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Jun 13, 2016

Key Managerial Personnel Under The Companies Act, 2013

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he Companies Act, 2013 (Act) has brought with it many new concepts; one amongst them is key managerial personnel (KMP), which had been a matter of imprecision and legal scrutiny among the corporates since its inception. Be that as it may, the concept inarguably, does have to its credit, several new ideas which are intended to raise the level of professionalism and accountability in the corporate arena.
 

The concept of KMP is nothing but bringing together a group of persons under one title, some of which already exist under the Companies Act, 1956 (1956 Act). Through this article, we have endeavored to address some key issues related to KMP

Q1. Who are treated as KMP?

As per section 2(51) of the Act, KMP means the following person(s), if appointed in a company, whether under a legal obligation under the Act
[i.e. under section 203(1) of the Act] or otherwise:

  1. the Chief Executive Officer (CEO) or the Managing Director (MD) or the manager;
  2. the company secretary (CS);
  3. the whole-time director (WTD);
  4. the Chief Financial Officer (CFO); and
  5. such other officer as may be prescribed (none prescribed till date).

While there is no doubt about CS, CFO and WTD being KMP, the first category of persons who are to be treated as KMP i.e. CEO or MD or manager, requires some analysis because of the use of the word ‘or’. While section 196(1) of the Act provides that no company shall appoint or employ at the same time a MD and a manager, nothing prohibits a company to have both a CEO and a MD or a CEO and a manager. The question that arises in such a situation is whether both the CEO and MD/manager would be treated as KMP or the company has the option of naming one of them as KMP.

On a perusal of the various provisions of the Act, it can be seen that onerous responsibilities, obligations and liabilities have been casted on KMP and that they are also included in the definition of ‘officers in default’ and ‘related party’ under the Act. Some of key provisions related to KMP are outlined below:

Following are the main provisions concerning KMP, under the Act:

  • KMP are included in the definition of ‘officer’ under section 2 (59) of the Act;
  • KMP are included in the definition of ‘officer who is in default’ under section 2 (60) of the Act;
  • KMP and his relative are included in the definition of ‘related party’ under section 2 (76) of the Act;
  • The nature of concern or interest of KMP on the matters proposed to be transacted in a meeting, are to be disclosed in the explanatory statement to the notice of such meeting, in terms of section 102 of the Act;
  • A relative of KMP is not eligible to be appointed as auditor in terms of section 141 of the Act;
  • A KMP or his relative cannot be appointed as an independent director under section 149 of the Act;
  • The details of securities held by each KMP in the company or its holding, subsidiary, subsidiary of company’s holding company or associate companies is to be recorded in a separate register, to be maintained in terms of section 170 of the Act and rules made thereunder;
  • KMP shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote in terms of section 177;
  • The Nomination and Remuneration Committee shall formulate and recommend to the Board a policy, relating to the remuneration for the KMP in terms of section 178;
  • The appointment or removal of KMP shall be made in a board meeting in terms of section 179 of the Act;
  • Every KMP shall, within a period of thirty days of his appointment, or relinquishment of his office, disclose to the company his concern or interest in the other associations or such other information relating to himself as may be prescribed in terms of section 189;
  • KMP are prohibited from forward dealings in securities of company under section 194;
  • KMP shall not enter into insider trading in terms of section 195;
  • For appointment of KMP, a return in form DIR-12 & MR-1 is required to be filed with the Registrar of Companies within 60 days of appointment in terms of section 196 r/w section 170 of the Act;
  • Appointment of whole-time KMP is mandatorily in certain prescribed class of companies in terms of section 203;
  • Every whole-time KMP shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration in terms of section 203;
  • A whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time in terms of section 203;
  • Whole-time KMP holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company in which he wishes to continue to hold the office of KMP in terms of section 203;
  • If the office of any whole-time KMP is vacated, the resulting vacancy shall be filled-up by the Board at a meeting within a period of six months from the date of such vacancy in terms of section 203;
  • Notice of meeting ordered by tribunal pursuant to a proposed compromise and arrangement shall be accompanied by a statement explaining its effect on KMP in terms of section 230; and
  • A report adopted by the directors of the merging companies explaining effect of compromise on each KMP shall be circulated by the Company for the meeting ordered by the Tribunal pursuant to proposed merger or division of company in terms of section 232.

