Analysis of appointment of Key Managerial Personnel

Amitav Ganguly

BACKGROUND

Characteristically, companies have various levels or hierarchies of employees with base levels starting from workers followed by supervisors, executives, managers, senior managers, general managers, to the top management usually consisting of functional directors and ultimately the managing director. The overall superintendence, control and direction responsibilities stay with the Board of directors.  Upper levels of positions are understood as managerial positions although there is no uniformity across companies.

Be that may be, it becomes important to regulate those individuals holding managerial positions since the functioning of the companies as responsible corporate citizens, depend on their actions.

Within this background, the new Companies Act 2013 {new Act} [ Even the Erstwhile Act of 1956] have provided for regulation of specific managerial positions.

MEANING OF MANAGERIAL PERSONNEL

As the first step for regulation, the law has identified these positions, therefore the term, “managerial personnel” has been provided; though interestingly it has not been defined in the new Act.

There is however reference and elaboration of this term in Chapter XIII, sections 196 and 197 and Schedule V of the new Act which covers the following: –

1. Managing Director, {MD} or Chief Executive Officer, {CEO}

2. Whole time Director, {WTD}, and

3. {MA}

It is clear that the term “managerial personnel” as per the scheme of the new Act denotes the uppermost or top executive management; individuals who man such positions are part of the Board of Directors or are at comparable levels. Such individuals can be categorised in the following manner who have to be appointed by a company: –

1. They are directors who are entrusted with substantial powers of management of the affairs of the company, known as “managing directors”. A director occupying that position, by whatever name called is also included. (Reference section 2 {54} of the new Act);

2. They are directors who are in the whole-time employment of the company, and thus are rendering services full time to the company, known as “whole time directors”. (Reference section 2 {94} of the new Act)

3. They, subject to the superintendence, control and direction of the Board of directors, have the management of the whole, or substantial the whole, of the affairs of the company, known as “managers” and include any director or any other person occupying that position, by whatever name called. (Reference section 2{53} of the new Act).

MANAGERIAL PERSONNEL & KEY MANAGERIAL PERSONNEL

{Section 2 {51} of the Companies Act 2013}

Besides managerial personnel, the law in its wisdom has also provided for the first time the position of Key Managerial Personnel {KMP} in the new Act.

Although, as discussed earlier, the term “managerial personnel” has not been defined, significantly the term KMP has been defined under section 2 {51} and it appears in many sections of the new Act.

As per the section, KMP covers:

• not only the aforesaid “managerial personnel” {MP}, viz., MD/CEO, WTD & manager,
• but also “other personnel” i.e. company secretary {CS}, chief financial officer {CFO} and
• such other officer as may be prescribed by the Government.

Thus, KMP can truly be said to represent the top executive management of a company.

APPOINTMENT OF KEY MANAGERIAL PERSONNEL {KMP}

{Section 203 of the Companies Act 2013}

Mandatory appointments

This provision in sub section {1} stipulates mandatory having of certain Key Managerial Personnel in a company and if one or more such personnel are not in place, the company needs to appoint him/them. They are MD or CEO or manager and in their absence a WTD, CS and CFO. As can be seen that they are covered under definition of KMP in terms of section 2{51} of the Companies Act 2013, however, a prescribed officer of the Government is not covered.

It is to be noted here that the KMP should be “whole- time” and not part time

Not all company are mandated to have said KMP but only those companies which belong to such class/es of companies as may be prescribed by the Central Government.

As per Rules 8 and 8 A of Companies {Appointment and Remuneration of Managerial Personnel} Rules 2014, every listed company and every other public company having paid up share capital of Rs 10 crores or more shall have whole time KMP. Moreover, a company other than aforesaid companies which has a paid-up share capital of Rs 5 crores or more shall have a whole-time company secretary.

 Chairperson / MD/CEO

The first proviso lays down that, after the commencement of the new Companies Act, at the same time: –

1. an individual shall not be appointed or reappointed, as the chairperson of the company, in pursuance of the articles of association of the company,

2. as well as be appointed or reappointed as MD or CEO of the company.

It transpires from this provision that where an individual is holding the position as a chairperson of a company in that case he or she is restricted to hold the position as MD or CEO of that company. The purpose behind this provision is that an individual should not hold, at the same time, the dual positions of chairperson and MD/ CEO. This is a usual norm of good corporate governance.

 Exceptions

 There are however exceptions to this restriction, given in first proviso, in respect of cases where: –

1. The articles of association of such a company provide otherwise, or

2. The company does not carry multiple businesses.

In case of the first exception, a company is free to provide in its articles that an individual is permitted to hold the dual positions of chairperson and MD/CEO at the same time whether it has single or multiple business/es.

 In case of the second exception, which is the alternative provision, it can be interpreted that where a company has a single business, it can have one individual holding, at the same time, the dual positions of chairperson and MD/CEO.

Hence where the company does carry multiple businesses then it is required to have two individuals, one holding the position of chairperson and the other holding the position of MD/CEO.

