A founder in Koramangala paid himself ₹1.2 crore last year from a company that reported a net loss. His statutory auditor signed off. His investors did not blink. Then the company filed for a rights issue, a diligence lawyer read the board minutes, and the whole payout was flagged as an unapproved excess that had to be refunded to the company before the round could close. The salary was not the problem. The missing special resolution and the Schedule V limit were.
Managerial remuneration under Section 197 of the Companies Act, 2013 is the single compliance area where founders act on a half-truth. Some believe a director can draw any amount. Others believe no salary is allowed in a loss year. Both are wrong, and the gap between what you think the law says and what it actually says is measured in lakhs of penalty and clawback. Here is what the rule says in 2026, who it binds, and the exact steps to pay a director legally.
Who must comply: Every public company, and every private company the moment it converts, lists, or triggers deemed-public status.
The cap: Total managerial remuneration in a public company cannot cross 11% of net profits computed under Section 198. One MD/WTD caps at 5%, all of them together at 10%, other directors at 1% (or 3% where there is no MD/WTD).
Loss year: Pay is allowed, but only within Schedule V limits (₹60 lakh to ₹120 lakh-plus by effective capital), needing a Board plus special resolution.
Penalty: ₹1 lakh on the defaulting officer and ₹5 lakh on the company under Section 197(15), plus refund of any excess.
Act now: Fix the resolution trail before AGM season closes and before any diligence begins.
Managerial remuneration under Section 197: the rule most founders have never actually read
Section 197 sets the ceiling on how much a company can pay its managing director, whole-time director, manager and other directors in a financial year. The number that matters is 11% of net profits, and the net profit here is not the figure on your profit and loss statement. It is a specially computed figure under Section 198, which adds back and subtracts a defined list of items. Founders who benchmark salary against book profit, or against what a competitor pays, are already working from the wrong base.
The confusion runs deeper for private companies. A private limited company is exempt from Section 197 through the MCA exemption notification dated 5 June 2015, which is still in force. That exemption is real, and it is why a private company founder can structure a large salary even in a loss year without a Schedule V calculation. The trap is that founders treat the exemption as permanent. It ends the day the company becomes public, gets acquired by a public parent (becoming a subsidiary of a public company, which is treated as public under Section 2(71)), or begins its listing journey. At that point every historical pay decision gets read against Section 197, and unapproved excess becomes a diligence finding.
The cost of getting this wrong is specific. Section 197(15) levies a penalty of ₹1 lakh on the person in default and ₹5 lakh on the company. Section 197(9) requires any remuneration paid in excess of the limits to be refunded to the company, and Section 197(10) bars the company from waiving that refund unless it obtains approval by special resolution within two years and, for public companies with defaults to banks or lenders, the lender's prior nod. This is money that leaves the director's pocket and goes back to the company.
Diagram 1: The Section 197 ceiling at a glance (public companies)
| Who is being paid | Ceiling (% of net profit u/s 198) | How to exceed it |
|---|---|---|
| All managerial personnel and directors together | 11% | Special resolution in general meeting, subject to Schedule V |
| One MD, WTD or manager | 5% | Special resolution |
| More than one MD/WTD/manager (combined) | 10% | Special resolution |
| Directors other than MD/WTD, where a MD/WTD exists | 1% | Special resolution |
| Directors other than MD/WTD, where there is no MD/WTD/manager | 3% | Special resolution |
Sitting fees paid to a director for attending Board or committee meetings sit outside these percentage limits, capped separately at ₹1 lakh per meeting under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
What the law actually says: Sections 196, 197 and Schedule V read together
Three pieces of the Act work as one system, and reading any of them alone is how founders miss a step.
Section 196 governs appointment. A managing director, whole-time director or manager is appointed for a term not exceeding five years at a time, cannot be reappointed earlier than one year before the current term ends, and must be between 21 and 70 years of age. Appointing someone above 70 needs a special resolution recording the justification. The appointment and its terms are approved by the Board and, where required, by shareholders, and the terms must sit within Schedule V if the company wants to avoid Central Government approval.
Section 197 governs how much. It sets the 11% overall ceiling for public companies, the individual sub-limits above, and the treatment of loss or inadequate-profit years. It also carries the enforcement teeth in sub-sections (9), (10) and (15).
Schedule V governs the loss year. When a company has no profit or inadequate profit, Section 197(3) says it may still pay remuneration, but only per Schedule V Part II, and if it cannot meet even those conditions it must apply to the Central Government in Form MR-2. Schedule V ties the permitted pay to "effective capital", a defined figure built from paid-up capital, securities premium, and long-term borrowings, and excluding items such as revaluation reserve and accumulated losses.
Diagram 2: Which path applies to your company
Section 197 percentage limits and Schedule V do not apply. Pay is set by the Articles, the Board and shareholders. Watch Income Tax Section 40A(2)(b) reasonableness and Section 188 if the director is a related party under any other head.