Keeping this in mind, the law cannot be read to permit exclusion of certain KMPs from their prescribed obligations and liabilities by designating only one person as KMP. Thus, where a company has appointed both a CEO and a MD and the company is given the option to name one of them to be KMP, it would amount to excluding the other from the ambit of officer in default or related party, which cannot be the intention of law and although the word used under section 2(51) (i) and section 203(1) (a) of the Act, is ‘or’ yet it must be read as ‘and’ so as to carry out the intention of the legislature.

Thus, in case a company has appointed MD and CEO or CEO and manager, both will be treated as KMP with no regard to the question as whether such company is mandatorily required to appoint KMP in terms of section 203 of the Act or not and whether the appointment of MD and CEO or CEO and manager, is made on whole time or part time basis.

Q2. How are KMP appointed?

Section 179 (3) of the Act read with the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the business related to appointment or removal of KMP shall be transacted by the Board at its meeting. So, even if a company is not obliged to appoint KMP under section 203 of the Act, the KMP (as named under section 2(51) of the Act) shall be appointed only in a board meeting by means of a board resolution.

Further in terms of section 203 of the Act, a whole-time KMP is required to be appointed in a board meeting by means of a resolution containing the terms and conditions of appointment, including remuneration.

Further, in terms of requirements of section 196 of the Act, in case of appointment of MD, manager or WTD by a public company other than a government company & a private company, the appointment shall also be approved by the shareholders in the next general meeting held after their appointment by the board of directors.

Q3. Which company is mandatorily required to appoint KMP?

Section 203(1) of the Act makes it abundantly clear that only certain prescribed classes of companies are mandatorily required to appoint whole-time KMP. Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (KMP Rules) requires every listed company and every other public company having a paid-up share capital of ten crore rupees or more to appoint KMP. Further, Rule 8A of the KMP Rules provides that a company other than a company covered under rule 8 which has a paid-up capital of five crore rupee or more shall have a whole time CS. . But it doesn’t mean any other company cannot appoint KMP. A company not covered under section 203(1) can, therefore, voluntarily appoint any or all KMP.

Q4. What is the difference between KMP under section 2(51) and section 203?

The Act while defining the term KMP under section 2(51) also provides for mandatory appointment of whole time KMP in certain prescribed classes of companies under section 203(1). The question arises whether there is any difference between KMP and whole-time KMP. In literal sense, the only difference is of the words ‘whole time’. The word ‘whole time’ indicates that the KMP must contribute all his time to the company in relation to which he is a KMP. In other words, he must be in whole time employment of such company, though the provision doesn’t use the word ‘employment’ but it would be impractical to consider that a person would be contributing his whole time without being employed as such.

The Black’s Law Dictionary defines the term ‘Employment’ in the following manner:

  1. The relationship between master and servant.
  2. The act of employing.
  3. The quality, state, or condition of being employed; the condition of having a paying job.
  4. Work for which one has been hired and is being paid by an employer.

In addition, employment contract has been defined to mean a contract between an employer and employee in which the terms and conditions of employment are stated.

In case any CEO, manager, CS, CFO or WTD, is in whole time employment of a company, they shall be construed as whole time KMP for all the cases, whether it falls under sub-section (1) of section 203 or not. Where a company not covered under section 203(1) voluntarily appoints any or all KMP, it would be open to the company to have any or all of the KMP on part-time or whole-time basis.

 

On the other hand, for position like MD, which can be both part time or whole time, it is necessary to clarify at the time of appointment whether such director is on whole time basis or not. This could be done vide a service agreement or the same may be provided for under the board resolution making such appointment. Appointment of MD for the purpose of section 203 shall necessarily be on whole-time basis.

