This article has been written by Manya Manjari, a student of BBA LLB at the Indian Institute of Management, Rohtak. This article talks about Section 203 of the Companies Act, 2013. The Act lays down provisions for key managerial personnel. This article highlights the way key managerial personnel are appointed and the important eligibility criteria for them to be selected, along with the important case.
It has been published by Rachit Garg.
Table of Contents
Article 19(4) of the Constitution of India gives all Indian citizens the freedom to form associations. These include companies, societies, trade unions, partnership ventures, and clubs. With the growth of industry and business in India, there has been a significant increase in the number of companies, partnerships, and other businesses. Post-independence the Companies Act, 1956 was introduced to bring more uniformity and to govern the operations of companies and corporations. It was replaced with the Companies Act, 2013, which included several other provisions with the changing times. In addition to several changes, the new Act expanded the scope of key managerial positions and added several other members to it.
The presence of important regulators or people is significant to run a company or corporation efficiently. Key managerial personnel are the important body personnel that look after the different branches of businesses of the corporations. They are very important as they ensure the efficient working of a company.
Key managerial personnel: who are they
The legal and procedural aspects related to the appointment of key managerial personnel, including the “managing director, whole-time director or manager, managerial remuneration, secretarial audit“, etc., are covered in Chapter XIII of the Companies Act, 2013, when read with the Companies Rules, 2014. Corporations must designate key managerial personnel (KMP in short), according to the Companies Act of 2013. They are in charge of making decisions and guaranteeing the efficient operation of the business.
Section 2(51) states that, in relation to a company, “key managerial personnel” includes the following:
(i) the chief executive officer, manager or managing director;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the chief financial officer;
(v) any other officer designated as key managerial personnel by the Board who is a full-time employee and is not more than one level below the directors; and
(vi) any other officer as may be prescribed by the central government.
Rules governing the key managerial personnel
- Section 203 of the Companies Act, of 2013, when read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, states that every public company with a (paid-up) share capital of ten crore rupees or more and every listed company (companies whose shares are listed on a recognised stock exchange for public trading like Nifty) must have full-time key managerial employees, such as a Managing Director, Chief Executive Officer, or Manager and Chief Financial Officer.
- Section 203 of the Companies Act of 2013, in accordance with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules of 2014, mandates hiring a full-time company secretary for every private company with a paid-up share capital of ten crore rupees or more.
- The Companies Act, 2013, in its Schedule V, sets forth the requirements for the appointment and salary of the managing director, wholetime director, or manager.
Definitions of key managerial personnel
Chief Executive Officer
According to Section 2(18) of the Companies Act, 2013, a chief executive officer (CEO for brevity) is an official of a corporation who has been appointed by that company. The CEO is the highest-ranking officer of a company and is responsible for handling the day-to-day activities of the company. They handle capital allocation, the determination of the organisation’s strategy, and the management and organisation of the company’s executive staff.
Chief Financial Officer
Chief Financial Officer, also known as the CFO, is the person who has been appointed as the chief financial officer under Section 2(19) of the Companies Act, 2013. They monitor cash flow, make financial plans, assess the firm’s strengths and weaknesses, and develop strategic recommendations.
According to Section 2(24), “company secretary,” also referred to as “secretary”, means a person who is appointed by any company to carry out the duties of a company secretary under the Companies Act, 2013. The person is a company secretary as defined by Section 2(1)(c) of the Company Secretaries Act, 1980 . The Companies Act, 2013 also follows the definition of secretary or company secretary as laid down in the Company Secretaries Act, 1980, which defines the term as the members of the Institute of Company Secretaries of India (ICSI) who work as company secretaries. They perform several duties in numerous ministerial and managerial capacities for ICSI as a member of the organisation.
According to Section 2(53), a manager is anyone who, under the supervision, control, and direction of the Board of Directors (people who represent the interests of the shareholders of the company and look after the management of the company), has the management of all or largely all of the company’s affairs. This includes directors and anyone else holding the position of manager, regardless of whether they are employed under a contract of service or any contract for service. They are responsible for developing operational strategies, conducting performance reviews, and overseeing all daily operations. They work to maintain the company’s productivity, efficiency, and organisation at all times.
According to Section 2(54), a managing director is any director who is given a substantial supervisory role over the company’s affairs by virtue of the articles of association of the company, by a resolution adopted by its general meeting, or by a decision made by its board of directors. This definition also includes any director who holds the title of managing director, irrespective of their name. The managing director oversees and coordinates all corporate operations, personnel, and endeavours to sustain and expand the business.
