Company Law and Practice · Directors

Key Managerial Personnel and Managerial Remuneration under the Companies Act

Updated 11 October 2026 · Fact-checked

Key managerial personnel are the top officers who run a company day to day, such as the managing director, company secretary and CFO. Section 196 governs how a managing director, whole-time director or manager is appointed. Section 197 caps their pay as a percentage of net profits. Solve questions by applying these limits and approvals in order.

Understand Key Managerial Personnel and Managerial Remuneration

A company acts through people. Some of them hold senior executive posts: a managing director, a whole-time director, or a manager. The law treats these posts with extra care because these people control the business and are paid from company money. Two sections do most of the work for you: section 196 (who can be appointed and how) and section 197 (how much they can be paid).

The three posts are different. A managing director runs the company under the Board's control and has substantial powers of management. A whole-time director works for the company full time as a director. A manager is a person in charge of management who is not necessarily on the Board. Use the Act's definitions from section 2 and the study material when a question asks you to distinguish them, and keep your answer short and precise.

Section 196 sets the appointment rules. A company cannot have a managing director and a manager at the same time. The term cannot be more than five years at a time, and re-appointment cannot be made earlier than one year before the term expires. The person must be at least 21 and below 70, unless a special resolution is passed for a person who has reached 70. The person must not be an insolvent, must not have suspended payment to creditors or compounded with them, and must not have been convicted of an offence with a sentence of more than six months.

Section 197 sets the pay limits. Total managerial remuneration of a public company to its directors and manager cannot exceed 11% of net profits, computed under section 198. Within that, there are sub-limits for each category. If a company has no profits or inadequate profits, pay must follow Schedule V. Directors can also receive sitting fees for meetings, which sit outside these percentages.

In the exam, think in a fixed order: who is the person, is the appointment valid, how was it approved, and does the pay fit within the limits. Then state your conclusion clearly.

Key rules to remember

Overall limit (section 197(1)): Total managerial remuneration ≤ 11% of net profits; Applies to a public company, for its directors (including MD and WTD) and manager, for a financial year. Net profits are computed under section 198, and directors' remuneration is not deducted from gross profits for this purpose. The company in general meeting may authorise more, subject to Schedule V.
Limit for MD, WTD or manager: One such person ≤ 5% of net profits; more than one ≤ 10% of net profits together; Exceeding these needs a special resolution of the company in general meeting.
Limit for other directors: Non-executive directors ≤ 1% of net profits if there is an MD, WTD or manager; ≤ 3% in any other case; Exceeding these needs a special resolution. These percentages are exclusive of sitting fees under section 197(5).
Term of appointment (section 196(2)): Maximum 5 years at a time; no re-appointment earlier than 1 year before expiry; Applies to MD, WTD and manager.
Age limits (section 196(3)): At least 21 years and below 70 years; A person who has reached 70 may be appointed by a special resolution with justification in the explanatory statement.
Disqualifications (section 196(3)): Undischarged or past insolvent; suspended payment or compounded with creditors; convicted with sentence of more than 6 months; Each is a bar to appointment or continuing in the post.
Appointment procedure (section 196(4)): Board approval, then resolution at next general meeting; return to Registrar within 60 days; Central Government approval is needed only if the appointment is at variance with the conditions in Part I of Schedule V.
Refund of excess pay (section 197(9)): Refund within 2 years or lesser period allowed by company; held in trust until refunded; Waiver needs a special resolution within two years from the date the sum becomes refundable.
Penalty (section 197(15)): Person in default ₹1,00,000; company ₹5,00,000; Penalty for default in complying with the section.

How to solve Key Managerial Personnel and Managerial Remuneration questions

Use this order for any question on KMP, appointment or remuneration. It keeps your answer in the provision, facts, conclusion format.

1Identify the post: MD, whole-time director, manager, non-executive director, or another KMP. Note the type of company, public or private.
2State the relevant section: section 196 for appointment, section 197 for remuneration.
3Check the appointment conditions one by one: age, term, disqualifications, and not having both an MD and a manager.
4Check the approvals: Board approval, then the next general meeting, and the Registrar return within 60 days.
5For pay, work out net profits under section 198, then apply the percentage limits for each category.
6Decide whether the pay is within the limit, or needs a special resolution, or falls under Schedule V because of no or inadequate profits.
7Write a clear conclusion and state the consequence, such as refund under section 197(9) or a penalty.

Quickest way: Percentage ladder for remuneration

When to use it: Use it when a numerical question gives net profits and asks whether the pay is allowed.

Write net profits first. Do not subtract directors' pay from gross profits when computing for this section.
Compute 11% as the overall cap.
Compute 5% for one MD, WTD or manager, or 10% if there is more than one.
Compute 1% for non-executive directors if an MD, WTD or manager exists, otherwise 3%.
Compare the actual pay with each cap. Anything above needs a special resolution, or in the case of the overall cap, authorisation in general meeting subject to Schedule V.
Keep sitting fees outside all percentages.

