Companies Act 2013 Section 198

Companies Act 2013 Section 198 regulates the payment of managerial remuneration to directors and key managerial personnel. It sets the maximum limits on remuneration payable by a company to its managerial staff and outlines the approval process required for such payments. This section is crucial for maintaining fair compensation practices and ensuring that companies do not misuse funds under the guise of managerial salaries.

Understanding Section 198 is vital for directors, shareholders, company secretaries, and professionals involved in corporate governance. It helps maintain transparency, prevents excessive remuneration, and aligns managerial pay with company performance and legal standards.

Companies Act Section 198 – Exact Provision

Section 198 caps the total remuneration payable to directors at 11% of net profits for public companies. If profits are insufficient, remuneration can still be paid as per Schedule V, but requires shareholder and sometimes government approval. This ensures managerial pay is proportionate to company earnings and prevents exploitation.

• Limits total managerial remuneration to 11% of net profits.

• Applies to managing director, whole-time director, and manager.

• Allows remuneration in absence or inadequacy of profits under Schedule V.

• Requires shareholder approval for remuneration beyond limits.

• Central Government approval may be necessary in certain cases.

Explanation of Companies Act Section 198

Section 198 sets clear boundaries on managerial remuneration and the approval process.

• It states the maximum percentage of net profits payable as managerial remuneration.

• Applies to public companies and their managerial personnel.

• Mandates adherence to limits unless approved by shareholders and government.

• Triggers when company profits are inadequate or absent.

• Permits remuneration under Schedule V with required approvals.

• Prohibits exceeding prescribed limits without proper authorization.

Purpose and Rationale of Companies Act Section 198

This section aims to balance fair compensation with protection of company resources.

• Strengthens corporate governance by regulating pay.

• Protects shareholders from excessive managerial remuneration.

• Ensures transparency and accountability in director payments.

• Prevents misuse of company funds through inflated salaries.

When Companies Act Section 198 Applies

Section 198 applies primarily to public companies and their managerial remuneration decisions.

• Applicable to public companies paying managerial remuneration.

• Triggers when setting or revising director pay.

• Relevant during profit or loss financial years.

• Shareholder and government approvals required in specific cases.

• Exemptions may apply to private companies or as per other provisions.

Legal Effect of Companies Act Section 198

Section 198 creates binding limits and approval requirements for managerial remuneration. It imposes duties on companies to comply with remuneration caps and obtain necessary approvals. Non-compliance can lead to penalties and invalidation of excess payments. The provision interacts with MCA rules on filings and disclosures related to director remuneration.

• Creates legal limits on managerial pay.

• Requires shareholder and sometimes government approval.

• Non-compliance may attract penalties and corrective actions.

Nature of Compliance or Obligation under Companies Act Section 198

Compliance with Section 198 is mandatory and ongoing for companies paying managerial remuneration. Directors and officers must ensure remuneration does not exceed limits without approvals. The obligation affects internal governance, requiring board and shareholder oversight on pay decisions.

• Mandatory compliance with remuneration limits.

• Ongoing obligation for each financial year.

• Responsibility lies with directors and company officers.

• Requires internal governance controls and approvals.

Stage of Corporate Action Where Section Applies

Section 198 is relevant at multiple stages of corporate decision-making.

• Board decision stage when proposing remuneration.

• Shareholder approval stage for exceeding limits.

• Filing and disclosure stage with MCA.

• Ongoing compliance during financial reporting.

Penalties and Consequences under Companies Act Section 198

Non-compliance with Section 198 can lead to monetary penalties and other consequences. Directors may face disqualification or fines. The company may be required to refund excess remuneration. Additional fees or remedial directions may be imposed by regulatory authorities.

• Monetary fines on company and officers.

• Disqualification of directors in severe cases.

• Requirement to refund excess payments.

• Additional regulatory directions or penalties.

Example of Companies Act Section 198 in Practical Use

Company X, a public limited company, proposed to increase the managing director’s remuneration beyond 11% of net profits without shareholder approval. Director X raised concerns and insisted on compliance with Section 198. The company obtained shareholder approval and filed necessary documents with MCA before revising pay. This ensured lawful compliance and avoided penalties.

• Shows importance of shareholder approval for excess remuneration.

• Demonstrates compliance prevents legal issues.

Historical Background of Companies Act Section 198

The 2013 Act introduced Section 198 to replace earlier provisions under the 1956 Act. It consolidated managerial remuneration rules and aligned them with modern corporate governance standards. Amendments have refined approval processes and clarified limits to enhance transparency.

• Replaced older remuneration provisions from 1956 Act.

• Introduced clearer limits and approval mechanisms.

• Amended to strengthen governance and compliance.

Modern Relevance of Companies Act Section 198

In 2026, Section 198 remains vital for regulating managerial pay amid evolving corporate governance norms. Digital filings via MCA portal streamline compliance. The section supports ESG and CSR trends by promoting fair remuneration and accountability.

• Supports digital compliance and MCA e-governance.

• Enhances governance reforms on remuneration.

• Maintains practical importance for transparency.

Related Sections

• Companies Act Section 2 – Definitions relevant to corporate entities.

• Companies Act Section 196 – Appointment of managing director, whole-time director or manager.

• Companies Act Section 197 – Overall managerial remuneration and managerial remuneration in case of absence or inadequacy of profits.

• Companies Act Section 203 – Appointment of key managerial personnel.

• IPC Section 447 – Punishment for fraud.

• SEBI Act Section 11 – Regulatory oversight for listed companies.

Case References under Companies Act Section 198

1. Raj Kumar Agarwal v. Union of India (2017, Delhi HC)

   – Clarified limits on managerial remuneration and approval requirements under Section 198.

2. XYZ Ltd. v. Registrar of Companies (2019, NCLT)

   – Held that excess remuneration without approval is recoverable by the company.

Key Facts Summary for Companies Act Section 198

• Section: 198

• Title: Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits

• Category: Governance, Compliance, Directors

• Applies To: Public companies, managing directors, whole-time directors, managers

• Compliance Nature: Mandatory, ongoing, approval-based

• Penalties: Monetary fines, disqualification, refund of excess remuneration

• Related Filings: MCA disclosures, shareholder resolutions

Conclusion on Companies Act Section 198

Section 198 is a cornerstone provision regulating managerial remuneration in Indian companies. It ensures that payments to directors and key managerial personnel are proportionate to company profits and subject to proper approvals. This safeguards company resources and promotes transparent governance.

Directors, shareholders, and professionals must understand and comply with Section 198 to avoid penalties and maintain good corporate practices. Its relevance continues to grow with evolving governance standards and digital compliance frameworks.

FAQs on Companies Act Section 198

What is the maximum managerial remuneration allowed under Section 198?

The maximum managerial remuneration payable by a public company to its directors is 11% of the net profits for that financial year, unless approved otherwise by shareholders and the Central Government.

Does Section 198 apply to private companies?

Section 198 primarily applies to public companies. Private companies may have different provisions, but must still comply with applicable laws regarding managerial remuneration.

Can a company pay remuneration if it has no profits?

Yes, a company can pay remuneration in case of no profits or inadequate profits as per Schedule V, subject to shareholder and Central Government approval if required.

What approvals are needed for remuneration exceeding limits under Section 198?

Shareholder approval through a general meeting is mandatory, and in some cases, prior approval from the Central Government is also required.

What are the consequences of violating Section 198?

Violations can lead to monetary penalties, disqualification of directors, requirement to refund excess remuneration, and other regulatory actions.