Section 2(94) defines a whole-time director, and it includes a person who is a whole-time employee of the company. Under the Companies Act, 2013, the full-time director works throughout their entire period of appointment and does the works that are as decided by the company. They are not the same as the independent director. They operate on a daily basis and have a significant stake in the company. A managing director can also act as a whole-time director.
Roles and responsibilities
Chief Executive Officer
CEOs are one of the most significant members of any company. A CEO can act as a director, managing director, chairman or any other employee. The Companies Act, 1956 had no provision for a CEO. This is a concept that has been borrowed from the United States of America. The responsibilities of a CEO are the following:
- The CEO is vested with the power to take major corporate decisions on behalf of the company.
- He is also in charge of the overall operation of the company and the allocation of resources to the different departments.
- They have the responsibility for setting visions, laying down values and maintaining a healthy corporate culture in the organisation.
- Since the CEO is the face of any company and represents the company in front of the larger public, the media and society in general, they are also responsible for maintaining effective communication with all stakeholders.
Chief Financial Officer
- The chief financial officer or the CFO is engaged in daily activities of the company related to Financial planning.
- CFOs are vested with the power to formulate new financial strategies and stimulate the company’s financial function.
- Section 134 of the Companies Act, 2013 mandates the signing of financial statements by the CFO, and they must comply with all the financial rules, look over the accounts, and journalise new ways to overcome difficulties faced by the company.
- The responsibility for the protection of the authors of the company and communicating important suggestions to the investors and the board members about the engagement of the companies also rests with the CFO.
- CFOs ensure that the company complies with all the set tax standards and is not engaging in any economic malpractices.
- The company secretary is also known as a compliance officer. CS is responsible for ensuring the company’s compliance with the statutes and regulatory authorities.
- Company secretaries report directly to the board of the companies about the legal provisions and compliances of the company that must be followed.
- Company secretary also assists the board of the companies in the daily functioning of the company.
- They are responsible for suggesting legal requirements to the company directors and pointing out their duties and responsibilities.
- Company secretaries also act as a mediator between the government stakeholders and the company, as one of their most important functions is to ensure positive corporate governance practices.
Managing director, whole time director and manager
- Director, whole-time director and manager all perform almost similar duties and responsibilities as they are invested with managing the affairs of the company as laid down in the Memorandum of Association (MOA is a legal document that contains all the information about the company regarding the vision, goals behind the formation and its authority) and Articles of Association(AOA is a legal document that contains all the information regarding the constituents of the company, purpose and its authorities).
- They are also responsible for guiding and directing the board of the company for smooth functioning and achievement of its objective.
- They have the duty to sign documents or financial statements, any meeting proceeding, or even enter into any contract on behalf of the company.
- They overlook the companies’ operation investments or other ventures and provide guidance and supervision access to manage problems that the company might face.
Qualifications for key managerial personnel
The Companies Act, 2013 lays down no distinct qualification for appointing any key managerial position, but the age criteria have been settled by it. Section 196 (3)(a) of the Companies Act, 2013 lays down the minimum age of any person being considered to be hired for a key managerial position, which is twenty years. It has been reduced by the 2013 Act from twenty-five to twenty.
The act has also laid down the upper limit of age, which is seventy. In case a person over seventy years of age will have to be appointed, it will be done especially by passing a resolution along with notice and an explanation for the reason behind appointing the person.
Bars on a person becoming a KMP
- The Companies Act, 2013, alongside age, also excludes people from being appointed as a KMP who is an undischarged insolvent (a person who is not able to pay his or her debts) or is yet to be adjudicated.
- It excludes people who lack the mental capacity to function as reasonable people.
- It also excludes any person who has delayed or defaulted in the payment to its creditors.
- Lastly, people convicted by the court of any offence have been imprisoned for a period of more than six months.
Exclusions under Schedule V
Schedule V of the Companies Act, 2013, in addition to other exclusions, lays down certain situations where people won’t qualify to become members of the KMP.
- Schedule V has a separate list of legislation, and it prohibits the person from becoming a KMP if convicted and imprisoned or if he was made to pay a fine ranging from 1000 to 5000 rupees.
- If any person has been detained for any offence under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
- The KMP, employed in the same position in any other company, would get the remuneration from the companies as per the ceiling set down by the Companies Act, 2013.
- Lastly, the person must be a resident of India. The term resident of India has also been defined by the act ‘as any person who has stayed in India continuously for more than twelve months since the date of appointment’.
- Compliance related to people belonging to the Special Economic Zone(SEZs are zones where the trade laws are different than the rest of the countries) is subject to changes made by the Ministry of Commerce and Industry. They can take up the position without much problem by just producing visa documents.
