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Calculation of Effective Capital for Managerial Remuneration

In case, in any financial year, a company has no profits or its profits are inadequate to pay remuneration to managerial personnel (viz. managing director, whole-time director, manager), the company can pay remuneration within the limits given in Section II of Part II of the Schedule V of the Companies Act, 2013.

These limits of yearly remuneration payable to the managerial personnel is based on the sum of the effective capital of a company.

The meaning of the term "Effective Capital" is provided in the Explanation I under Part II of the Schedule V of the Companies Act, 2013.

Illustration

Effective Capital - Calculation table

Sl. No.
Particulars
Amount (Rs.)
1.
Paid-up share capital
(excluding share application money or advances against shares)
1000
2.
Share premium account
10
3.
Reserves and surplus
(excluding revaluation reserve)
50
4.
Long-term loans and deposits repayable after one year
(excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements)
30
A
Sub-total (1+2+3+4)
1090



5.
Investments
(except in the case of investment by an investment company whose principal business is the acquisition of shares, stock, debentures or other securities)
70
6.
Accumulated losses
0
7.
Preliminary expenses not written off
20
B
Sub-total (5+6+7)
90



Effective Capital (A-B)
1000


Note: The effective capital is calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.


*Do consult with a practising professional like chartered accountant, cost accountant, company secretary, if you have any confusion in the matter.

Comments

  1. Very useful it helped me a lot
    Thank you

    ReplyDelete
  2. Why Current liabilities are not taken into account???

    ReplyDelete
    Replies
    1. Current liabilities have no role to play in it. As per the meaning of Effective capital given under Sch V of Companies Act - whatever heads are required to be considered for the calculation seems to be mentioned above.

      Current liabilities are taken into account for calculation of Working capital (not effective capital).

      Delete
  3. Which year balances has to be taken for effective capital caluclation

    ReplyDelete

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