Q5. If a company which is not required to mandatorily appoint a KMP, appoints it, whether the company is bound to comply with the provisions of section 203 with respect to the appointment of KMP?

While section 203(1) talks about mandatory appointment of whole time KMP in prescribed classes of companies, an issue which is being debated among the professional fraternity is whether the other sub-sections of section 203 of the Act shall apply only to the whole-time KMP appointed under sub-section (1) of section 203 or to other KMP also, who are appointed voluntarily by companies.

In our view, the other sub-sections of section 203 of the Act [other than sub-section (1)] shall become applicable only to the KMPs of the companies which are mandatorily required to be appointed as whole-time KMP under section 203(1) of the Act. This is for the reason that a section should be read as a whole and the sub-sections of a section are not independent from the section itself.

If a company which is not required to mandatorily appoint a KMP appoints it, then such company is not bound to comply with the other provisions of section 203 of the Act with respect to the KMP.

 

Q6. Whether a whole time KMP can hold office in its subsidiary or subsidiaries?

Section 203 of the Act outlines the following requirements with respect to appointment of person holding office as whole time KMP in another company:

  • A whole time KMP shall not hold office in more than one company except in its subsidiary company at the same time;
  • A whole time KMP can be appointed as director (non-executive) in any other company with the permission of the Board of directors of the company where he is appointed as whole time KMP; and
  • A whole time KMP holding office in more than one company as on the date of commencement of the Act shall within a period of six months from such commencement, choose one company in which he wishes to continue to hold the office as KMP.

Company Law Committee Report

As per Para 13.13 of the Company Law Committee Report dated February 01, 2016 released by the Ministry of Corporate Affairs for public comments, the Committee has taken the view that a KMP may be appointed in more than one subsidiary company on the basis that section 13 of the General Clauses Act, 1897 which provides that ‘singular’ shall include the ‘plural’, unless there is anything repugnant in the subject or the context.

However, we do not agree with this view, as in our opinion, the term subsidiary company as used in section 203 of the Act means any one subsidiary company. Our view is based on the following grounds:

  1. Singular includes plural doesn’t applies here: Section 13 of the General Clauses Act, 1897, which provides that singular term includes its plural and vice versa, shall take effect unless there is anything repugnant in the subject or context. This means that if the word (to be interpreted) in a statute does not specifically provide for a singular or plural meaning then provision of section 13 shall take effect i.e. the rule that singular includes plural and plural includes singular, shall apply. However, section 203 purposely uses the word “subsidiary company” to mean one subsidiary company.
  2. In Bhanushali Hsg. Coop. Society Ltd vs Mangilal & Ors on 24 July, 2015, the Supreme Court has held that that the principle underlying Section 13 of the General Clauses Act regarding singular including the plural and vice versa does not have universal application and that the principle can apply only when no contrary intention is deducible from the scheme or the language used in the statute.
  3. Legislative clause: Notes on clause to section 203 at the time of the introduction of the Companies Bill also affirm the position that KMP can be appointed in a single subsidiary. The Notes on clause 203 provided that “whole-time KMP shall not hold office in more than one company, except in a subsidiary at the same time”. It cannot be disputed that the term “a” is to be read as “one”, for example, the sentence “A car is stolen” shall be read by a man of ordinary prudence to mean that only one car is stolen.
  4. Committee report: The report of JJ Irani Committee on Company Law has also suggested that KMP should be in the whole time employment of only one company at a given point of time
  5. Officer in default: KMP is whole time employee, which is also ‘officer in default’ under section 2(60) of the Act. There are many companies which are joint venture companies which are subsidiaries of holding companies. In addition, there are companies where holding company and its subsidiary companies are listed entities. Further it is seen that one holding company has layer of subsidiaries, both horizontally as well as vertically. If the concept of one whole time KMP is also extended to all the subsidiaries, it will impact the work of the whole time KMP and the possibilities of his devoting time and attention will get hampered. He should not be held responsible and thereby should not become officer in default for the non-compliances of more than one company.
  6. Specific role: Appointing a KMP in more than one subsidiary may not justify his position. The purpose of Section 203 is promotion of compliance and governance by requiring companies to have KMP who have specified obligations under the Act. KMP have specific responsibilities. Appointing a person as KMP in more than one subsidiary may not justify his position considering his role and responsibilities.

