Appointment of Key Managerial Personnel

Author: Nishtha Mittal, Amity Law school Delhi affiliated to GGSIPU.

INTRODUCTION

In this article, we shall aim to define the Key Managerial Personnel and discuss their  appointment procedure as put forth in the Companies Act, 2013 read with the company rules of 2014. While the companies act, 1956 only laid the basis for officers like- Manager, Managing Director, Whole-time Director as ‘Managerial personnel’ assigned the task of management of companies, the Act of 2013[1] introduced ‘Key managerial personnel’, the term used for certain appointments who have a duty to manage plus perform some functional roles as prescribed under the Companies act, 2013. This amendment was brought about on the recommendation of Dr. J.J. Irani, chairman of an expert committee[2].

Who are Key Managerial Personnel?

The exhaustive definition of KMPs[3] is provided in a substantive provision that defines KMP in the Companies Act, 2013 which was not originally incorporated in the Companies Act, 1956. ‘Key Managerial Personnel‘ as provided above includes[4]–

1. Chief executive officer/ managing director/ manager;
2. Company Secretary;
3. Whole-time director;
4. Chief financial officer;
5. Such other officer who’s an all-time employee, not more than one level below director as designated by the board; (as inserted by companies amendment act, 2017)
6. Such other personnel as prescribed by the central government.

The inclusion of clause (5) in the definition allows the discretion of the Board of a company to designate as KMP, any full-time employee of the company and who, in the corporate hierarchy is at a position one level below the Director. Also, clause (6) of the provision gives power to the legislature to include any further officials as KMPs, but this power has not yet been exercised. We shall discuss their roles in brief in the next section of the article.

Role of Key Managerial Personnel

As discussed above, let us look at the roles played by KYPs-

1. Chief Executive Officer: officer designated to head the company who is also known as Chief Operating Officer (COO) thus this position maybe occupied by any whole-time officer like Director or Managing Director. Here the designation symbolizes to deem any officer as CEO or COO.[5]
2. Company secretary[6]: every listed company shall appoint company secretary as an officer under the act to perform the functions of company secretary with more administrative powers. The listed company must have a turnover of Rupees five crore or above.[7]
3. Whole time director[8]: as per the act, this officer is in whole time appointment in the company as a director. He may be appointed as CEO, manager, Company secretary or CFO as provided for in Article of association of the company.
4. Chief financial officer[9]: personnel appointed as CFO of the company responsible for all the accounts and financial dealings of the company implicitly[10].
5. Managing director[11]: any manager appointed as director who is not directly accountable to the board unlike the manager but performs substantive managerial functions via any article of association or any other agreement between such director or officer and the company appointing him.
6. Manager[12]: officer subject to direct control, supervision and direction of the board and looks over all the managerial functions of the company with ambit so wide to include managing directors of the company. He may or may not be any employee of the company. Unlike managing director, he is responsible for whole of the management of the company, whether or not it includes supervision over managing directors. Also, the role played by Manager or MD determines a person to be at this position.

APPOINTMENT OF KMPs

Chapter XIII deals with the ‘Appointment and remuneration of Managerial personnel‘ in the act. Section 203 of the act[13] read with Rule 8 of the Company (appointment and remuneration of managerial personnel) Rules, 2014[14] deals with the appointment procedure and conditions in detail.

Companies that shall appoint KMPs[15]

The rule provides that every listed company and every other public company having a paid-up share capital of ten crores or more shall have full time managerial personnel to be designated as KMPs.[16] Further, as per Rule 8A, a company which is having paid up share capital of Rupees Five Crores or more shall have a whole time Company Secretary instead of directors. This provision is only applicable to company as defined in section 8[17] of the act and for companies not covered under this section, it’s necessary to appoint whole time company secretary if its paid up capital is greater than five crore rupees.

Appointment requirements

The key managerial personnel are appointed by the resolution passed by the board defining the terms and conditions of such whole time employment also stating the salary or remuneration of such personnel as provided in the act.[18]

If there exists any vacancy in the office of Key Managerial Personnel, the board shall appoint new personnel to fill the vacancy within six months of vacancy of such office. [19]Any key managerial personnel may become the director of the company with approval of the board.

