This article is written by Hema Modi, a second year student of Pravin Gandhi College of Law, Mumbai. It provides an overview of the Key Managerial Personnel according to the Companies Act, 2013. It contains the procedure of appointment and remuneration to the KMPs.
Indian Companies Act, 1956 was replaced by Indian Companies Act, 2013 which is considered to be the landmark legislation with several new ideas with the intention of raising accountability in the corporate sector and increasing the level of professionalism. One of the new concepts is Key Managerial Personnel(KMP) which had been under legal scrutiny since its inception.
According to Section 2(51) of the Companies Act, 2013, Key Managerial Personnel in a company are-
- Chief executive officer or the managing director;
- Company secretary;
- Chief financial officer;
- Whole-time director;
- Other officers as may be prescribed.
These refer to a group of people who are in charge of managing the operations of a company. They are responsible for planning, directing and controlling the functioning of a company. They are the first point of contact between the company and its stakeholders.
Managing director or whole-time director or manager
The Section 2(54) of the Companies Act, 2013 defines managing director as a director who is responsible for substantial powers of the management of the company and its affairs and is appointed by an agreement or a resolution passed in its general meeting.
Whole-time director of a company is defined under Section 2(94) of the Act which means a director in whole-time employment of the company.
Manager, as defined under Section 2(53) of the said Act, is any individual who works under the control and direction of the Board of Directors and is entrusted with the management of the whole of the affairs of the company.
Which companies are obligated to appoint KMP?
According to Section 203(1), it is very much clear that following companies are mandated to appoint a whole-time KMP when read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014:
- Every listed company.
- Public companies having paid-up share capital of 10 crore rupees or more.
- Companies having paid-up share capital of 5 crore rupees or more are mandated to have a Company Secretary.
Procedure of appointment
- The appointment of key managerial personnel is prescribed under Section 203 of the Act. Every member of managerial personnel is appointed through a resolution adopted by the Board with terms and conditions of appointment and remuneration.
- A member of managerial personnel can hold the position in one company at a given time. However, a member of managerial personnel of a company can be a member of managerial personnel of its subsidiary company.
- In case of vacancy, the Board has the responsibility of filling up within six months from the date of such vacancy.
- If the company or its Board tries to violate the provision of appointment of managerial personnel, then the company has to suffer from penalty. The company shall be punishable with fine of rupees one lakh which may extend up to rupees five lakh. Every director and other key managerial personnel shall also be punishable with a fine of Rs. 50,000. If the contravention is continuing, then they would be charged with Rs. 1,000 per day after the first offense.
The Act provides that the role of chairman and managing director or chairman and chief executive officer should not be assigned to one person.
However, there is an exception to the above provision. In certain cases, the provision will not apply:
- The company carries a single business.
- Articles of the company contain a provision for appointments of the same person.
- If the company carries out more than one business and has appointed one or more CEOs for each of the business.
Section 2(53) of the Companies Act, 2013 defines manager as an individual who is under the control and superintendence of Board of Directors and is responsible for managing the whole or substantial amounts of business of the company.
A manager is appointed by the Board of Directors at a meeting which shall be subject to resolution to be passed at the next general meeting of the company. The resolution consists of terms and conditions for the appointment and remuneration to be paid to the manager which has to be initially approved by the Board of Directors.
Any act done by the manager before the approval of the Board of directors and passing of resolution shall be deemed to be invalid.
According to section 196(3) of the Act, there are certain qualifications required to be eligible for the appointment of a manager. They are:
- Should not be less than 21 and greater than 70 years of age.
- Should not be insolvent or adjudged as insolvent.
- Should not be convicted of any offence having punishment which is greater than six months.
- Should not have suspended payment to his creditors.
A company secretary or secretary under section 2(24) of the Act whose function is to report the Board about the compliance of the provisions of the Act and other rules in relation to this Act. It also ensures that whether or not the company is complying with the secretarial standards.
The Central Government under Clause (c) of Section 205 has prescribed the role of company secretary in a company. he/she has to ensure the following things:
- To facilitate the meetings of the Board members and the general meeting and maintain the minutes of the meeting.
- To assist the Board members in the conduct of the affairs of the company.
- To perform duties as prescribed by the Board of Directors.
- To represent company before different Tribunals, regulators and other authorities.
Officer who is in default
According to Section 2(60) of the Act, an ‘officer who is in default’ is defined as an officer who shall be liable for any penalty or punishment by way of imprisonment or fine. The officers may include:
- Key managerial personnel,
- Whole-time director,
- Any person who is responsible for maintenance, filing or distributing records or accounts.