Common mistakes in Key Managerial Personnel and Managerial Remuneration

Applying the 11% limit to a private company.
Students remember the percentages but skip the opening words of the section.
Fix: Section 197(1) speaks of a public company. Begin each answer by checking the company type.
Including sitting fees inside the percentage limits.
All forms of director pay look alike.
Fix: Section 197(2) says the percentages are exclusive of fees under section 197(5). Treat sitting fees separately.
Saying the term of an MD can be up to five years with re-appointment at any time.
Half-remembering the term rule.
Fix: Re-appointment cannot be made earlier than one year before the term expires. Quote both parts.
Saying a person aged 70 can never be appointed.
Students learn the age cap as absolute.
Fix: A person who has reached 70 can be appointed by special resolution with justification in the explanatory statement.
Using one 5% cap for all executive directors together.
Confusing the single-person and group limits.
Fix: 5% applies to any one MD, WTD or manager. If there is more than one, the total cap is 10%.
Ignoring the no-profit rule.
Questions focus on percentages, so students forget the loss case.
Fix: If profits are absent or inadequate, pay only in accordance with Schedule V, as section 197(3) says.

Worked examples

Example 1

The net profits of Bharat Textiles Ltd., a public company, for the year are ₹10,00,00,000 computed under section 198. It has one managing director and no other whole-time director or manager. The MD is paid ₹70,00,000 and the non-executive directors together are paid ₹15,00,000 as commission. No special resolution has been passed. Examine whether the remuneration is within the limits.

Show the solution

Provision: section 197(1) sets an overall 11% cap. Without a special resolution, one MD can be paid up to 5% and non-executive directors up to 1% if there is an MD.
Overall cap: 11% of ₹10,00,00,000 = ₹1,10,00,000. Total paid = ₹70,00,000 + ₹15,00,000 = ₹85,00,000, which is within the cap.
MD cap: 5% of ₹10,00,00,000 = ₹50,00,000. The MD is paid ₹70,00,000, which exceeds it by ₹20,00,000.
Non-executive cap: 1% of ₹10,00,00,000 = ₹10,00,000. They are paid ₹15,00,000, which exceeds it by ₹5,00,000.
Both excesses need approval of the company in general meeting by special resolution, and none has been passed.

Answer: The overall 11% limit is satisfied, but the MD's pay exceeds the 5% limit and the non-executive directors' pay exceeds the 1% limit. Without a special resolution the excess amounts of ₹20,00,000 and ₹5,00,000 are not allowed and must be refunded under section 197(9), or the company must obtain the special resolution.

Example 2

Sundaram Industries Ltd. wants to appoint Mr. Rao, aged 72, as managing director for seven years. The company already has a manager. Advise the Board.

Show the solution

Provision: section 196 governs appointment of an MD, WTD or manager.
Term: section 196(2) bars an appointment for more than five years at a time. A seven-year term is not allowed.
Age: under section 196(3)(a) a person who has attained 70 may be appointed only by special resolution, with the justification given in the explanatory statement.
Co-existence: section 196(1) says a company cannot appoint or employ a managing director and a manager at the same time. The company has a manager, so it cannot appoint an MD while the manager continues.
Procedure: the Board approves the terms and pay, the next general meeting approves it, and a return is filed with the Registrar within 60 days.

Answer: The proposal is not valid as made. The Board should reduce the term to at most five years, pass a special resolution with justification for Mr. Rao's age, and not employ a manager and an MD together. Then it should follow the approval and filing steps in section 196(4).

Exam tips

Start with the section number and company type. Examiners reward the provision first, then the analysis, then the conclusion.
In numerical questions, show each percentage cap as a separate line. Method marks are easy to earn this way.
Learn section 196 as a checklist of age, term, disqualification and procedure. Most facts-based questions test one item from that list.
Mention the consequence at the end, such as the refund under section 197(9) or the penalty under section 197(15).
Use the Act's words for limits and conditions. Do not round or paraphrase a percentage.

Practice questions from Directors

Key Managerial Personnel and Managerial Remuneration in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Key Managerial Personnel and Managerial Remuneration: frequently asked questions

What is the maximum remuneration a public company can pay its directors?

Under section 197(1), total managerial remuneration of a public company to its directors and manager cannot exceed 11% of net profits for the year. The company in general meeting may authorise more, subject to Schedule V.

What is the difference between a managing director and a whole-time director?

A managing director holds substantial powers of management and acts under the Board's control. A whole-time director works full time for the company as a director. Quote the definitions in section 2 of the Act in your answer.

What is the maximum term of a managing director under section 196?

A managing director, whole-time director or manager cannot be appointed or re-appointed for more than five years at a time. Re-appointment cannot be made earlier than one year before the term expires.

Are sitting fees included in the 11% limit?

No. Section 197(2) says the percentages are exclusive of fees payable to directors under section 197(5). The amount of such fees cannot exceed the amount prescribed.

What happens if a director receives more than the allowed remuneration?

Under section 197(9), the director must refund the excess to the company within two years or a shorter period allowed by the company, and hold it in trust until then. Waiver needs a special resolution within two years.