According to section 178 of the act read with Rule 6 of company rules, 2014, the nomination and remuneration committee of the board is responsible for suggesting or recommending the appointment of key managerial personnel before board passes a resolution for the same. This committee also determines the remuneration or salary payable to the personnel and also takes decision regarding senior management of the company.

Restrictions as to Appointment

Proviso to section 203 lays down that any person shall not be appointed or re-appointed as chairperson or managing director or the chief executive officer of the company simultaneously unless some conditions are fulfilled:[20]

1. Articles of the company requires such appointment or re-appointment;
2. No multiple businesses are carried on by companies.
3. Classes of companies engaged in multiple businesses through multiple chief executive officers as laid down by Central Government.

Whole time key managerial personnel shall not hold the post for more than one companies except if the other company is the subsidiary company or he is appointed by the board as director of that company or resolution is passed by the board for his appointment as managing director or manager[21].

It was provided by the act upon its commencement that any KMP holding more than one office of the company are required to vacate all the offices within six months except the one he chooses to keep[22]. Thus multiple appointments is a restriction provided under section 203 with certain exceptions thereto.

Penalties on contravention of the act[23]

As provided in Act of 2013, if any company so defined fails to appoint the key managerial personnel, it shall bear a fine not less than one lac rupees which may be extended to five lac rupees as per court[24]. However this provision for penalty was amended by the Companies (amendment) ordinance, 2018 which now substitutes the penalty of Rupees one lac with Rupees five lac as a lower limit.

Also any key managerial personnel would be held liable to pay a fine of Rupees fifty thousand and if the offence is a continuing one, then the additional fine of Rupees one thousand on every occasion of continuation of offence but there’s a cap of Rupees five lacs on this penalty.

Maintenance of a register by registrar of the company

The eligible company is required to keep a register containing details of all the key managerial personnel in the company stating the amount of Security held by them in the company or holding company or associated company or any subsidiary company of the main company with Suh other details as mentioned in Rule 17 of Company (appointment and qualifications of directors) rules, 2014.

Appointment under Companies Act, 1956 (before act of 2013)

Before the enactment of Companies Act, 2013, there were various sections providing for appointment procedure and requirements in 1956 Act. The act of 2013 merely clubs the appointment provisions of the previous act into one, that is Section 203. There were various provisions in 1956 Act that are as follows:

Section 316: One officer appointed as Managing director of many companies;

Section 383A: Appointment of Company Secretary;

Section 386: common manager of many companies.

As we can see, there is no substantial difference between the provisions of both the acts except 2013 act enhancing some penalties related to default of company with regard to compliance of Section 203.

AMENDMENTS TO SECTION 203[25]

As we have seen in the previous section, penalty cap under subsection 5 has been altered to set the limit of fine starting from Rupees five lacs instead of one lac with an additional penalty in case of continuing offence where the fine is increased to five thousand rupees instead of one thousand for every day the offence is continued by the perpetrator.

JUDICIAL PRECEDENTS

M/s. Castrol India limited vs. techno polis knowledge park[26]

Issue:  company in question had defaulted in not appointing a full time company secretary within six months after the presiding secretary resigned from the position.

Question of law: what amount of penalty maybe levied by the court for such default?

Decision: Court held company liable for the default of not appointing company secretary within six months limit as provided under the act but since it appointment the secretary before disposal of case that is within one year from due date, court opined that penalty of Rupees five thousand was enough to create a deterrent effect on the defaulter and it may not levy five lac rupees though it is the lower limit for default. But since the company rectified its default before case disposal, there is no need for it to pay such hefty fine for the same.

Northwest energy private limited vs. ROC, Mumbai[27]

The company in question violated section 203[28]/ section 383A[29] of the act by not appointing key managerial personnel that is the company secretary in the prescribed time limit. Thus court held the company liable and levied a fine of Rupees one lac with an additional sum of Rupees thirty thousand payable by each ex director of the company.

Sridhar sundararajan vs. ultramarine and pigments limited[30]

Issue: appointment and re-appointment of same person as managing director and chairman of the company.