Qualification for Chief Executive Officer
The Companies Act, 2013 does not lay down any strict guidelines for becoming a CEO. Neither qualification, service term, experience, or terms and conditions exist. So, it is totally on the management of members of the company as to what their qualifications, roles or functions must be. India and many other countries practise this system where they don’t have any defined qualification or role. The requirements are subject to the provisions of the Articles of association of any company.
Qualification for company secretary
Unlike the CEO, the company secretary has to qualify the criteria as laid down by Section 2(45) of the Act to be appointed as a company secretary, which is:
- The person must be a member of the Institute of Company Secretaries of India, incorporated by the Companies Act, 1956 and also licensed. Any person who is also a member of the Institute of Chartered Secretaries of London is also eligible for the same. This qualification stands for the company having a paid-up share capital of more than rupees 50 lakhs or more.
In the case of any other type of company, the person qualifying to be a company secretary must have more than one of the following qualifications:
- The person must have a law degree from any university.
- They must be a member of the Institute of Chartered Accountants.
- They must have a membership of the Cost Accountants of India.
- A postgraduate degree or diploma in management from any college or the Indian Institute of Management.
- A postgraduate degree from any university in Commerce or
- A diploma in company law from an Indian law institute.
Miscellaneous qualifications require the following:
- A keen knowledge of Company Law, awareness about the meeting provisions, mercantile laws like the Contract Act, 1872, Sale of Goods Act, 1930, Negotiable Instruments Act, 1881 and so on.
- The person must also know economics and the existing market situations and understand the social and political conditions.
Qualification for Chief Finance Officer
The Companies Act, 2013 does not lay down any definite qualifications, experiences or terms and conditions for appointing a CFO. It is also silent on naming the roles or functions. It depends upon the management of the company as to what qualifications are required. Still, the CFOs generally possess an MBA (Masters of Business Administration) or Master’s degree in Accounting.
Qualification for Director
Similar to the provision for a CEO or CFO, the Companies Act, 2013 does not provide any educational or professional qualification for a director. Unless otherwise stated by the company.
Section 149(1) of the Companies Act, 2013 provides a provision for appointing at least three directors if it is a public company and two directors if it is a private company. Only one director is necessary in the case of One Person Company (OPC). In any case, there can be a maximum of fifteen directors, and if more have to be appointed, it would be done by passing a special resolution at the company’s general meeting. However, a few conditions must be complied with for the appointment of a director:
- Only a natural person can become a director.
- The person is required to have a Director ID Number (DIN).
- The person also must possess a Digital Signature Certificate (DSC) giving their consent for the position.
Under Section 164(1) of the Companies Act, 2013, the person will be disqualified and not qualify for the position of a director under these conditions:
- If the person is of unsound mind and has been declared so by the court.
- If the person is an undischarged insolvent
- If the person has applied and been adjudicated as an insolvent
- If the person has been accused of an offence which has the punishment of imprisonment involving a period between six months to five years or convicted and imprisoned for an offence punishment for which is seven years or more.
- If the person has been non-adherent to the call requests in response to the shares of the company.
- If the court has ordered the person stopping him from being appointed as a company director.
Qualification for managing director and manager
Similar to the provisions of the qualification criteria for other KMPs, the qualifications of the managing director and manager are subject to the provisions laid down by the management of the companies in the articles of association.
Appointment process of key managerial personnel
Section 203 of the Companies Act, 2013 compulsorily provides a requirement for KMPs to be appointed on a whole time basis which means that the KMP must provide full time service to the management and activities of the company. However, the companies not covered under the definition of 203 of the Companies Act, 2013 can also appoint part-time key managerial personnel for the management of the company.
Appointment of directors
In most companies in India, the first directors (first directors are the persons who have founded the company primarily) are taken to be named as directors in the article of association of the company. If this is not the case, one of the subscribers to the memorandum (one of the first members of the shareholders of the company) will be named the director.
The case is different where one Person company (OPC) is concerned; as per Section 152 of the Companies Act, 2013, the individual who is a member of the company will be taken to be its first director until the members select a director.
The provisions that are generally followed while appointing a director are as follows
- The directors of the companies must be appointed in the General meeting of the company, except if otherwise mentioned in the Companies Act, 2013.
- Directors must have a DIN (Director Identification Number).
- The person who is to be appointed in the position of director must furnish a Digital Signature Certificate for their identification.
- The company then files Form DIR-12, which contains the information related to the person concerned and the KMPs.
- Form DIR-2 is also filed for the person’s free consent to be appointed director.
- These documents are filed to the registrar of companies within 30 days of the appointment of the KMP, along with the prescribed fees.
