summary:
Section 197(16) of the Companies Act, 2013, explains the statutory obligation of auditors to report whether managerial remuneration complies with Section 197, including the 11% limit linked to Section 198, mandatory disclosure in the audit report under Section 143, applicability to private companies, exemptions, consequences of non-compliance, and its significance in corporate governance and shareholder transparency.
Section 197(16) of Companies Act, 2013—Explained Like a Human, Not a Bare Act
When people talk about director remuneration, emotions usually run high.
Shareholders worry,
directors justify,
and auditors… quietly observe.
That’s exactly where Section 197(16) of the Companies Act, 2013, steps in.
This section doesn’t decide how much directors should be paid.
It decides who must speak up if the law is not followed.
And that “who” is the auditor.
So, What Does Section 197(16) Actually Say?
In very simple terms:
👉 Section 197(16) requires the company’s auditor to clearly state in their audit report whether the remuneration paid to directors is in accordance with Section 197 or not.
That’s it.
No calculations for the auditor to approve.
No discretion.
No silence allowed.
If remuneration follows the law, say it.
If it doesn’t, say that too.
Why Did the Law Put This Responsibility on Auditors?
Let’s be honest.
Directors:
- approve remuneration,
- receive remuneration,
- and often influence decisions around it.
So the law needed an independent voice.
That voice is the statutory auditor.
Section 197(16) exists because:
- director pay should not be self-policed, and
- Shareholders deserve transparency, not assumptions.
How Does This Connect to the Famous “11% Rule”? ”?
Most people know this part already:
👉 Total managerial remuneration cannot exceed 11% of the company’s net profits (as calculated under Section 198), unless specific approvals are taken.
What Section 197(16) does is simple:
- it makes sure someone actually checks this, and
- reports it publicly.
That public reporting happens in the auditor’s report under Section 143.
What Exactly Must the Auditor Do?
The law is very clear here.
The auditor must:
- verify the remuneration paid to directors, and
- State explicitly whether it complies with Section 197.
Even if:
- everything is perfectly compliant.
- approvals are in place,
- amounts are reasonable
The auditor still must say so.
Silence is not compliance.
Is This Reporting Optional or Based on Materiality?
No.
Not at all.
Section 197(16):
- is mandatory,
- applies regardless of amount, and
- cannot be skipped just because “it’s not material.”
Even ₹1 excess must be reported.
Does Section 197(16) Apply to Private Companies?
This is where people get confused.
Many private companies enjoy exemptions under Section 197 for remuneration limits.
But here’s the important part:
👉 Wherever Section 197 applies, Section 197(16) automatically applies.
So auditors of private companies must:
- understand the exemptions properly, and
- still report compliance (or non-compliance) where required.
You don’t get to ignore the reporting just because the company is private.
What If Remuneration Is Not in Accordance With Section 197?
Then the auditor has no choice.
They must:
- Clearly mention non-compliance in the audit report.
This can lead to:
- shareholder questions,
- regulatory scrutiny,
- refund of excess remuneration, or
- reputational damage.
Section 197(16) makes sure such issues don’t stay hidden inside boardrooms.
What Section 197(16) Is NOT About
Let’s clear this up:
- It does not approve remuneration
- It does not decide salaries
- It does not replace board or shareholder approval
It simply ensures:
👉 The truth is stated on record.
A Simple Real-Life Example
Imagine this:
A company earns ₹10 crore in net profits.
Maximum permissible remuneration = ₹1.10 crore.
But directors are paid ₹1.25 crore.
Even if:
- the board approved it.
- the directors agreed to adjust later.
The auditor must report:
“Remuneration is not in accordance with Section 197.”
That statement alone changes everything.
Why Section 197(16) Matters More Than It Looks
This section may look small, but it:
- strengthens corporate governance,
- protects minority shareholders,
- keeps auditors accountable, and
- prevents quiet excesses.
It’s not about restricting pay.
It’s about owning up to compliance.
For expert guidance on director remuneration, audit reporting, and Companies Act compliance, consult CallMyCA.com—your trusted platform for professional Chartered Accountant support and reliable corporate advisory solutions.
