Readers are expected to know the above provisions as this article only contains issues pertaining to these provisions.Section 203 (1) read with Rule 8 of Companies (Appointment & Remuneration of managerial personnel) Rules, 2014 makes it mandatory for listed companies and public companies having a paid up capital of 10 crore or more to have following whole time key managerial personal –
Category I: Managing director (MD), ‘or’ chief executive director (CEO) ‘or’ manager and in their absence a whole time director (WTD);
Category II: Company Secretary; and
Category III: Chief financial officer (CFO)
Analyzing category I:
Where company appoints MD or Manager and there is no CEO in the company–
Section 196(1) absolutely prohibits a company to have MD and manager at the same time.
Here in such case there is no confusion in relation to use of word ‘or’ in category I as company may either have MD or manager.
Let’s say if company appoints MD and there is no CEO then such MD will be treated as KMP which will eventually attract section 2(76) (i.e. related party) and section 188 (i.e. related party transaction), but MD being director is already a related party to the company. If company appoints manager and there is no CEO in the company then such manager will be treated as KMP and will fall under the definition of related party.
But the problem arises when company have MD/Manager and CEO at the same time as there is no provision prohibiting appointment of MD/Manager and CEO at the same time.
Where company appoints MD or Manager and CEO in the company simultaneously –
Following two situations may arise in such case.
SITUATION 1: where a company appoints both MD and CEO at the same time.
SITUATION 2: where a company have Manager and CEO at the same time.
Situation 1: Where a company appoints both MD and CEO at the same time
There is no prohibition on appointment of both MD and CEO simultaneously as there was for appointment of MD and manager.
Law is silent in this regard.
Also when we analyze second proviso to section 203, which talks about if a notified company (i.e. Public company having paid up capital of 100 crore more and turnover of 1000 crore or more) carrying multiple businesses appoints one or more CEO for each such business then an individual can be appointed as Chairperson as well as MD or CEO simultaneously which was restricted under first proviso to section 203.
Dissection of above provision – In the given example, X ltd is carrying multiple businesses and has appointed one CEO for each such business, as per second proviso to section 203 X ltd can appoint its chairperson as MD which will result in a situation where company is having both MD as well as CEO hence appointment of MD and CEO at the same time is also patted by second proviso to section 203.
Having both MD and CEO in the company means only one will be treated as KMP, if company treats its MD as KMP it will help the CEO to escape from the definition of related party even after holding such a prominent position in the company. If company treats it’s CEO as KMP then MD being director already falls within the definition of related party.
Situation 2: Where a company appoints manager and CEO at the same time
In this situation, if a company treats its manager as KMP then again CEO will not be regarded as related party to the company. And if company treats its CEO as KMP then obviously manager will be free from such related party tag. It may be noted that in this situation manager and his relatives is not a related party to the company but as per section 2(76) –
(iii) ‘Firm’ in which director or manager or his relative is a partner;
(iv) ‘Private company’ in which a director or manager or his relative is a member or director;
(v) ‘Public company’ in which a director or manager is a director and holds along with his relatives, more than two per cent. Of its paid-up share capital
Then such firm, private company and public company is a related party to the company even if he himself or his relative is not a related party to such company.
Category II & III is not an issue because of the use of word ‘and’ both CS and CFO will be treated as KMP.
Disclaimer: This write up is intended to start academic discussion on few significant interpretations under Companies Act, 2013 and rules there under. It is not intended to be a professional advice and should not be relied upon for real time professional facts. Readers are advised to refer relevant provision of law before applying or accepting any of the point mentioned above. Author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write up.
I am hopeful that this write up would be of some help w.r.t. your professional working and endeavors under Companies Act, 2013. Kindly share your opinion.
