KEY MANAGERIAL PERSONS UNDER COMPANIES ACT, 2013

[Dr. Sanjiv Agarwal]

The provisions relating to key managerial personnel have been brought into Companies Act for the first time in the 2013 law. The provisions are very important from all professional's view point as company secretaries and chief financial officers (could be a chartered accountant, cost accountant or company secretary or any other professional), all will be impacted.

Statutory Provisions

The following statutory provisions of the Companies Act, 2013 are relevant -

Key Managerial Personnel [Section 2(51)]

“key managerial personnel”, in relation to a company, means -

1. the Chief Executive Officer or the managing director or the manager;

2. the company secretary;

3. the whole-time director;

4.  the Chief Financial Officer; and

5. such other officer as may be prescribed;

Appointment of Key Managerial Personnel (Section 203)

(1)   Every company belonging to such class or classes of companies as may  be prescribed shall have the following whole-time key managerial personnel, -

1. managing director, or Chief Executive Officer or manager and in their  absence, a whole-time director;

2. company secretary; and

3. Chief Financial Officer :

Provided that an individual shall not be appointed or reappointed as the   chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless, -

1. the articles of such a company provide otherwise; or

2. the company does not carry multiple businesses:

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government.

(2)   Every whole-time key managerial personnel of a company shall be  appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration.

(3)   A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time

Provided that 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

Provided further that 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 key managerial personnel

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         The above provision is effective from 01.04.2014.

Appointment of Key Managerial Personnel

[Rule 8 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]

“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”

Appointment of Key Managerial Personnel (Section 203)

Sub- section (1) of Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, stipulates that,  “every listed company and every other public company having paid- up share capital of 10 crore rupees or more, shall have the following whole- time Key Managerial Personnel”

1. Managing Director or Chief Executive Officer or manager and in their absence, a whole-time director;

2. Company Secretary; and

3. Chief Financial Officer.

Sub-section (1) of Section 203 classify key managerial personnel into three clauses irrespective of definition of KMP under section 2(51) as aforesaid.

Section 203 is a new provision and provide that every company belonging to such class or description of companies, as prescribed by the Central Government, shall have managing director, or chief executive officer or manager and in their absence, a whole time director and a Company Secretary, as whole-time key managerial personnel. It also seeks to provide that a whole-time key managerial personnel shall not hold office in more than one company (except in a subsidiary at the same time) except that of a director if company permits him in this regard.

In terms of Section 203, Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribe that 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, a whole-time KMP is required to be appointed only by those companies which are listed companies (i.e., listed on one or more stock exchanges) and other public companies having a paid up share capital of Rs. 10 crore or more.

Thus, above provisions makes it mandatory for specified class of companies to appoint KMP’s. Thus, if a company is not covered under Section 203 (1) i.e is not a listed company or does not have paid-up share capital exceeding Rupees 10 crore, may not be required to appoint any KMP including a CFO, but it may still have a CFO/CS on a voluntary basis. It may be noted that whether Section 203 applies or not, if a company has these KMP's in place, they all shall be treated as KMPs for the purposes of Companies Act, 2013

Section 203(1) provides for appointing “whole-time key managerial personnel”, i.e. on a whole time basis. It does not convey as to how such whole time KMP's shall be appointed.

The word “whole- time” has not been defined under the Act, but its meaning could be understood with reference to “whole- time director”. The whole time director had been explained in the explanation to Section 269 of the Companies Act, 1956 as “whole-time director includes a director in whole time-employment of the company”.

Thus, whole-time director means a director employed to devote the whole of his time and attention in carrying on the affairs of the company. He cannot be employee of another company. The whole-time director, besides being a director, is to be regarded as an employee of the company, because the position of a whole-time director is more akin to an employee vis-a-vis the company. It has been held by Bombay High Court in Ramaben A Thanawala v. Jyoti Ltd. 1956 (10) TMI 22 - HIGH COURT OF BOMBAY , that the expression “whole-time director” must refer to a director who spends his whole time in the management of the company in the same sense as a managing director does.                            

Therefore, drawing analogy from the above interpretation in relation to whole-time director, it could be inferred that the “whole-time key managerial personnel” appointed under section 203(1) shall be a person deemed to be in whole time employment of the company.

 Another word “shall have” used in section 203(1) also need to be legally interpreted. The word “shall have” means will have to, is determined to or definitely. From law point of view the word “shall have” means must, is or are obliged to.                     

Therefore read with section 2(19), it is mandatory for the listed company or public company having paid-up share capital of Rs.10 crores or more to appoint whole-time key managerial personnel.

However, a KMP could be appointed on the basis of contractual appointment on whole time on a basis consideration and tenure to be decided by the management / share holders as the case may be. In case of a CFO, he should be designated as CFO and such an appointment may comply with the aforesaid provisions.