Can a person be appointed as KMP of one company while being on payroll of another group company?
Summary: The article examines the interpretation of Section 203 of the Companies Act, 2013 regarding whole-time Key Managerial Personnel (KMP), particularly in group company structures. It notes that Section 203(1) requires prescribed companies to appoint whole-time KMPs, while Section 203(3) restricts a whole-time KMP from holding office in more than one company except its subsidiary. The article explains that the Act uses the terms “appoint” and “employ” distinctly, suggesting that companies may appoint or employ KMPs, and that the legislative intent is to ensure accountability, availability, and avoidance of conflicts of interest. It discusses a practical scenario where a person remains on the payroll of one group company but is appointed as KMP of another group company while working exclusively within the same group, stating that the objective of the provision may be considered substantially met if the arrangement is properly approved and documented. The article also refers to public filings of certain corporate groups where KMP remuneration is disclosed as nil in the appointing company and recommends governance safeguards, including written declarations, group service or secondment arrangements, and remuneration cost allocation with appropriate statutory disclosures.
KMP Appointment in One Group Company While on Another Group Company’s Payroll
| Particulars | |
| Provisions of the Act | 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,—
(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director; (ii) company secretary; and (iii) Chief Financial Officer : Section 203 (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. On a combined reading of sub-section (1) and subsection (3), it is, therefore, clear beyond doubt that, subject to the exceptions provided in section 203 itself, a KMP means a person who devotes the whole of his time for the company of which he/she is a KMP and who cannot work (full-time or part-time) for any other company or do any other profession or vocation, business or any similar activity, even with the permission of his employer.
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| Meaning of “whole-time” | The term ‘whole-time’ is analogous to ‘full-time’ and this term has been defined in several dictionaries. The Webster’s Dictionary gives the meaning of the words ‘whole-time’ as full time. The words ‘full time’ mean employed for or working the amount of time considered customary or standard e.g. full-time clerks; involving or operating the amount of time considered customary or standard. The Shorter Oxford English Dictionary also gives the meaning of words ‘whole time’ as full time. According to this dictionary, the term ‘full time’ (adjective) means the total normal working hours. |
| Analysis of Section 203 | It is relevant to note here that the term used in Section 203 (1) of the Act in relation to the KMPs is ‘whole time’. However, Section 203(2) of the Act uses the term ‘appoint’ and not ’employ’. Moreover, Section 203 (3) of the Act, inter-alia, permits a person to be appointed as a Managing Director of more than one company at the same time.
Further, Section 203(3) of the Act uses the term ‘appoint’ as well as ’employ’. Therefore, it may be concluded that, companies have been given an option under the Act to appoint or employ KMPs. The definition of manager under the Act, provides that a manager can be appointed under a contract of service or otherwise. The legislature was well aware of the use of the terms ‘appoint’ and ’employ’ in the context of KMPs and has used the two words in contrast to each other. If the intent of the legislature would have been to ensure that the KMPs are whole time ’employees’ of the company, it would have used the term ’employ’ instead of ‘appoint’ and would not have provided for an option as aforesaid. It is a well-established principle of law that if the law is clear and unambiguous all the words used should be given a literal construction and should be given their full meaning. In other words, a statue cannot be interpreted in a manner which ultimately will defeat the intent of the law makers. |
| Intent of law | The intent behind Section 203 appears to be to ensure that important managerial and statutory positions are held by identifiable, responsible and accountable persons. The purpose of the “whole-time” requirement is to ensure availability, accountability and avoidance of conflict of interest or divided responsibility.
Therefore, where a person is on the payroll of one group company but is appointed as KMP of another group company, and such person is working exclusively within the same group and is not engaged with any unrelated third-party organisation, the object of the provision may be considered substantially met, provided the arrangement is properly approved and documented. |
| Practical scenario in group structures | At XYZ Ltd., certain employees are on the payroll of one group company but are appointed as KMP of another XYZ Ltd. group company. This is done for administrative efficiency, cost optimisation and centralised governance support within the group. The concerned person works for the XYZ Ltd. group and is not engaged with any unrelated third party. Accordingly, there is no external conflict of interest merely because payroll is maintained in another group company. |
| Industry Practice | Public filings of certain large corporate groups indicate that in some cases KMP remuneration is disclosed as Nil in the annual return of the appointing company, suggesting that such persons may be remunerated by another group company or under group-level employment / cost arrangement. This supports the practical industry understanding that payroll and KMP appointment need not always be in the same company.
Benchmark entities identified include: 1. Adani Energy Solutions Limited Company (Listed at NSE & BSE) 2. Paliwal Real Estate Limited (Subsidiary of DLF Industries: Listed at NSE & BSE) 3. Nambi Buildwell Limited (Subsidiary of DLF Industries: Listed at NSE & BSE) 4. DLF Promenade Limited (Subsidiary of DLF Industries: Listed at NSE & BSE) |
| Good governance safeguards
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1. A written consent / declaration should be obtained from the KMP confirming that he / she is available to discharge duties of the appointing company, is not engaged in any external employment / business and there is no conflict of interest. This will support the “whole-time” requirement in substance.
2. A group service / secondment / deployment note may be maintained between the payroll company and the appointing company. This will evidence that although salary is processed by one group company, the services of the concerned person are made available to the appointing company for discharging KMP responsibilities. 3. Cross-charge / allocate the remuneration cost to the appointing company, wherever applicable, and ensure appropriate disclosure in statutory records / annual report. |
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