Thus, it appears that the intention of law is to connote the term ‘subsidiary company’ is to give a singular meaning as otherwise a person holding the office of KMP in holding company can hold similar position in all its subsidiary companies, which may be one or a hundred. Attributing a plural meaning would defeat the entire purpose of appointing a whole time KMP.

Q7. Whether under section 203, a whole-time KMP can hold only the same office of KMP in its subsidiary company or any other office also?

Sub-section (3) of section 203 uses the term ‘office’ and not ‘similar office’. Further, the general dictionary meaning of term ‘office’ is a place of business for non-manual work. However, the term ‘office’ used under section 203 of the Act implies a position or a designation like office of director, office of CEO etc. At times, the subject-matter of a statute may indicate that a particular word is used in a popular sense, even though the dictionary may attribute to it a wider meaning or a narrower meaning (Rambuc Chaturbhuj v. State of Rajasthan, AIR 1963 SC 351). Thus, when we interpret a word, we shall not only see the dictionary meaning but even more the popular meaning, which the word has acquired in common parlance (Craft Interiors Pvt. Ltd. v. Commissioner of central excise, Bangalore, 2006 AIR SCW 5546 at p. 5549). Thereby, the popular meaning overpowers the original basic meaning.

Further, it is well settled that every word in a statute shall be interpreted in its context and that interpretation is best which makes the textual interpretation match the contextual (Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. AIR 1987 SC 1023). Therefore, the term ‘office’ used in section 203 shall be interpreted in the same context as the section, which provides for appointment of KMP and only talks about holding office as a KMP.

While ascertaining the meaning of term ‘office’ here, it is necessary to read the second proviso to sub-section (3) of section 203, as per which a whole-time key managerial personnel holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company, in which he wishes to continue to hold the office of KMP. Here also the term ‘office’ has been used in the similar fashion as in sub-section (3) of section 203 but the proviso very categorically says that the KMP has to select one company where he wishes to continue to hold the office of KMP.

Therefore, it can be inferred from the above that the term ‘office’ used under sub-section (3) of section 203 shall mean the office of KMP only. Further in this regard, a KMP may also hold the position of director in any other company but with the permission of the Board of directors of the company where he is acting as KMP in terms of third proviso to sub-section (3) of section 203.

Q8. Under what circumstances a managing director (KMP) can be appointed as managing director in any other company?

As per section 203, a whole time MD of a company which is mandatorily required to have a whole time KMP shall hold office in its subsidiary only but as an exception to this , a company may appoint a person as its managing director, if he is the managing director of one, and of not more than one, other company provided such appointment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.

Q9. Whether a single person can hold more than one positions of KMP in a company which is mandatorily required to appoint KMP?

The embedded question here is that whether mandatory appointments provided for under section 203 (1) of the Act, are merely designations or different persons holding such designations. Let’s analyze the answer to this question considering the followings factors:

Managing Director: As per section 2(54) “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.

Manager: As per section 2(53) “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;

Whole Time Director: As per section 2(94) “whole-time director” includes a director in the whole-time employment of the company. The Director must be in the whole time employment of company and would be executing the functions for which it is hired on whole time basis.

Company Secretary: As per section 2(24) “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, 1980 who is appointed by a company to perform the functions of a Company Secretary under this Act. Section 205 of the Act prescribes the specific functions of a Company Secretary in the Company.

