Definition of Key Managerial Personnel
The concept of appointing Key managerial Personnel (KMPs)in the case of certain classes of companies has found a place in the statute Book for the first time through the insert of Section 203 of the Companies Act(herein after referred to as “The Act”).Before we discuss the substantive law on the subject ,let us look at Section 2(51) of the Act which provides the exhaustive definition of a KMP.In relation to a company, a KMP means-
i) the Chief Executive Officer (CEO)or the Managing director or the Manager.
ii) the company Secretary
iii) the whole time director.
iv) the Chief financial Officer(CFO).
v) Through an insert to the Section made effective from 9.2.2018 through the Companies (Amendment)Act, 2017 , such other officer , not more than one level below the directors who is in whole time employment, designated as KMP by the board.
The above inclusion in the definition allows the discretion to the Board of a company to designate as KMP, a person who is in full time employment of the company and who, in the echelons of corporate hierarchy stands one level below the members of the Board.
vi) Such other officer as may be prescribed.
The residual clause empowers the Central govt. to designate any other officer as a KMP but the Govt. is yet to invoke its jurisdiction on the above.
Readers will recall that under Section 269 of the Companies Act, 1956 there existed an obligation on the part of public limited companies and private companies which were subsidiaries thereof, with a paid –up share capital of Rupees five crore or more to appoint a managing director or whole time director or the Manager who were collectively referred to as "Managerial Personnel".
The requirement for compulsory appointment of a company secretary came about much later in the 1956 Act through the introduction of Section 383A with effect from 1.2.1975 by the companies (Amendment)Act, 1974.Initially the threshold paid up share capital for appointment of a company secretary was Rupees twenty five lacs. The threshold was increased to Rupees five crores through an amendment put through by the Companies (Amendment) Act, 1988 effective from 1.12.1988.
It is pertinent to note that, notwithstanding the obligation that existed in the law to appoint the above category of persons, none of them were designated either as KMPs or by another appropriate terminology.
Status under Listing regulations
Regulation 2(o)of the SEBI(LODR)Regulations, 2015 replicates the definition of a KMP as provided under Section 2(51) of the Act.
In addition, the above Regulations makes use of the terminology of “Senior Management”under Regulation 16(1)(d)to meanofficers /personnel of the listed company who are members of its core management team excluding the board of directors and normally shall comprise all members of management one level below the CEO/managing director/whole time director/manager (including the CEO/Manager in case they are not part of the Board )and shall specifically include the company secretary and chief financial officer.The above is the substituted definition of the term which has been made effective from 1.4.2019 through the SEBI(LODR)Amendment Regulations, 2018.
Requirements of appointing KMPs-Section 203 in the Act
Section 203 which was made enforceable from 1.4.2014 provides , inter alia, that every company belonging to such class or classes as prescribed, shall appoint compulsorily the following KMPs-
a) Managing director or chief executive officer or manager or in their absence a whole time director. It follows from the above that a whole time director becomes a KMP only if the company has failed to appoint a managing director or CEO or manager.
b) Company secretary and
c) Chief financial officer(CFO).
Section 203 (1) has to be read conjointly with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel )Rules, 2014 which provides that every listed company and every other public company having a paid up share capital of ten crores or more shall have full time managerial personnel to be designated as KMPs.
Considering the fact that the definition of a “public company” under Section 2(71) has an extended connotation in that it includes a private company which is a subsidiary of a public company, it follows that the requirement to appoint full time KMPs applies to even a subsidiary private company.
Listed Company to appoint KMP even if its paid up share capital is less than rupees ten crores
A listed company has been defined under Section 2(52) to mean a company which has any of its securities listed on any recognized stock exchange.As the definition does not restrict itself to a company whose equity capital alone is listed, it is obvious that even if the company has any other security such as a debt instrument which is listed , it comes within the ambit of Rule 8 making the company liable to appoint a KMP.The status of such a company as a listed entity may, in consequence of the above, be ambivalent in that it would lose its status as a listed company once the instrument listed has been repaid or retired .Listing of a security is episodic and it cannot be the yard stick for determining the status of a company. Viewed against this perspective, the definition of a listed company in Section 2(52) is defective and it is therefore in the fitness of things that a review of the definition has been called for in the Companies (Amendment)Bill, 2020 which might eventually culminate in the status of a listed company being restricted to one whose equity capital alone is listed .