Appointment by nomination
Section 161(3) lays down provisions for the appointment of a director by nomination. The directors appointed by nomination are called the nominee directors. The Board of the company appoints a person as a director as per nomination depending upon the law in force or as mentioned in the article of association of the company.
Appointment as per casual vacancy
Section 161(4) lays down the appointment of a director as per vacancy. Suppose the position of the director is vacant due to any reasons like the resignation or death of the previous director or the expiration of the director’s term. In that case, the board will appoint a new director to fill the position. The person will stay in the office up to the end of the term of office of the previous director.
Appointment by Proportional representation
Section 163 of the Companies Act, 2013 lays down the provisions for the appointment of directors. Two-thirds of a company’s total number of directors would be selected either by voting or cumulative voting. This can also be done by voting every three years whenever vacancies in the position arise.
Appointment of Chief Financial Officer, Chief Executive Officer and Company Secretary
The appointment process for all the KMPs other than the director is quite similar. They are appointed by the resolution containing the conditions for their appointment to the respective positions. It would be decided and passed by the members of the board of the company. It is also mandatory for them to hold office in only one company at one time as per Section 203 (3). If the person is appointed as the CEO or CFO of more than one company, they must select one company to continue the position within six months of joining the other company.
Recommendations of the committee
Every company has a Nomination and Remuneration Committee as per Section 178 of the Companies Act, 2013. They decide the appointment and other remuneration facilities for the members of the company, so KMPs are appointed after a prior recommendation from them. In many companies, a recommendation from the Audit Committee is also taken into consideration under Section 177.
General meeting of the Board
Under Section 173 of the Companies Act, 2013, a meeting of members of the board is summoned by notice within at least a week before the meeting. The agenda and purpose of the meeting are clearly stated in the notice. The board members hold a meeting in which the KMPs are appointed by approving the resolution of the above-mentioned committees. The letter of appointment is then given to the respective person according to their designation.
SEBI stands for Security Exchange Board of India, and it is responsible for regulating the securities and several commodities markets in India. The meeting minutes are circulated to the board members, and if the company is listed with any stock exchange, then the change is notified to the stock exchange within 24 hours of such an appointment. The same is also modified on the website of the company within 2 days of the meeting. This is mandated by SEBI Regulation 30 and Regulation 46.
Filing of Forms with ROC
The company must file Form MGT-14( this form is used for filing and passing resolution) to the Registrar of companies within thirty days of appointment, as laid down by Section 117. As per Section 170, Form DIR-12 must also be filed within sixty days, which would contain all the particulars of the appointment of the KMPs, which would include- a certified copy of the resolution that the board members passed, the letter of appointment and other documents as prescribed by the registrar.
Entry in Register of ROC
The appointment process is concluded by making changes in the register of the directors and key managerial personnel as mandated by Section 170 of the Companies Act, 2013.
State Bank of Travancore v. Kingston Computers (I) P. Ltd. (2011)
In the case, the Supreme Court set aside the order given by the Delhi High Court and upheld the judgement by the trial court. In this case, the plaintiff company State Bank of Travancore, had filed a suit against the illegality of handling of suits by Mr AK Shukla, who claimed to be one of the Directors of the Company and also claimed that he had been authorised to handle and file suits on behalf of the company by the CEO of the Company, Mr RK Shukla. This claim was rejected by the trial court as the appointment was not in lieu of the procedure established by the law. The Delhi High Court had overruled this judgement and ignored the lack of evidence backing the appointment, so the matter was appealed to the Supreme Court.
The issue raised in the Supreme Court was whether the order of the High Court was just and not violative of any law.
The Supreme Court upheld the trial court’s judgement, reversing that of the High Court’ and laid down that “No person shall conduct the affairs of the company if they are not authorised by the company to do so.” Since Mr AK Shukla was appointed by the CEO of the company Mr RK Shukla by issuing an authority letter and was allowed to handle the matters of the company and file suit on behalf of the company, it is an unlawful appointment. This is because the appointment was not made by the company’s Board of Directors, and the provision of Sections 203 and 196 were not followed. So, the suit filed by Mr AK Shukla was dismissed, and the appeal was allowed.
Mayank Agarwal v. Technology Frontiers (India) Private Limited (2021)
In this case, the plaintiff Mr Mayank Agarwal filed a suit against the defendant company alleging professional misconduct by the Company Secretary, Mr Sriram S., as he was acting out of his authority as a Company Secretary and sought to pay all the costs associated with the company to the plaintiff for the wrongs done against him. The suit filed by the company secretary was adjudicated. The company was responsible for issuing a notice or making declarations on behalf of the company. It acted according to the board of directors, so the suits filed by the company secretary were illegal and hence against the provisions of the law.