Section 197 applies in full. Go to the next question.
Pay within 11% (and the 5% / 10% / 1% / 3% sub-limits). Cross them only with a special resolution.
Pay only within the Schedule V Part II effective-capital slab, backed by a Board resolution and a special resolution. Beyond the slab, apply to the Central Government in Form MR-2.
Diagram 3: Schedule V Part II limits in a loss year (by effective capital)
| Effective capital of the company | Yearly remuneration ceiling per managerial person |
|---|---|
| Negative or less than ₹5 crore | ₹60 lakh |
| ₹5 crore and above but under ₹100 crore | ₹84 lakh |
| ₹100 crore and above but under ₹250 crore | ₹120 lakh |
| ₹250 crore and above | ₹120 lakh + 0.01% of effective capital above ₹250 crore |
Two conditions decide whether these slabs even apply. The remuneration must be approved by the Board, and by the Nomination and Remuneration Committee where the company has one. A special resolution at the general meeting doubles each slab figure, and that resolution stays valid for up to three years. Miss the special resolution and the entire loss-year payout above the ordinary limit becomes an excess that Section 197(9) requires the director to refund.
What you must do now
Whether you run a funded startup, a mid-market private company, or a company heading toward listing, the fix is a clean approval trail. Work through these steps before your next AGM closes and well before any investor or acquirer opens a data room.
- Confirm your company's status first. Private and standalone means the exemption applies and the percentage limits do not. Public, listed, or a subsidiary of a public company means Section 197 binds you today. A startup that took a public strategic investor may have become deemed public without noticing.
- Compute net profit under Section 198, not book profit. Get your Company Secretary or auditor to prepare the Section 198 working before you decide any figure. This is the base the 11% is measured against, and it decides whether this is a profit year or a Schedule V year.
- Fix the remuneration at the right forum. The Board approves the appointment and pay of an MD or WTD, the Nomination and Remuneration Committee recommends it where the company must have one under Section 178, and shareholders approve by ordinary or special resolution depending on the amount.
- Pass a special resolution wherever you cross a limit. Crossing 11% in a profit year, or paying above the ordinary Schedule V slab in a loss year, both need a special resolution. Draft the explanatory statement with the disclosures Schedule V Part II requires, including the reasons and the effective-capital figure.
- File Form MR-1 for the appointment. A return of appointment of an MD, WTD or manager goes to the Registrar in Form MR-1 within 60 days of the appointment, under Section 196(4) read with Rule 3.
- File Form MR-2 only if you cannot meet Schedule V. Where a loss-year payout exceeds even the doubled Schedule V slab, the company applies to the Central Government for prior approval in Form MR-2. Build in time; this route is slow.
- Disclose the ratio in the Board's Report. Section 197(12) with Rule 5 requires listed companies to disclose the ratio of each director's remuneration to the median employee remuneration, and the percentage increase for each. Missing this is a common Board's Report defect. See the Section 134 Board's Report disclosure guide.
- Recover any excess before diligence. If a past year's pay crossed a limit without approval, act under Section 197(10): pass the special resolution within the two-year window and recover or regularise the excess before an investor's lawyer finds it.
Common errors that cost companies later: benchmarking to book profit rather than Section 198, treating sitting fees as part of the 11% (they are separate), assuming a loss year means zero pay, and forgetting that the special resolution for a loss-year payout lapses after three years and needs renewal.
The deeper implication
According to CS Sapna Malpani, the risk in managerial remuneration is rarely the amount and almost always the paperwork. A founder can legally pay a serious salary in a loss-making public company, but only if the Board minute, the Schedule V working and the special resolution exist and match. When they do not, a defensible business decision turns into a refund liability and a diligence red flag that can stall a fundraise or an acquisition.
Enforcement is getting quicker. As the MCA moves more penalties to fast administrative adjudication by Registrars and expands its Regional Directorate capacity, remuneration defaults that once sat unnoticed will surface faster and attract orders faster. Companies planning a listing in the next 24 months should reconstruct their remuneration approval trail now, while there is time to pass a regularising resolution, rather than during the pre-IPO diligence when there is not. For that timeline, the pre-IPO compliance countdown maps where this sits.
How it compares with provisions founders confuse it with
Managerial remuneration under Section 197 is frequently mixed up with two neighbours. Section 197 is a Companies Act ceiling on how much a company pays its directors and managerial personnel, enforced with refund and penalty. It is separate from the Income Tax treatment, where Section 40A(2)(b) lets the assessing officer disallow remuneration that is excessive or unreasonable relative to fair market value, a test that applies even to a private company that is exempt from Section 197. It is also separate from related-party approvals: where a director's remuneration is not covered by Section 197 and is instead a contract with a related party, Section 188 approvals can be triggered. A private company relies on the exemption for the first, still faces the tax test for the second, and must check the third on its own facts. The appointment mechanics of the MD or WTD, meanwhile, live in Section 196, and the presence of a whole-time Company Secretary to sign these filings is a Section 203 question covered in the Section 203 KMP guide.