No person to hold dual offices of chairperson and Managing director/CEO in certain cases
The first proviso under subsection (1)of section 203 imposes a restriction on the same person being appointed as chairperson of the company as well as the CEO/managing director of the company at the same time pursuant to the company’s articles unless the articles of the company provide otherwise or the company does not carry on multiple businesses.The above proviso is in line with the accepted principles of corporate governance followed universally which provide that the chairman of the company shall not don the mantle of CEO/Managing director simultaneously.
The second proviso to the subsection clarifies that the first proviso shall not apply to such classes of companies which are engaged in multiple businesses and which have appointed one or more CEOs for each of such businesses as may be notified by the Central Govt.In terms of notification No.SO 1913( E) dated 25.7.2014 , public companies having a paid up share capital of rupees one hundred crores or more and an annual turnover of one thousand crores or more which are engaged in multiple businesses and have appointed CEO for every such business have been considered as notified companies for the purposes of the above proviso by the Ministry of Corporate Affairs(MCA).
Taking a cue from the above ,SEBI has also mandated through the insert of sub-regulation (1B)under Regulation 17 that effective from April,1, 2020 the top 500 listed companies as determined on the basis of their market capitalisation for the preceding financial year shall ensure that the chairperson of the board shall be a non-executive director and is not related to the managing director or the CEO as per the definition of “relative” as provided in the Act.
The above restriction shall not, however, apply in the case of those companies which do not have any identifiable promoter as per the shareholding pattern filed with the Stock exchanges.
We would hasten to add that the implementation of the above sub- regulation has been put off for a period of two years by SEBI and it will kick in belatedly from April,1, 2022 .
Appointment of KMP shall by resolution of the Board-Section 203(2)-Can such approval be by circulation
The appointment of a KMP shall be approved by the board through a resolution which incorporates the terms and conditions of the appointment including the remuneration payable.The question that comes up for consideration is whether such approval can be obtained through a resolution passed by circulation .The answer to this question is an emphatic“ no” considering that Section 179 (3) read conjointly with Rule 8 of the Companies(Meetings of Board and its powers)Rules 2014 stipulates that the appointment or removal of KMPs shall be made by the board only by means of resolutions passed at its meetings.
Appointment of KMP to be preceded by the recommendation of the Nomination and Remuneration Committee (NRC) of the Board
Section 178 of the Act read with Rule 6 of the Companies (Meetings of board and its Powers)Rules, 2014 provides that Listed and other public companies which are covered under Rule 4 of the Companies(Appointment and Qualification of directors)Rules, 2014 shall constitute a NRC.The NRC, as part of its functions, has to identify persons who may be appointed in senior management in accordance with the criteria laid down and recommend to the Board their appointment. The NRC shall also be responsible for formulating the criteria for determining qualifications, positive attributes and independence of a director and to recommend to the board the policy relating to the remuneration payable to the directors ,KMPs and other employees.
The Act does not expressly provide that the recommendation of the NRC for appointment of a KMP has to be madeonly at a meeting of the Committee. The recommendation can be through a circular resolution also. However, given the ramification of the recommendation as also perhaps the need to discussacross the table the merits of the contenders for the position, it would be agood secretarial practice to have the recommendation approved at a properly convened meeting of the NRC.
Appointment of CFO to have approval of the Audit Committee under Listing regulations
Apart from the recommendation of the NRC, in the case of listed companies the appointment of the CFO has to be approved by the Audit committee. Regulation 18(3) of the Listing regulations read with Part C thereof , provides that the audit committee shall approve the appointment of the CFO after assessing the qualifications, experience and background etc. of the candidate. The pertinent question that emerges from the above is whether the Committee should approve the appointment after it has been approved by the Board or should its approval precede the board’s approval.The latter would appear to be the correct procedure given that every Board committee being a sub-set of the board, is subservient toit.
Whole time KMP shall not hold office in more than one company except the subsidiary company at the same time-Section 203(3)-Can such appointment be in more than one subsidiary
This subsection imposes fetters on the KMP of one company holding office as KMP in more than one company, with the exception being that he can be associated in that capacity in a subsidiary company at the same time.
The question that is raised often on this issue is whether this association as KMP could be extended to more than one subsidiary. It is pertinent to note that under Section 13 of the General Clauses Act , 1897, in all central Acts and Regulations , unless there is anything repugnant in the subject or context, words importing the masculine gender shall be taken to include the feminine and words in the singular shall include the plural and vice versa.
