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.