Role Transition and Salary Arrangements for KMP, Corporate Laws / SEBI / LLP

[Sudhir M]

Can a KPM of a holding company become a KPM in a subsidiary company? If yes, is it permissible for them to receive a salary from the subsidiary company instead of the holding company?

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[YAGAY andSUN]

Key Managerial Personnel (KMP)

Yes, a Key Managerial Personnel (KMP) of a holding company can become a KMP in a subsidiary company, and it is permissible for them to receive a salary from the subsidiary company instead of the holding company, under certain conditions. Here's a more detailed explanation:

1. KMP of Holding Company Becoming KMP of Subsidiary

A Key Managerial Personnel (KMP) refers to an individual occupying a key managerial position in a company, such as the Managing Director (MD), Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Company Secretary (CS), as defined under the Companies Act, 2013.

It is legally permissible for an individual who holds a position as a KMP in a holding company to also hold a KMP position in a subsidiary company. This is because the definition of KMP under the Companies Act, 2013 does not restrict such a dual role. The key point is that both companies (holding and subsidiary) must ensure compliance with the relevant provisions of the law.

• Board Resolution: The board of directors of both the holding company and the subsidiary company would typically pass resolutions to appoint the same person as KMP in both companies.
• Conflict of Interest: The person in question must disclose any potential conflicts of interest, particularly in situations where decisions in one company could impact the other (such as when dealing with transactions between the two companies).

2. Receiving Salary from the Subsidiary

Regarding the payment of salary, it is also permissible for the KMP to receive a salary from the subsidiary company instead of the holding company, as long as the following conditions are met:

A. Company's Articles of Association

• Both the holding company and the subsidiary company should have the necessary provisions in their Articles of Association (AoA) or board resolutions that allow for the KMP to receive compensation from the subsidiary.

B. Approval from Shareholders/Board

• If the subsidiary company appoints the KMP, the subsidiary's board must approve the salary and other terms of employment as per the requirements of the Companies Act, 2013, and the subsidiary's AoA.
• Similarly, the holding company's board would have to ensure there is no conflict of interest in the compensation arrangements, especially if the KMP is receiving salary from the subsidiary company for their services to that company.

C. Compliance with Remuneration Limits

• The KMP's salary from the subsidiary company must be in line with the provisions under the Companies Act, 2013, which outlines limits for the remuneration of managerial personnel based on the company's paid-up capital and net profits (Sections 196-197 of the Act).
• The subsidiary should adhere to these limits unless an exception is granted by the Central Government for remuneration exceeding prescribed limits.

D. Disclosure and Transparency

• Any payments made to the KMP from the subsidiary company should be disclosed in the financial statements of both the holding company and the subsidiary, in accordance with the Indian Accounting Standards and Corporate Governance guidelines.

E. Legal and Financial Considerations

• The holding company must ensure that the KMP’s role in the subsidiary is properly reflected in their contractual arrangements, and that the subsidiary company complies with all relevant tax and financial reporting requirements regarding the KMP's remuneration.

3. Potential Conflicts or Restrictions

• Dual Role Issues: There may be potential conflicts of interest when a KMP holds a position in both the holding and subsidiary companies, particularly in decision-making. The individual must carefully navigate such situations to ensure that corporate governance principles are upheld and there is no unfair advantage taken.
• Regulatory Oversight: The Ministry of Corporate Affairs (MCA), along with other regulatory bodies, will closely monitor the governance practices within both the holding and subsidiary companies. Hence, adequate compliance measures should be in place.

Conclusion:

Yes, a KMP of a holding company can become a KMP in a subsidiary company, and it is permissible for them to receive a salary from the subsidiary company instead of the holding company, provided the necessary corporate governance, legal, and regulatory requirements are met. The salary must comply with the provisions of the Companies Act, 2013, and should be duly approved by the board or shareholders, as applicable.