Considering the above provision, it can be argued forcefully that the term “subsidiary” as used in section 203 (3) could include more than one subsidiary and hence a person while being KMP of the Holding company, can be associated as KMP of more than one subsidiary.
It would interesting to dip into the rich repository of jurisprudence available on the issue.In an interesting case, the word”machine “ as applied in an exemption notification issued under Section 25 of the customs Act, 1962 was interpreted to include “machines” in Collector of Customs v United Electrical Industries Ltd.(AIR 1999 SC 3796 )(2000) .Again in the case of J.Jayalalitha v UOI(AIR 1999 SC 1912) it was held that in the expression “Special judge appointed for case” as occurring in section 5 of the Prevention of Corruption Act , 1988 was interpreted to include “cases” and a Special Judge appointed “for a group of cases”was held to be covered by the expression “case”.
The question is whether such liberal interpretation of the singular to include the plural can be applied universally in all circumstances and cases. Section 13 of the said Act prohibits such extension of the singular to cover the plural where it is repugnant to the subject or context. The position of the KMP in a company, brings with it onerous responsibilities, apart from exposure to legal consequences in cases of non-compliance with the provisions of law.That being so, it would be a travesty of justice if the KMP of the holding company were allowed to be associated as KMP of more than one subsidiary. In fact in our view, the law should not allowed the KMP to be associated as KMP of a subsidiary company in the first place as this would be in a sense contrary to the requirement of the law which calls for “whole-time “ association with the company of which he is a KMP.The position in the law makes it possible for the company secretary of the Holding Company to be Company Secretary simultaneously of the Subsidiary company.This is contrary to the accepted convention that a person shall be company secretary of only one company.
It is pertinent to note that in several cases, the extension of the singular to include the plural has been denied by the Judiciary.In Dhandhania Kedia & Co V CIT(AIR 1959 SC 219) the Apex Court has held that in construing the definition of “Previous Year” in Section 2(11) of the Income Tax Act, 1922, it has been pointed out that the definition was not applicable for construing "previous years" and that the rule that the singular included the plural was not attracted as it was repugnant to the subject and context of the definition ,for there could only be one previous year to the year of assessment.
Similarly , it has been held that the word” member” occurring in the definition of “tenant” as enacted in the Increase of Rent and Mortgage Interest (Restriction)Act, 1920 meant only one member, a contrary intention appearing so as to exclude Section 1(1) of the Interpretation Act , 1889.(Dealex Properties Ltd v Brooks)(1965)1 All ER (1080).
Given the above position in the law, in our view, the KMP of a holding company can be a KMP of only one subsidiary and not beyond.
The above view is lent greater fortification by the second proviso to the sub-section which clarifies that if a whole-time KMP is holding office in more than one company at the same time on the date of commencement of the Act, he shall within six months from the commencement of the Act ,make a choice as to the company with which he wishes to continue as KMP.
KMP can be director in any company with the permission of the board
The first proviso under Section 203(3) allows the involvement of a KMP as a director in another company provided, he obtains the permission of the board of the company of which he is KMP. In the absence of such permission, he is disentitled from holding such position.
Can the same person hold two positions as KMP in the company
It is not uncommon to find that the same person holds the position of Company secretary and CFO in the company.In fact this practice is followed by a number of companies including large listed companies .Is there any restriction against such multi-tasking.In our view there is no expressprovision in the law which prohibits such practice. In State of Gujarat v CoromandalInvestment (P) Ltd (71 comp case 470)(Guj.), the court held in the context of Section 383A of the 1956 Act that where the Secretary of the respondent company was also an employee of another company, there was no violation of Section 383A of the Act.
Similarly in H.M.IbrahimSait v Mettupalayam Narayani Bank Ltd.(10 comp Case 300)(Mad.) it was held that a director of the company could act as company secretary of the company and could conduct all court proceedings including filing of insolvency proceedings.
It is pertinent to note that Section 383A in the 1956 Act called for the appointment of a whole-time company Secretary.In the same vein, Section 203 of the Act speaks about the appointment of whole-time KMPs. In our view, as long as the KMP is associated in a whole-time span> capacity in the company, the law is satisfied even if he is donning two hats simultaneously. Having said this, since better corporate governance is the need of the hour , a company should not go overboard and appoint the same person as KMP for three positions.