- ✓ A public company cannot pay total managerial remuneration above 11% of Section 198 net profit without a special resolution.
- ✓ Individual sub-limits are 5% for one MD/WTD, 10% for several together, and 1% (or 3%) for other directors.
- ✓ Private companies are exempt under the 5 June 2015 notification, but the exemption ends on conversion, listing, or becoming a public-company subsidiary.
- ✓ A loss year permits pay within Schedule V, from ₹60 lakh up to ₹120 lakh-plus by effective capital, doubled with a special resolution valid three years.
- ✓ Section 197(15) penalty is ₹1 lakh on the officer and ₹5 lakh on the company; Section 197(9) forces refund of any excess.
- ✓ File Form MR-1 within 60 days of appointing an MD/WTD/manager; use Form MR-2 for Central Government approval beyond Schedule V.
- ✓ Even an exempt private company still faces Income Tax Section 40A(2)(b) reasonableness on director pay.
Sources and references
- Section 197, Companies Act 2013, Integrated Ready Reckoner (CAIRR)
- Section 197 in The Companies Act, 2013, Indian Kanoon
- Schedule V (see Sections 196 and 197), India Code
- Section 197 full text and sub-sections, IBC Laws
- Appointment and Remuneration of Managerial Personnel, ICSI Backgrounder
- Analysis of amendments in Schedule V Part II, Taxguru
Reconstructing an approval trail after a diligence flag costs far more than setting it right now. Sapna Malpani & Associates helps private, public and IPO-bound companies fix remuneration resolutions, Schedule V workings and MR-1/MR-2 filings.
- Estimate your default exposure with the MCA penalty handling tool
- Run a full-year check with the annual compliance checker
- File the appointment return through ROC compliance filing
Talk to a practising Company Secretary in Bangalore on WhatsApp: +91 96208 03375.
Frequently asked questions
Does managerial remuneration under Section 197 apply to a private limited company?
No. A private limited company is exempt from Section 197 under the MCA exemption notification dated 5 June 2015, which remains in force in 2026. A private company can fix director remuneration through its Articles, Board and shareholders without the 11% ceiling or Schedule V. The exemption ends the moment the company converts to public, becomes a subsidiary of a public company (deemed public under Section 2(71)), or lists. Even while exempt, a private company still faces the Income Tax reasonableness test under Section 40A(2)(b).
Can a director draw a salary if the company made a loss?
Yes, but a public company must pay within Schedule V Part II limits, which are tied to effective capital and range from ₹60 lakh for effective capital under ₹5 crore up to ₹120 lakh-plus for larger companies. The pay needs Board approval, Nomination and Remuneration Committee recommendation where applicable, and a special resolution to use the doubled slab. Beyond even the doubled limit, the company must obtain Central Government approval in Form MR-2. A private company relying on the exemption can pay in a loss year without this calculation.
What is the penalty for breaching Section 197 managerial remuneration limits?
Section 197(15) imposes a penalty of ₹1 lakh on the person in default and ₹5 lakh on the company. Separately, Section 197(9) requires any remuneration paid in excess of the permitted limits to be refunded to the company, held in trust until refunded. Section 197(10) prevents the company from waiving that refund unless it passes a special resolution within two years, and for public companies with dues to banks or lenders, obtains the lender's prior approval.
How is the 11% managerial remuneration limit calculated?
The 11% ceiling applies to net profit computed under Section 198 of the Companies Act, not the net profit shown in the profit and loss account. Section 198 prescribes specific additions and deductions to arrive at the figure. Within the 11%, one managing or whole-time director is capped at 5%, several together at 10%, and other directors at 1% where a managing or whole-time director exists, or 3% where none does. Sitting fees for meetings are outside these percentages, capped at ₹1 lakh per meeting.
Which forms are filed for managerial remuneration and appointment?
Form MR-1 is the return of appointment of a managing director, whole-time director or manager, filed with the Registrar within 60 days of the appointment under Section 196(4) read with Rule 3. Form MR-2 is the application to the Central Government where a loss-year remuneration cannot meet Schedule V conditions. The remuneration terms themselves are recorded through Board and shareholder resolutions, with the special resolution's explanatory statement carrying the Schedule V disclosures.
Does the Section 197 limit include sitting fees and commission?
Commission and salary form part of managerial remuneration and count towards the 11% ceiling and the individual sub-limits. Sitting fees paid for attending Board or committee meetings are treated separately and are not counted within the percentage limits, but they are capped at ₹1 lakh per meeting under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Independent directors cannot receive stock options and are typically paid by way of sitting fees and profit-linked commission within these bounds.
Need help with this in practice?
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