How to test managerial remuneration requiring central government or shareholder approval

Testing this means first identifying, payment by payment, which items of managerial remuneration actually required shareholder approval by special resolution or central government approval before being paid — based on whether the company had adequate profits, whether the payment fell within or outside the Schedule V limits, and whether any special circumstance such as a loss-making company or a managerial person with no prior sectoral experience applied — then tracing the actual approval obtained to its terms and, critically, its date, since an approval obtained after payment does not retroactively validate it.

Why timing is the single most important fact in this test

It is common for a company to pay remuneration throughout the year and obtain shareholder approval only at the annual general meeting that follows. Where the payment required prior approval, a later ratification does not cure the breach for the period it was unapproved — it only addresses the position going forward.

The testing sequence

1. 01Map every component of managerial remuneration paid during the year against its approval requirementSalary, perquisites, commission, and any sitting fee or professional fee paid to a director in another capacity — each can carry a different approval requirement depending on the company's profit position and the Schedule V limit.
2. 02Determine whether the payment falls within the limit a board or ordinary resolution can approve, or requires a special resolutionRemuneration within Schedule V limits for a company with inadequate profits still generally needs shareholder approval by special resolution; remuneration beyond specific conditions can require approval of a different kind. Work this out for each payment rather than assuming last year's approval route still applies.
3. 03Obtain the actual resolution and test it against the remuneration paidConfirm the resolution covers the specific individual, the specific components of remuneration, and the specific amount or formula actually paid — not a generic authorisation that happens to be in the minute book.
4. 04Test the date of the resolution against the date remuneration was paidApproval dated after payment has already been made is evidence of a breach for the unapproved period, whatever the resolution itself eventually says.
5. 05Where approval was not obtained or was obtained late, test for the waiver or recovery conditionsThe Companies Act allows a company, in specified circumstances, to waive recovery of remuneration paid in excess of what was approved, subject to its own conditions and approvals. Confirm whether the company has actually gone through this process or is simply carrying the excess unresolved.
6. 06Cross-check the conclusion against the secretarial compliance report and CARO reportingThis finding should be consistent with, not contradicted by, what the company secretary's compliance certificate and the statutory auditor's CARO report separately say about the same payments.