is that the director's remuneration must be reasonable, performance-linked, and subject to appropriate oversight. Section 197 applies to all Public companies and does not apply to Private Limited Companies and OPC .

Maximum Remuneration Limits for Profitable Companies

For public companies having profits in any financial year, the total managerial remuneration payable to all directors, including managing directors, whole-time directors, and managers, shall not exceed 11% of the company's net profits for that financial year. This net profit is computed in the manner prescribed under Section 198 of the Companies Act 2013, with the important clarification that directors' remuneration itself is not deducted from the gross profits for this calculation.

Within this overall 11% limit, individual restrictions apply to specific categories of directors. The remuneration payable to any one managing director, whole-time director, or manager shall not exceed 5% of the net profits of the company. If there is more than one such director, the combined remuneration to all managing directors, whole-time directors, and managers collectively shall not exceed 10% of the net profits. These individual limits ensure that compensation is distributed appropriately and prevent the concentration of excessive remuneration to any single individual.

Companies may exceed the 11% overall limit only with specific approvals. Previously, Central Government approval was required for such excess payments. However, recent amendments allow companies to pay remuneration exceeding 11% of net profits by passing a special resolution approved by shareholders in general meeting, provided the company complies with the conditions specified in Schedule V of the Act.

Remuneration for Loss-Making or Inadequate Profit Companies

Just because a company is losing money doesn't mean directors work for free. Schedule V has specific provisions for companies with no profits or inadequate profits. The limits depend on how much capital the company has, which makes sense - bigger companies can afford to pay more even during tough times.

The structure is pretty straightforward. If your company's effective capital is less than ₹5 crores (or negative), managerial persons can get up to ₹60 lakhs annually, while other directors are capped at ₹12 lakhs. As the capital increases, these limits go up proportionally. For companies with capital over ₹250 crores, there's even a formula that adds 0.01% of the excess capital to the base limits.

Approval Requirements and Governance Framework

Section 197(4) requires director remuneration to be determined through the company's articles, a company resolution, or a special resolution in the general meeting if the articles demand it. Companies under Section 178(1) - including listed companies and other prescribed entities - need additional approval from their Nomination and Remuneration Committee, which must evaluate and recommend compensation packages before they go to the board and shareholders. The approval process should consider company performance, industry standards, the director's role, and economic conditions, with companies maintaining detailed documentation, including peer comparisons and justification for any increases or exceptional payments.

Treatment of Expense Reimbursements

Under the Companies Act 2013, reimbursement of actual expenses incurred by directors for attending board meetings and fulfilling their official duties is not classified as remuneration. Such reimbursements typically include travel expenses for board meetings, accommodation costs during official company visits, communication expenses directly related to company business, and other genuine expenditures incurred whilst performing directorial duties, but companies must maintain proper documentation including receipts, approvals, and clear business justification for each expense.

The distinction between remuneration and expense reimbursement is critical for compliance purposes, so companies should establish clear policies distinguishing between the two categories and ensure that only actual, reasonable, and business-related expenses are reimbursed to avoid potential challenges from regulatory authorities or shareholders.

GST Implications for Public Company Directors

The Goods and Services Tax treatment of director remuneration in public companies follows the same principles as applicable to private companies, with the classification depending on the nature of the director-company relationship rather than the company type. The critical factor is whether the director has an employer-employee relationship with the company or provides professional services.

For executive directors who maintain a genuine employer-employee relationship with the company, GST is not applicable on their remuneration. This treatment is supported by Schedule III of the Central Goods and Services Tax Act, 2017, which excludes services by an employee to the employer from the definition of supply. Key indicators of this relationship include regular salary payments, TDS deduction under Section 192 of the Income Tax Act, and accounting of remuneration under the head 'Salaries' in the company's books.

When directors provide professional services without establishing an employer-employee relationship, particularly non-executive and independent directors, the services become subject to GST at 18% under the reverse charge mechanism. The company becomes liable to pay GST on behalf of the director, and the remuneration is typically accounted separately from 'Salaries' in the company's financial records.

TDS Obligations for Public Companies

Public companies must comply with Tax Deducted at Source provisions when making payments to directors, with the applicable section depending on the nature of the payment and the director's relationship with the company. The recent increase in threshold limits from ₹30,000 to ₹50,000 annually from Financial Year 2025-26 provides some relief for smaller payments.

Section 194J(1)(ba) of the Income Tax Act applies to remuneration, fees, and commission paid to directors, excluding salary payments covered under Section 192. Companies must deduct TDS at 10% on payments exceeding ₹50,000 annually under this provision. This section covers sitting fees, commission payments, professional fees, and other forms of director compensation but specifically excludes salary payments.

For directors receiving regular salary payments where a genuine employer-employee relationship exists, Section 192 applies with TDS calculated according to the director's overall tax liability, considering applicable deductions and exemptions. This typically applies to managing directors and whole-time directors who are actively involved in day-to-day management.

Conclusion

Director remuneration in public limited companies is governed under Section 197 and Schedule V, along with necessary approvals and tax implications under GST and Income Tax laws. Companies must balance competitive pay with compliance, emphasising proper documentation and governance. For foreign directors, additional issues such as visa requirements and tax treaties arise. Listed companies must ensure compliance with the stricter disclosure and SEBI compliance.

Disclaimer : This article provides general guidance and should not be considered legal or tax advice. Companies should consult qualified professionals for specific situations and the latest regulatory updates.

Author Bio

Editorial Team | in

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.