Question of law: whether such person can be disqualified on the ground that special resolution was not passed fir his appointment?

Decision: court held that any person who has attained the age of seventy years is disqualified for further appointment unless special resolution is passed for the same thus the injunction order for continuation of such appointment stands valid.

MS. Sanchar tele systems limited vs. ROC, NCT of Delhi[31]

Issue: interpretation of the term ‘officer in default’.

Question of law: whether the term maybe defined according to section 2(60) of the act as stated by defense counsel or according to subsection 5 of the section 203?

Decision: it was held that the term must be strictly interpreted according to subsection 5 of section 203 that provides the penalty for contravention of the act and includes payment of fine by the director of the company at default thus making them ‘officer in default’. This interpretation is implicit from the section as it does not use the term expressly but holds director and other key managerial personnel as liable.

CONCLUSION

The above analysis reflects quintessence of the companies act, 2013 as well as pointing out certain loopholes in the same. The act doesn’t justify or reason appointment of same managing director as key managerial personnel of more than one company. Despite the fact that the act has left many open ended questions to be interpreted by the reader on their own, this act throws light on the imminent need of the management of the company by the personnel appointed under section 203. Amendment to 1956 act clubbed appointment procedure into one provision that also makes it easier for interpretation. Deterrence is also taken care of by the amendment by increasing the penalty for contravention as it enhances binding nature of the act and eliminates any scope of escapism. The original provisions for the key managerial personnel along with recent amendments to the act provide for smooth functioning of the companies by relying on their management as regulated by the act.

Continuous amendments in the statute by judicial interpretation or otherwise is an evidence of its growing nature. Stagnant acts price to be fatal to social development because of their inability to change with time. The companies act has been modified time and again to incorporate many provisions suitable to the current needs of corporate world thus forms a backbone of companies.

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[1] The Companies Act, 2013, No. 18, Acts of Parliament (2013).

[2] Ministry of company affairs (2005) Presentation of the Report of the Expert Committee on Company Law by Dr. J.J. Irani, Chairman of the Expert Committee [press note] Mar.

[3] Key managerial personnel.

[4] Section 2(51) of Companies act, 2013- Definition of Key managerial personnel.

[5] Section 2(18) of Companies Act, 2013.

[6] Section 2(24) of companies Act, 2013.

[7] Section 203(1) read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014.

[8] Section 2(94) of Companies Act, 2013- corresponding section 269 of the 1956 Act.

[9] Section 2 (19) of companies Act, 2013.

[10]  A. Ramaiya, pp. 75.

[11] Section 2 (54) of the Companies Act, 2013.

[12] Section 2 (53) of the Companies Act, 2013.

[13] Supra note 1 of 1.

[14] https://www.caclubindia.com/articles/companies-appointment-and-remuneration-of-managerial-personnel-rules-2014-20811.asp

[15] Rule 8 of Company (appointment and remuneration of managerial personnel) Rules of 2014.

[16] https://www.caclubindia.com/articles/sec-203-appointment-of-key-managerial-personnel-42747.asp

[17] http://www.mca.gov.in/SearchableActs/Section8.htm.

[18] Section 203(2) of the Companies Act, 2013.

[19] Section 203(4) of the Companies Act, 2013.

[20] Proviso to section 203(1).

[21] Section 203(3) of the Companies Act, 2013.

[22] Id.

[23] Section 203(5) of the Companies Act, 2013.

[24] Substituted by the Companies (Amendment) Ordinance,2019 dated 12.01.2019. [Companies (Amendment) Ordinance 2018 is repealed on 12th January 2019]

[25] http://egazette.nic.in/WriteReadData/2019/209478.pdf

[26] M/s. Castrol India Ltd., Techno polis Knowledge Park (2017) SCC Online NCLT 10323.

[27] https://www.google.com/amp/s/www.casemine.com/judgement/in/5d9b18994a9326534f695480/amp.

[28] Supra note 1.

[29] Companies act of 1956.

[30] [2016] 66 taxman 167 (Bombay).

[31] https://indiankanoon.org/doc/3053113/.