Section 197 Managerial Remuneration Caps, Simply Explained
Section 197 of the Companies Act 2013 is one of those provisions everyone half-remembers as "11%" without being confident what the 11% is of, what happens in a loss year, or when a special resolution is actually required. The mechanics split cleanly into two regimes depending on whether the company has adequate profits.
Regime 1: Adequate Profits — Percentage of Net Profit
When a public company has profits, total managerial remuneration is capped at 11% of net profit, computed under Section 198 (a specific tax-like computation, not the accounting profit figure — it adds back items like managerial remuneration itself and certain capital profits).
Within that 11% overall envelope:
- Managing Director / Whole-Time Director / Manager: 5% of net profit each, or 10% in aggregate if there's more than one
- Non-executive directors: 1% of net profit if the company has a managing/whole-time director or manager, rising to 3% if it doesn't
Breach the 11% overall cap and a special resolution is required at the AGM, with an explanatory statement, followed by Board's Report disclosure under Section 197(12) read with Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014.
Regime 2: Inadequate or No Profits — Schedule V Effective-Capital Slabs
When profits are inadequate or absent, Section 197's percentage-of-profit logic doesn't apply — Schedule V Part II Table A takes over instead, and the cap becomes a function of effective capital, not profit:
| Effective capital | Per-person limit (yearly) |
|---|---|
| Negative or below ₹5 crore | ₹60 lakh |
| ₹5 crore to below ₹100 crore | ₹84 lakh |
| ₹100 crore to below ₹250 crore | ₹1.2 crore |
| ₹250 crore and above | ₹1.2 crore + 0.01% of the excess over ₹250 crore |
Effective capital here means paid-up share capital plus reserves and surplus plus long-term borrowings, minus accumulated losses and unamortised intangibles — a different computation from both accounting net worth and Section 2(57) statutory net worth.
The Ordinary Resolution / Special Resolution Split
This is the part that gets glossed over most often. The table limit itself — the per-person figure above — is payable on an ordinary resolution. Since the 2018 amendment to Schedule V, a company can go up to twice that table limit, but only with a special resolution and explanatory statement. Beyond 2x the table limit, this route doesn't apply at all — no resolution, ordinary or special, authorises remuneration above the 2x ceiling under Schedule V.
So there are effectively three bands, not two: within the table limit needs nothing extra, between 1x and 2x needs a special resolution, and above 2x isn't available under Schedule V regardless of resolution type.
Frequently Asked Questions
Is the 11% cap based on accounting profit or something else?
Neither the P&L profit figure nor EBITDA — it's net profit computed specifically under Section 198 of the Companies Act, which starts from accounting profit but makes specific add-backs (including managerial remuneration itself) and exclusions (certain capital profits and profits on sale of undertakings) that accounting profit doesn't make.
What's the difference between "effective capital" and "net worth" for Schedule V purposes?
Effective capital (paid-up capital + reserves & surplus + long-term borrowings − accumulated losses − intangibles) is a Schedule V-specific figure, distinct from Section 2(57) statutory net worth and from plain accounting equity. Using the wrong one will place a company in the wrong slab.
Can a company pay above the Schedule V table limit with just an ordinary resolution?
No. The table limit is the ordinary-resolution ceiling. Anything up to 2x that limit needs a special resolution (enabled by the 2018 Schedule V amendment). Above 2x, Schedule V doesn't authorise the payment through this route at all.
Does the 11% cap apply to private companies?
Section 197's percentage caps apply to public companies. Private companies are exempt from the Section 197 remuneration ceiling itself, though other governance and disclosure requirements still apply depending on the company's other characteristics.
CORAA's Section 197 Remuneration Calculator runs both regimes — the 11%/5%/10%/1%/3% profit-based caps and the Schedule V effective-capital slabs, including the ordinary-resolution/special-resolution/2x-ceiling bands — off the same inputs, so the special-resolution trigger doesn't get missed in a loss year that's easy to mistake for a straightforward profit-based check.