The issue raised in this case was whether the company secretary was empowered to act on behalf of the company when the company is alone responsible for applying for cases.
It was held by the Tribunal that the Company Secretary is one of the key managerial personnel. Hence, he is also the Compliance Officer of the company, and he is empowered to perform the duties assigned to him by the company. The resolution passed by the board of directors is not required to substantiate special powers upon him. Also, as per the Order 20 of the Civil Procedure Code, 1908, the Company Secretary, by virtue of the office he holds as per section 203 of the Companies Act, can take up and sign and verify pleadings on behalf of the company. The Company secretary has also gotten certain functions as per Section 205 of the Companies Act, 2013 and Rule 10(4). The judgement held that the Company Secretary was acting within his scope of authority as he was adhering to adequate due diligence while filing the suit, and hence the application was dismissed.
LSF10 Rose Investment S.A.R.L. v. Rattanindia Finance Private Limited and ors. (2022)
In this case, the petitioner LSF 10 Rose Invest, and the respondents, Rattanindia Finance Private Limited, were in conflict regarding the appointment of the position of full-time CFO. The Article of Association laid down the procedure for the appointment of the CFO, which was that the petitioner had the right to nominate a CFO, and the respondent could take it down if dissatisfied. The petitioner could nominate a second CFO, and if that is also rejected by the respondents, they can appoint a third CFO. The petitioners had nominated two candidates, both of whom were rejected by the petitioners on the ground of Section 203(3), according to which a KMP could hold office in one company at a time. Since the nominated persons failed to disclose their interest after their nomination as to what company they would be working with, they were rejected. When the last candidate was rejected, the petitioner filed several applications to the tribunals to appoint the third nominee as the CFO, as agreed in the Articles of Association.
The issue raised was whether the petitioner acted unlawfully by filling several applications for failure to appoint the third nominee as the CFO.
It was held by the tribunal that the Article of Association clearly lays down the procedure to be followed. So the defence on the ground of the validity of nomination could not be taken by the respondents. Since the respondents claimed that the first two nominees were invalid on grounds as per Section 203, it does not imply that the third nominee, who had validity, counted as the first-named candidate. So following the article of association, the tribunal ordered the appointment of the third nominated candidate, the CFO of the company and the application was allowed.
Scheme of Arrangement and Amalgamation of Samco Commodities Limited with Samco Securities Limited (2022)
In this case, the abovementioned amalgamation of the Scheme of Arrangement and Amalgamation of Samco Commodities Limited, the transferor Company with Samco Securities Limited, the Transferee company was concerned, and the case was brought before the tribunal for the observations by the official liquidator appointed by the Registrar of the companies. Among other observations, one of the significant points of concern was that the amalgamating companies had not appointed any Company Secretary as per the requirements laid down by the provisions of the Companies Act, 2013. The company had filed for compounding offences for the failure of compliance with the Registrar of Companies.
The issue raised was whether the company would be allowed to file the application for the compounding of offences for not complying with Section 203 and appointing a Company Secretary.
The tribunal observed that the companies failed to comply with the given standard of appointing a company secretary even after qualifying the criteria for appointing one. The observation by the Official Liquidator, however, revealed that the companies had, after being informed, appointed a company secretary and applied for compounding of the offence committed. So, the liquidation was allowed, and the application for compounding of offence with the Registrar of companies was accepted.
Key managerial personnel are the most important part of the company. They are responsible for the significant amount of work done and are also in charge of making many decisions during their employment. So it is paramount to ensure that the KMPs are qualified as per the norms and that the appointment is in consonance with the prescribed statutes. Since these provisions are made for the benefit of the company and the people employed, they must be complied with in all senses.
Frequently Asked Questions (FAQs),
Can a Managing Director be appointed as a Director?
Yes, an MD can hold office as a director in a maximum of 20 companies, but this must be notified to the ROC.
Where are the forms filed?
The forms are filed with the official website of the Ministry of Company Affairs online. They must be filed within the specified time as the Act or government prescribes.
Does the central government have any role in the appointment procedure?
As per Section 200 of the Companies Act, 2013, if the company fails to comply with any Schedule V standards, the Central Government may be requested to facilitate the appointment of KMPs.
- Company Law by Avtaar Singh, 17th Edition
- https://taxguru.in/company-law/ceo-appointment-companies-act-2013.html#:~:text=The%20Companies%20Act%2C%202013%20do es, Chief%20Executive%20Officer%20(C.E.O.).
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