 However, the second proviso lays down that nothing contained in the first proviso shall apply, to: –

1. such class of companies engaged in multiple businesses, and

2. which has appointed one or more Chief Executive Officers for each such business.

The Central Government is empowered to issue notification to this effect

Thus, there is provision for notified exemption to various large organisations which have multifarious businesses across various geographical locations and for their effective management, decentralisation of functions have taken place with profit centres. In such situation, each such centre is being headed by a CEO.

Hence the restriction of first proviso will not apply which means that such companies will have flexibilities in this respect. It is however not clear why such large organisation cannot get its articles of association amended suitably excluding the first proviso.

In terms of the above empowerment, the Government on 25^th July 2014, by a notification, has provided by way of exemption to those public companies having paid up share capital of Rs 100 crores or more and annual turnover of Rs 1000 crores or more, which are engaged in multiple businesses and which have appointed CEO for each such business.

Appointment through Board resolution 

This sub section {2} lays down that every whole-time KMP of a company shall be appointed: –

1. by means of a resolution of the Board, and

2. the said resolution shall contain the terms and conditions of the appointment including the remuneration of the KMP.

From the foregoing it is clear that there cannot be any circulatory resolution of the directors as permitted in terms of section 175 of the Companies Act 2013, for appointment of KMPs. Thus, in a duly convened and conducted board meeting the directors present thereat should deliberate and give their approval to the appointment. The details of the terms and conditions which include remuneration of the KMP should also be deliberated by the Board, decided and the same should be part of the appointing Board resolution. This streamlines the various processes earlier followed by different companies for appointments of KMPs, more particularly the company secretary and the CFO.

 Limit of holding other office

 Subsidiary

This sub section {3} restricts a KMP from holding office in more than one company except in one of its subsidiary companies. If a whole time KMP is permitted to hold an office in the subsidiary company, it appears to be reasonable to interpret that the other office can be of KMP or any other office. Pertinently it is not necessary that the said subsidiary should be a wholly owned subsidiary; however, for such holding of offices requisite Board meeting resolutions of the holding as well as subsidiary company are preferred. Wherever required, the resolution of meeting of Nomination & Remuneration Committee of the Board should also be passed.

Holding another directorship

The first proviso lays down that the KMP can hold the position of a director of any company with the due permission of the Board which preferably should be by way of passing a resolution at a meeting, although this has not been specifically provided here. It appears from this, that the KMP can only hold one directorship and not more. This, of course, is in addition to his appointment in the subsidiary.

 Transition provision

The second proviso is a transition provision and lays down that, a KMP holding office in more than one company at the same time on the date of commencement of new Companies 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. This provision is inconsequential now.

Appoint or employ a managing director who already holds position

The third proviso which is in line with section 316 of the erstwhile Companies Act 1956 lays down that a company may appoint or employ a person as its MD: –

1. if he is the MD or manager of one, and of not more than one, other company, and

2. such appointment or employment is made or approved by a resolution passed at a meeting of the Board of the company with the consent of all the directors present at the meeting and of which Board meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.

From this provision it is clear that, in this case, there cannot be circulatory resolution of the directors as laid down in section 175 of the Companies Act 2013, and thus in terms of these provisions, in a duly convened and conducted board meeting the directors present thereat should deliberate and give their approval to the said appointment or employment.

Company cannot have a managing director and a manager

Pertinently, section 196 {1} of the Companies Act 2013 also mandates that a company cannot appoint or employ, at the same time, a managing director and a manager.

Vacation of office

As per this sub section {4}, where the office of any whole time KMP is vacated, the resulting vacancy shall have to be filled-up by the Board of directors at its meeting within a period of six months from the date of such vacancy. It may be noted that the vacancy can be for any reason whatsoever.

This time frame will ensure that compliance is done by the company expeditiously.

A question may arise where a company already fulfils the requirement of whole time KMP and also has more KMP than the minimum. Here, a particular vacancy should not invoke this provision. For example, a company has a MD, WTD, CS and CFO and subsequently the WTD resigns, in which case this provision should not apply since only one of the MD or WTD is required as KMP. However, there should be clarification from the authorities.

Penal Provisions

This is a penal provision in sub section {5} stating that if a company contravenes the provisions of this section: –

1. the company shall be punishable with fine, minimum of which is one lakh rupees and maximum of which is five lakh rupees, and

2. every director and key managerial personnel of the company who is in default shall be punishable with fine which may extend to fifty thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

Interestingly this sub section does not use the term “officer who is in default” who has been defined in section 2 {60} of the Companies Act 2013. It uses the words “every director and key managerial personnel of the company who is in default” thereby focussing on them for ensuring compliance and face the consequences of violation, if any. It is therefore limiting the provision. It is not clear why this distinction has been made.

Conclusion

The new provisions for Key Managerial Personnel {KMP} in the Companies Act 2013 are very welcome law to streamline the corporate governance of a company. Hopefully the KMP will continue to play very strategic and responsible roles in corporate functioning for years to come.

Click here to read other articles of Amitav Ganguly