Section 197 of the Companies Act 2013: How Much Can Directors Really Be Paid?

Paying directors is always a sensitive topic. Too little, and good talent walks away. Too much, and shareholders start asking uncomfortable questions.

This is exactly why Section 197 of the Companies Act, 2013, exists.

It doesn’t stop companies from rewarding performance. But it does make sure that managerial pay remains reasonable, justified, and transparent—especially in public companies where shareholder money is involved.

At its core, Section 197 puts a cap on how much directors and top management can take home in a year. Not opinions. A legal limit.

The 11% Rule Explained in Simple Terms

Section 197 says that total managerial remuneration cannot exceed 11% of the company’s net profits for a financial year.

This 11% is not just salary.

It includes everything.
Monthly pay.
Commission.
Performance bonuses.
Perks like housing or cars.
Even stock options and ESOPs.

Nothing escapes this calculation.

The idea is straightforward. Profits belong to the company and its shareholders first. Management gets rewarded, but within a controlled framework.

Who Does This Law Apply To?

This section mainly applies to public companies.

Private companies have more flexibility when it comes to managerial pay. But public companies operate with public money, wider ownership, and higher scrutiny. So stricter rules apply.

Managing directors, whole-time directors, executive directors, and key managerial personnel all come under this umbrella.

If you’re on the board of a public company, Section 197 is something you simply cannot ignore.

What Counts as Managerial Remuneration?

Many companies make mistakes here.

They assume remuneration only means salary. It doesn’t.

Section 197 covers:

• Fixed monthly salary

• Commission linked to profits

• Annual or performance bonuses

• Perquisites like accommodation, travel, insurance

• ESOPs or equity-based compensation

All of this is added together. And then checked against the 11% limit.

That’s why disclosures in board reports matter so much.

Can a Company Pay More Than 11%? Yes, but carefully.

Exceeding the limit is not illegal. Doing it without approval is.

If a company wants to go beyond 11%, it must:

• Get board approval

• Pass a special resolution in a general meeting

• Clearly explain why higher pay is justified

• File the necessary documents with the Registrar of Companies

Shareholders must know. And they must agree.

That’s the safeguard.

What Happens When Profits Are Low or Zero?

This is where Schedule V comes in.

Even if a company has no profits, it may still need competent leadership. Schedule V allows companies to pay minimum remuneration to directors in such cases, subject to conditions.

It’s a practical solution. Companies don’t shut down leadership just because profits dip for a year.

But again, procedures matter. Approvals matter. Documentation matters.

What Companies Should Actually Do in Practice

Compliance with Section 197 isn’t difficult. It just needs discipline.

Companies should:

• Calculate net profits correctly using Section 198

• Track total managerial pay throughout the year

• Review remuneration during board meetings

• Conduct internal compliance checks

• Clearly disclose remuneration details in the board’s report

Most violations happen due to oversight, not intention.

Penalties Are Not Just Financial

Non-compliance can lead to:

• Monetary penalties

• Regulatory action from the MCA

• Questions from shareholders

• Reputational damage that lingers

In listed companies, even a small compliance lapse can snowball quickly.

Real Situations Companies Face

There have been cases where companies paid hefty bonuses without shareholder approval. Regulators stepped in. Penalties followed. Fresh resolutions had to be passed.

On the other hand, some loss-making companies correctly used Schedule V to pay directors minimum remuneration. No issues. No notices. That’s compliance done right.

The law doesn’t punish intent. It punishes shortcuts.

FAQs on Section 197 of Companies Act 2013

Does Section 197 apply to private companies?
No. It mainly applies to public companies.

Is ESOP included in remuneration?
Yes. Equity-linked compensation is part of total managerial remuneration.

What if the 11% limit is crossed without approval?
Penalties may apply, and excess remuneration may need to be refunded.

Final Takeaway

Section 197 is not anti-management. It is pro-balance.

It allows companies to reward leadership, but not at the cost of shareholder trust or corporate discipline. When followed properly, it improves governance, transparency, and long-term credibility.

If your company needs help with managerial remuneration structuring, Schedule V compliance, board approvals, or MCA filings, Callmyca.com can guide you through the process without risk or confusion.