The Act though defines the terms, CEO and CFO but does not provide for any specific functions to be performed by them. The term ‘CEO’ and ‘CFO’ are globally accepted management positions. In general business parlance, while a CEO is vested with the vast powers of management and operations of company, CFO is responsible for handling the functions related to finance in the organization.

Keeping in view the nature of functions expected to be performed by KMP along with the fact that they shall be appointed on a whole time position, it can be construed that the Act did not envisage a single person performing different functions on a whole time basis. Moreover the rationale behind providing mandatory appointment of certain KMP on whole time basis only in certain classes of companies is that the company having large operations should have different persons performing important & crucial functions.

 

Thus, a whole-time position signifies whole-time ‘employment’ for a particular position/job and it is logical and necessary that an individual has, in order to do justice to his job/functions, must deploy his whole time for such functions/duties. Thus, it cannot be wrong to say that an individual is not likely to render/fulfill the responsibilities of two whole-time positions at the same time, even in the same company.

“1.70 (iii)
The suggestions for describing role or functions of these officers in the Bill in a clearer manner are noted to be addressed appropriately with legislative vetting. The intention is that while these officers should be appointed in all companies in respect of which these would be mandated, companies should have flexibility in appointing appropriate persons on these positions themselves and law should not mandate any education qualification or experience etc. “

Here also MCA has very categorically used the word ‘officers’ in reference to the KMP.

Thus, three different individuals shall be appointed in whole time employment of the prescribed companies for holding office as KMP, as section 203(1) of the Act is not designation specific but it is specific to individuals holding such designations. This is so because the three designations are crucial and these are intended to be held by three individuals in whole-time employment of a company.

  1. Usage of word “Personnel”: Section 203(1) provides for appointment of prescribed class of whole time key managerial personnel. The oxford dictionary defines the term ‘Personnel’ as a plural noun which shall mean ‘people employed in an organization or engaged in an organized undertaking’. It can be inferred that by using the term ’personnel’, the intention is to refer to a group of persons rather than an individual.
  2. Meaning of whole-time position: The Act provides for the appointment of whole time key managerial personnel. It is important to note that the word ‘whole time’ has been used which shall be read to mean that the CEO/MD/Manager or WTD, CS and CFO shall be on whole time basis.
  3. Functions of KMP: The Act also provides specific functions of various KMP, which are outlined below:
  4. Table F to Schedule I of the Act: A reference can also be drawn to Article 78 of the Table F which provides a provision of the Act or these regulations requiring or authorizing a thing to be done by or to a director and chief executive officer, manager, company secretary or chief financial officer shall not be deemed to be satisfied if it is being done by or to the same person acting both as director and as, or in place of, chief executive officer, manager, company secretary or chief financial officer. For example a document is required to be signed by a managing director and a company secretary and if such document is signed by a single person acting both as managing director and company secretary, then it will not be treated as a valid document.
  5. Report of Standing Committee on the Companies Bill: In order to ascertain the intention of lawmakers while providing for mandatory appointment of KMP under section 203 of the Act, the report of the Standing Committee on the Companies Bill, 2009 may be taken as an aid. While commenting on an issue related to appointment of KMP, the Ministry of Corporate Affairs (‘MCA’) has stated the following position:

CONCLUSION:

It is evident that the new Act vide this concept seeks to ensure proper allocation of responsibilities amongst the decisive minds of a company and also to make them accountable in case of any defaults/ non-compliances committed by company in the course of business. Thus, under the new regime, the KMP are expected to be highly diligent which in turn would enhance the level of professionalism and would ultimately be helpful in gaining the faith of the shareholders/stakeholders of companies.

The concept is indeed noble and very crucial though there is lot of air around it that needs to be cleared. In our view, similar to directors and company secretary, it would be desirable to lay down the role and duties of CEO and CFO also explicitly in the Act to make them specifically accountable under the Act.

Readers can send their suggestions or comments at   –   E: ankit@indiacp.com | E: nidhi@indiacp.com