KEY MANAGERIAL PERSONNEL

UPDATE: on 30^th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

In any jurisdiction, Quality of Corporate Governance and compliance of ethics depends upon quality of people taking charge of the affairs. The companies Bill 2012 have some inbuilt elements of corporate governance in it. First time Concept of Key Managerial Personnel is being introduced in India. Which seems different with “officer who is in default” as that concept is still in this Bill.

THE GANG CALLED KEY MANAGERIAL PERSONNEL (SECTION 2):

Key managerial Personnel are a particular class of Officers of the company. In legal terms, “officer includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.” See Section 2 (59). Some particular officers are designated as “officers who is in defaults”.

“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default.

Prima facie, independent Directors, non – executive directors are “officer” of the company but not “officer in who is in default”. This is clear from this clause that Key Managerial Personnel are further a class of “Officer who is in Default”.

Definition clause (51) of Section 2 of the Bill, define Key Managerial Personnel in these words:

“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed.

There may not be much practical difference in these two class of officers called “Officer who is in default” and “Key Managerial Personnel”; unless subordinate legislations have some clear vision about “such other officer as may be prescribed” in the definition of Key Managerial Personnel.

This is also interesting to note there is possibility of part – time key managerial personnel under section 203.

For sake of celerity, I reproduce definition of all terms used in this definition of key managerial personnel.

“Chief Executive Officer” means an officer of a company, who has been designated as such by it. (Clause 18)

“Managing Director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. (Clause 54)

“Manager” means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not. (Clause 53)

“Company Secretary” or “Secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act. (Clause 24)

“whole-time director” includes a director in the whole-time employment of the company. (Clause 94)

“Chief Financial Officer” means a person appointed as the Chief Financial Officer of a company. (Clause 19)

APPOINTMENT OF KEY MANAGERIAL PERSONNEL (SECTION 203):

This section provides insight of appointment of key managerial personnel. It may be noted that this section is a general section which talk about detailed board resolution but specific sections like Section 196 are also need to comply, as the case may be. Existence of provision like section 196 pave a way for different hierarchical treatment among different key managerial personnel.

Classes of Key Managerial Personnel (Sub – section 1):

Plain reading of Sub – section (1) of Section 203, irrespective of definition clause 2(51) classify key managerial into three clauses:

(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.

This sub – section read, “Every company belonging to such class or classes of the companies as may be prescribed shall have the following key managerial personnel”. There is no scope to classify different category of companies for different key managerial personnel. Once a company falls into a classification, it will have to appoint one person for each of three classes of key managerial personnel. This means at a given time there shall be 3 key Managerial Personnel in a company unless there is any vacancy.

First Proviso of this sub – section say, an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,—

(a) The articles of such a company provide otherwise; or

(b) The company does not carry multiple businesses.

Hence, there is an attempt to separate position of chairperson of the company and position of Managing Director or Chief Executive Officer. It seems to open for speculation that a Manager, if he is also a director and a Whole – time director may be chairperson of a company but not Managing Director or Chief Executive officer of the company. Same position may also be true for company secretary or chief financial officer.

Second proviso permits one or more Chief Executive Officer, not managing director, for a company with multiple businesses.

Manner of Appointment (Sub – section 2):

Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration.

I have two observations: (i) this sub – section use term “whole-time key managerial personnel” and (ii) Resolution containing terms and conditions”. This means there is a fair possibility of part – time key managerial personnel. Further, all terms and conditions for appointment of whole time key managerial personnel must be part of resolution for appointment. This also means part – time key managerial personnel may be appointed without any such resolution. (I hope, there will be no part –time – whole – time director.)

Limit on number of positions (Sub – section 3):

Whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time. He can be a director of any other company with the permission of the Board.

A company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company and such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.

According to this proviso, a person may be appointed as managing director of another company, if he is a managing director or manager of first company. However, if a person is managing director of first company, he may not be manager of another company. Such appointment of managing director shall be in meeting of board of directors not otherwise. It requires specific notice.

Vacancy in office (Sub – section 4):

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Penalty on contravention (Sub – section 5):

If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every director and key managerial personnel of the company who is in default shall be punishable with fine which may extend to fifty thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

You can notice “Key Managerial Personnel who is in default” against “Officer who is in default” in this sub – section.

REGISTER OF KEY MANAGERIAL PERSONNEL: (Sub – section 1 of Section 170)

Every company shall keep at its registered office a register containing such particulars of its directors and key managerial personnel as may be prescribed, which shall include the details of securities held by each of them in the company or its holding, subsidiary, subsidiary of company’s holding company or associate companies.

RETURN OF KEY MANAGERIAL PERSONNEL: (Sub – section 2 of Section 170)

A return containing such particulars and documents as may be prescribed, of the directors and the key managerial personnel shall be filed with the Registrar within thirty days from the appointment of every director and key managerial personnel, as the case may be, and within thirty days of any change taking place.

PROHIBITION ON FORWARD DEALINGS IN SECURITIES OF COMPANY BY KEY MANAGERIAL PERSONNEL (Section 194):

No director of a company or any of its key managerial personnel shall buy in the company, or in its holding, subsidiary or associate company—

(a) a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or

(b) a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.

These are important provisions related to Key Managerial Personnel. Some other important sections include; Sections 21, 61, 92, 102, 118, 141, 149, 170, 177, 189, 194, 195, 209, 232, and 257.

Please note blog post is not a professional advice but general information about the subject covered here. You may use one or more of buttons given below to share this blog-post.