Is the company Secretary of a private company with a paid up share capital of Rupees ten croresor more a KMP
Rule 8A in the Companies(Appointment and Remuneration of Managerial Personnel)Rules, 2014 was introduced with effect from 9.6.2014 to provide that a company other than a company covered under Rule 8 which has a paid up share capital of five crore rupees or more shall have a whole-time company secretary. This rule has again been substituted with effect from 1.4.2020 by the Companies (Appointment and Remuneration of Managerial Personnel)Amendment Rules, 2020 to provide that every private company which has a paid-up share capital of rupees ten crores or more shall have a whole-time company secretary.Does the person so appointed pursuant to the above Rule be considered as a KMP of the company.In our view, he does not qualify for such consideration as a KMP.This view stands fortified by the fact that Section 203 (1)calls for the appointment of KMPs in a certain class of companies. Companies which come within the purview of the above provision have to appoint KMPs,apart from the company secretary.Rule 8A calls for only the appointment of company secretary in case of private companies with a paid up share capital beyond the prescribed threshold. The appointment of any other KMPs has not been mandated by this Rule and hence the above conclusion.
The curious case of the CEO under the Act
The term CEO has been defined by Section 2(18)to mean an officer of a company who has been designated as such by it. It is pertinent to note that a person can be designated as a CEO without being made a part of the board. At the same time , he is ranked alongside the managing director or manager of the company.Notwithstanding the above, it is intriguing to note that unless he is made a part of the board as managing director , he is not bestowed with substantial powers of management. As a vanilla CEO his remuneration is not subject to regulation by shareholders either since he is not a “Managerial Personnel” under Section 197 read with Schedule V of the Act. The only reference to the CEO under Section 197 comes in sub-section (13) which provides that where any insurance is taken by the company for the CEO and others for indemnifying any of them against any liability in respect of any negligence , default , misfeasance , breach of duty or breach of trust for which they maybe guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel. However, if such person is proved to be guilty, the premium paid shall be treated as part of his remuneration.
At the same time under Section 2(60) the CEO is liable for punishment as officer who is default along with other KMPs.
Considering the above, it is imperative that the remuneration of a vanilla CEO is brought within the ambit of regulation and he is also endowed with powers of management by the Board as the Chief Officer of the company. The office of the CEO who is not part of the board cannot be belittled by the Act and it is appropriate that he is perched at the highest echelons of the corporate structure.
KMP an officer and also an officer who is in default
The KMPs are considered as “officers” under Section 2(59) of the Act and are also responsible as “officers who are in default” under Section 2(60) making them liable for any penalty or punishment by way of imprisonment , fines or otherwise for non-compliances committed by the company of any of the provisions of the Act.Under Regulation 5 of the Listing Regulations, the KMPs apart from the directors or any other persons dealing with the company are under obligation to ensure that the company complies with the responsibilities or obligations that are thrust on it by the regulations.
Managing director of one company can be managing director of another company
Where a person is acting as managing director or manager of one company, he is allowed in terms of the last proviso to section 203(3), to be appointed managing director of another company provided such appointment or employment is made or approved by a resolution passed at a meeting of the board of the second company with the unanimous consent of all the directors present at the meeting. It is also imperative to ensure that the proposal for such appointment should be incorporated in the notice convening the meeting.
It is however, pertinent to note that the whole -time director of a company cannot be associated as whole- time director of another company.This is on account of the fact that ,by definition under Section 2(94),a whole time director is one who is in the whole-time employment of the company.
Vacancy in the office of KMP to be filled up by board within six months from the occurrence of such vacancy-Section 203(4)
The above sub-section enjoins upon the board to take action by filling up a casual vacancy in the position of KMPs at a duly convened meeting. The approval of the board shall be invariably preceded by the process of seeking the recommendation of the NRC , where there is a need to constitute one, of the proposed appointee.
Conclusion
The above exposition encapsulates the quintessence of the law on the subject. While making the appointment of KMPs in certain classes of companies compulsory is laudable, certain nagging questions remain still unanswered, leaving room for interpretation. There does not appear to be any justification in the law in allowing the same person to act as Managing director of two companies , given the complexities of the eco-system of the present day.Why should the vanilla CEO be bereft of any substantial powers of management unless he has the additional trappings of donning the mantle of a Managing director as well. Why should the KMP of a parent company be allowed to serve as KMP in a subsidiary. Answers to these questions need to be found and it is about time the MCA rose to the occasion to clear the cobwebs of doubt that exist in several quarters on such matters.
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