Section 197 of the Companies Act, 2013—Managerial Remuneration Limits Explained in Plain Language
When people talk about company compliance, one topic that quietly creates anxiety for directors is managerial remuneration. Every public company wants to pay its leadership fairly. At the same time, no company wants to land in trouble for overpaying directors or violating the law.
This is where Section 197 of the Companies Act, 2013, comes in.
In my experience as a practicing chartered accountant, most disputes around Section 197 do not arise because companies want to break the law. They arise because the section is misunderstood or treated casually. Let’s walk through this provision the way it actually works in real life—without legal jargon and without overcomplicating it.
What Section 197 Really Tries to Achieve
At its core, Section 197 exists to answer one simple question:
How much can a public company pay its top management without harming shareholders’ interests?
The law recognizes that:
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Good leadership deserves fair compensation
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But unchecked remuneration can drain company profits
So instead of leaving this entirely to internal decisions, the Companies Act places clear statutory boundaries.
The 11% Rule—The Backbone of Section 197
The most important number you need to remember under Section 197 is 11%.
A public company cannot pay more than 11% of its net profits as total managerial remuneration in a financial year. This includes all payments made to:
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Managing Directors
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Whole-time Directors
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Managers
The idea is simple: managerial rewards should grow only when the company itself performs well.
Individual Limits Within the 11% Ceiling
Many people assume the 11% limit applies only at a group level and forget about individual caps. That’s where mistakes happen.
Within the overall 11% limit:
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A Managing Director, Whole-time Director, or Manager can generally receive up to 1% of net profits
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Other directors together cannot exceed 3% of net profits
If there is more than one MD or WTD, the limits are applied collectively, not individually.
What Happens If a Company Pays More Than Allowed?
This part is non-negotiable.
If remuneration paid exceeds the limits prescribed under Section 197:
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The excess amount must be refunded to the company
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The director cannot waive this refund
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The company cannot regularise it later without proper approval
This is where audits often catch issues. Even if excess payment happened unintentionally, the law still requires recovery.
Applicability—Who Needs to Worry About Section 197?
One important clarification many people miss:
Section 197 applies only to public companies.
Private companies are not governed by these remuneration caps. However, the moment a company becomes public, Section 197 becomes fully applicable.
So if you are:
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A listed company
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An unlisted public company
You must comply with Section 197 without exception.
Why Section 197 Matters Beyond Just Compliance
From a professional standpoint, Section 197 serves several important purposes.
It Protects Shareholders
Excessive executive pay reduces profits available for dividends and growth. This section ensures management does not prioritize personal compensation over company health.
It Improves Corporate Governance
Transparent remuneration policies improve board discipline and reduce internal conflicts.
It Reduces Regulatory Risk
Non-compliance can lead to audit qualifications, ROC scrutiny, and shareholder disputes.
It Builds Investor Confidence
Investors prefer companies where executive compensation is regulated, justified, and disclosed clearly.
How Companies Can Stay Compliant in Practice
In real-world compliance, Section 197 is manageable if handled systematically.
Step 1: Calculate Net Profits Correctly
Net profit under the Companies Act is not the same as accounting profit. Many errors start here.
Step 2: Plan Remuneration in Advance
Do not decide remuneration casually at year-end. Plan it alongside financial projections.
Step 3: Board Approval Is Mandatory
Every remuneration decision must be approved through a properly recorded board resolution.
Step 4: Shareholder Approval Where Required
If remuneration exceeds normal limits or special conditions apply, shareholder approval becomes essential.
Step 5: Maintain Proper Documentation
Remuneration registers, board minutes, and explanatory statements should always be audit-ready.
Practical Examples From Real Situations
Example 1: Managing Director Overpayment
A public company earns ₹8 crore in net profits.
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Maximum total managerial remuneration allowed: ₹88 lakh
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MD’s individual limit: ₹8 lakh
If the MD is paid ₹12 lakh, the extra ₹4 lakh must be refunded, even if the payment was approved internally.
Example 2: Directors’ Sitting Fees vs Remuneration
Many companies confuse sitting fees with remuneration. While sitting fees are allowed separately, excessive remuneration still falls under Section 197 limits.
Example 3: Audit Discovery
If excess remuneration is discovered during a statutory audit or secretarial audit, recovery becomes compulsory. Delays only worsen compliance exposure.
A Common Mistake Directors Make
One of the most frequent issues I see is directors assuming:
“We will regularise it later.”
Unfortunately, Section 197 does not work that way. Once excess remuneration is paid, recovery is not optional.
This is why professional review before payment is far better than damage control later.
Final Thoughts—Section 197 Is About Balance, Not Restriction
Section 197 does not exist to punish management. It exists to ensure fairness.
It allows companies to:
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Reward leadership
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Maintain profitability
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Protect shareholders
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Strengthen governance
When understood properly, it becomes a guide—not a hurdle.
If your company needs clarity on managerial remuneration, calculation of net profits, board approvals, or compliance documentation, getting professional advice early can prevent expensive corrections later.
For structured, reliable support on Section 197 compliance and other company law matters, you can always refer to callmyca.com, where experienced professionals help businesses stay compliant while focusing on long-term growth.