- Any director who is aware of the activities taking place is in contravention of the law or the provisions and yet indulges in or participates in it.
Importance of an officer who is in default
- He/she must ensure that the officers are acting in the best interest of the company.
- He/she performs the duty in good faith.
- He/she makes the key officials of the company more responsible.
Officer who is in default is appointed by his/her consent to work under such designation and the board of directors has to pass resolution in order to appoint him/her as the ‘officer in default’.
Any director, manager, key managerial personnel or any person who works under the direction and guidance of Board of Directors is an officer under Section 2(59) of the Companies Act, 2013.
The managerial remuneration is the money paid to managerial personnel to incentivize them to work more for the company and for its best interests. These incentives are important to drive the workforce to perform their tasks diligently and in good faith.
Remuneration to managerial personnel
Section 197 of the Companies Act, 2013 provides for the remuneration to be given to the managerial personnel. According to the law, managerial personnel is entitled to eleven percent of the net profit of that company. However, this figure of eleven percent can be changed with the approval of the Board. The net profit shall be calculated according to Section 198 of the Act.
The remuneration payable to directors who are neither managing directors nor whole-time directors shall be decided by the Board which shall not exceed
- 1% for managing director or whole-time directors.
- 3% in any other case.
Remuneration by a company having no profit inadequate profit
If, in any financial year, a company has no profit or the profit is inadequate, the company shall not pay its managerial personnel i.e., manager, whole time director or managing director any remuneration except in accordance to the approval of the Central Government.
Remuneration drawn in excess of prescribed limit.
If any managerial personnel draws or receives excess of remuneration as prescribed either directly or indirectly without prior approval of the Central Government, then he/she shall return or refund the amount or hold it in trust of the company.
Recovery of managerial remuneration
Unfortunately, in any case, if a company is required to restate its financial statements due to fraud or any violation of the law, then the company shall recover remuneration from any managerial personnel. The managerial personnel must be in the term for which financial statements are asked for.
Central government or company to fix remuneration limit
Section 200 of the Act, in respect of cases where company has no profit or inadequate profit, the Central Government or Company may fix the remuneration within the limits specified under the Act. They shall look into:
- The financial condition of the company.
- Remuneration or commission drawn by an individual in other capacity apart from managerial personnel capacity.
- Professional qualification and experience of an individual.
Compensation for the loss of office
Section 202 of the Act provides for the loss of office of the key managerial personnel. It is a reproduction of Section 318 of the Companies Act, 1956.
The company can make payment by way of compensation for loss of office or consideration for retirement from office to a managing or whole time director or manager but not to any other director.
However, no payment shall be made in the following cases:
- If the director resigns from the office due to reconstruction of the company or its merger with any other corporate body.
- If the office of the director is vacated under sub-section (1) of Section 167.
- If the company is winding up on the orders of Tribunal or voluntarily and the winding up was due to the negligence of the director.
- If the director is guilty of fraud or misrepresentation or breach of trust or gross negligence or gross mismanagement of the conduct of the company or any subsidiary company.
- If the director has instigated or was involved in bringing out the termination of his/her office.
Other provisions regarding key managerial personnel
- A key managerial personnel is eligible for authentication of a document or proceeding or signing of contracts on behalf of the company.
- A person is not eligible to be a director of a company if his/her relative is a member of key managerial personnel.
- A company is required to maintain a register of the names of KMP’s appointed along with the details of securities held by them.
- A return and change in KMP have to be notified to the Registrar of Companies within 30 days of its reappointment.
- The KMPs have the right to be heard in Audit Committee meeting but shall have no right to vote.
- Key managerial personnel is prohibited from making forward dealings and insider tradings in securities of the company.
- Every key managerial personnel shall have to provide the details relating to his concern or interests of the company within 30 days of his appointment or relinquishment.
- The remuneration policy of the Key managerial personnel is to be recommended by the Remuneration and Nomination Committee of the company.
Key managerial personnel holds a key place in the company and helps in facilitating the smooth functioning of business. The new Act of company law i.e., the Companies Act, 2013 has tried to provide for a section which includes the KMPs and their appointment process. The new amendment act of 2017 has also tried to liberalize the provision of managerial remuneration. The necessity of approval of central government is no longer in effect which has reduced the burden of company in abiding by it because of which there was much delay in further transactions of the company.
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