Wednesday, February 9, 2011

Managerial Remuneration in Unlisted Companies: Process Eased

When the rest of the world is tightening the screws on payment of managerial remuneration in the wake of the financial crisis, the Ministry of Corporate Affairs (MCA) in India has eased the process for such payments in the case of unlisted companies. However, this is certainly understandable. The erstwhile process of requiring even unlisted public companies to approach the MCA for payment of managerial remuneration was criticized as being unduly onerous and inefficient on businesses. Moreover, questions arose as to whether the Government was the appropriate entity to determine compensation of managers, and whether the machinery was adequate to handle the flood of applications. In terms of overseeing payments to managers, there is no public shareholding in unlisted companies thereby attenuating the classic agency problem in corporate governance between managers and shareholders.

The MCA appears to have identified these issues, and rightly so, in removing the obstacle of requiring Government approval for public unlisted companies. A copy of the notification available on the Press Information Bureau website, is set out below:
Schedul Xiii of the Companies Act 1956 Being Amended- Unlisted Companies Shall not Require Government Approval for Managerial Remuneration Where they have no Profits

The Ministry of Corporate Affairs issued today a notification on Managerial Remuneration in unlisted companies having no profits/inadequate profits. The notification reads as under:

Managerial Remuneration in unlisted companies having no profits/ inadequate profits

Companies are divided into private limited and public limited companies. Public limited companies are of two types – listed companies (whose shares are listed on a stock exchange) and unlisted companies. Normally, the general public does not hold shares in unlisted companies. Private limited companies are not subject to any limits on managerial remuneration. Public limited companies (listed and unlisted) with no profits/ inadequate profits are currently required to approach the Ministry for approval in those cases where the remuneration of Directors/ equivalent managerial personnel exceeds certain limits.

2. The matter has been re-examined in the light of the evolving economic and regulatory environment. The primary purpose of regulations over managerial remuneration is to protect stakeholders, particularly shareholders and creditors. Unlisted companies are in several respects similar to private limited companies. A substantial number of the applications coming to the Ministry fall under this category and the Ministry’s limited manpower is disproportionately involved in this exercise. In the case of unlisted companies so long as the conditions specified in Schedule XIII, including special resolution of shareholders and absence of default on payment to creditors, are fulfilled approval will not be needed hereafter.

3. Accordingly, Schedule XIII of the Companies Act 1956 is being amended to provide that unlisted companies (which are not subsidiaries of listed companies) shall not require Government approval for managerial remuneration in cases where they have no profits/ inadequate profits, provided they meet the other conditions stipulated in the Schedule.

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