Key Managerial Personnel (Under Companies Act 2013)

In simple words, Key Managerial Personnel (KMP) refers to those persons who are in charge of various aspects of business, to be specific- operations, finance and legal and are expected to deliver specified duties in the manner required under applicable laws. We could also define them as key persons who are responsible for leading the company in the best interest of stakeholders (including Government) and ensuring compliance with laws. Let’s analyse KMP in the light of Companies Act 2013.

 

Definition of KMP

Section 2(51)  of the Companies Act 2013 (“Act”) defines KMP as follows-

“Key Managerial Personnel”, in relation to a company, means—

(i) the Chief Executive Officer (CEO) or the Managing Director(MD) or the Manager;

(ii) the Company Secretary (CS);

(iii) the Whole-Time Director(WTD);

(iv) the Chief Financial Officer(CFO); 

(v) such other officer, not more than one level below the Directors who is in whole-time employment, designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed

Appointment of KMP

Section 203 of the Companies Act 2013 deals with appointment of KMP. As per Section 203 and applicable rules, every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel. Thus, both these class of companies shall have whole time KMP as follows-

      1.MD/CEO/Manager or in their absence a WTD

      2.Company Secretary (CS)

      3.Chief Financial Officer (CFO)

Obviously a person may ask question relating to appointment of Whole-Time KMP for private limited companies. As per Rule 8A every private company which has a paid up share capital of ten crore rupees or more shall have a Whole time Company Secretary. So it is clear that for private limited companies the law recommends only appointment of one Whole Time KMP- that is CS, that too when paid up capital is ten crore rupee or more. However, there is no prohibition for private companies (other than aforementioned class of private company) for voluntarily appointing MD/WTD/Manager/CFO/CS according to their convenience.

The Companies Act defines each whole time KMP as follows-

(a)“Managing Director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

 (b)“Chief Executive Officer” means an officer of a company, who has been designated as such by it;

(c) “Manager” means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not.

 (d) “Whole-time Director” includes a director in the whole-time employment of the company

(e)“Chief Financial Officer” means a person appointed as the Chief Financial Officer of a company;

(f) “Company secretary” or “secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, who is appointed by a company to perform the functions of a company secretary under this Act

Emphasis on the word “Whole-Time”

It is relevant to note that the Act/Rules give emphasis on the word “Whole Time”. In normal parlance, whole-time refers to “full time”. So a Whole Time KMP refers to a KMP who devote his/her entire working hours, skills and abilities for fulfilling his/her role in the company pursuant to the duties cast upon him/her by the Act and/or a contract/undertaking with the Company. So, the Act clearly differentiate Whole Time KMP from other directors and senior officials in the company and enunciate the duties expected from such personnel under the Act. They will also be responsible to the Company and other Stakeholders and will be held liable under various provisions of the Act.

Appointment process of Whole-Time KMP

Nomination & Remuneration Committee shall recommend the appointment of candidate to the Board of Directors, if the committee is of the opinion that the candidate satisfies the conditions under the applicable laws and requirements of the Company. The Board of Directors may consider the recommendation and pass a resolution appointing the Whole Time KMP along with terms and conditions upon which appointment is made. It is advised to issue appointment letter or enter into a contract post- board meeting setting out his/her duties, responsibilities, remuneration etc.

KMP/ Other roles in other Companies

Section 203(3) clearly says that “a whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time”. Again proviso says “nothing contained in this sub-section shall disentitle a key managerial personnel from being a director of any company with the permission of the Board. So, a Whole-Time KMP of a Holding Company can be a KMP in one Subsidiary company. So, other than becoming Whole Time KMP of subsidiary company, a Whole Time KMP cannot hold any other whole-time position in its subsidiary company or other companies.

The Act also does not specify the category of KMP in case of appointment of same candidate in subsidiary company as KMP.

The Act permits appointment of KMP of one Company as Director in any Company with the permission of former Company. Here the Act is silent on the matter whether such appointment of KMP as Director in any company should be in capacity of Executive Director or Non-Executive Director. But, since KMP is already in Whole-time employment of former company, it could be presumed that he/she cannot take up executive or whole time position in other companies. That means, a whole time KMP of a Company could be appointed as Non-executive Director in any company provided he/she has obtained “no objection” from board of directors of that Company. The word “any company” is not defined and hence could be interpreted that it includes “subsidiary company” also.

Dual Role in same company

Can same person be appointed under two or more categories? For eg: Mr.A is company secretary of XYZ Ltd, a company having 15 crores paid up capital. The Board of Directors thinking of appointing him as CFO of XYZ Ltd. Is this possible?

This question has to be analysed from the point of view of the lawmakers. There is all reason to believe that the intention of law makers while categorizing KMP to 3 categories is to ensure easy fixing of responsibility, improved transparency and specialization to their respective area of work/knowledge. The lawmakers could have visualised 3 key persons of different specializations leading a company forward without conflict of interest and without compromising on the legal, financial and operational aspects. Though the Act does not expressly prohibit appointment of same candidate in dual KMP capacities, it is advised to appoint 3 different persons of requisite qualifications for aforesaid 3 categories, to comply with law in true letter and spirit.

In above example, it is suggested to appoint another person with requisite qualifications as CFO.

Managerial remuneration

The provisions relating to managerial remuneration shall be complied with for remuneration of Whole time KMP in public limited companies.

Responsibility

As stated above, Whole Time KMP could be held liable for non-compliances under applicable provisions of the Act. For eg: A CFO/KMP could be held liable under 129 for contravention of provisions relating to Financial Statements. Whole Time KMP shall also be considered as “Officer in default” under Section 2(60) of Act. Where there is proof for any non-compliance from part of KMP, the respective penal provisions shall aplly. KMP shall also be covered under the term “Related Party” under the Act. Hence, the Whole Time KMP shall be very attentive and careful in the course of duties and while giving opinions/advise in their respective roles. In case of companies to whom RBI norms, listing regulations are applicable, the provisions contained therein shall also be complied with.

Conclusion

Apart from leading the business or day to day KMP shall parallelly concentrate on ensuring compliances under applicable laws. The Company management shall give ample oppurtunity to the Company Secretary and Chief Financial Officer to express their views on various legal/financials aspects of transactions and use them judiciously like tools to achieve good compliance scores. Let’s hope more provisions will be introduced in future to safeguard the KMP and to bring clarity to certain provisions discussed above.

We will analyse other aspects of KMP in coming days.

If you have any query relating to this article please reach me at victorjuruvath@gmail.com. If you have suggestions that any topic to be included in this blog or any comments on how this article is helpful to you or if you have any different views on the topic, please comment below.

Disclaimer: The views expressed here are based on author’s understanding of the provisions of the applicable laws. The contents of this article/blog are for general information purposes and are not intended to constitute any legal advice. The users of above information are requested to refrain from acting on the basis of information shared here without seeking legal advice from a reputed professional.