Appointment of KMPs u/s 203 of the Companies Act 2013 - Issues

Introduction

The Companies Act, 2013 (hereinafter referred to as “The Act”) has ushered in a number of innovative changes as compared to its predecessor Act and one such novel feature relates to the mandatory   appointment    of “key Managerial Personnel”(KMPs) in the case of certain classes of companies. Lest it should be assumed that this is an altogether new requirement  , we would hasten to add that what the Act has done is to expand the genre of KMPs in contrast to the 1956 Enactment which called for the mandatory appointment of personnel bearing the designation of Managing Director(MD), Whole Time Director(WTD), the Manager and the Company secretary in respect of certain classes of companies satisfying the prescribed thresholds.In keeping with demands of present day business, with all its complexities, the present Act also calls for the appointment of a Chief Executive Officer (CEO) and Chief Financial Officer(CFO) in addition to the need for appointing a MD /WTD as also a Company Secretary.

In this exposition, we shall apart from analyzing the nuances of the law,bring to fore the inherent contradictions therein,the contentious issues which emerge all of which we surmise will engage the attention of the professional fraternity.

Key Managerial Personnel(KMP)-Defined

Section 2(51) in the Act provides a “means” and hence exhaustive definition to the above expression.Persons holding the following positions in a company are brought within the ambit of the term:

1. the CEO or the MD or the Manager
2. the company secretary
3. the WTD
4. the CFO and
5. Any other officer as may be prescribed.

The residual clause above facilitates the Central Govt. to expand   the contours of the definition.However till date the above clause has not yet been invoked.

CEO-Defined

Although the CEO is placed as per Section 203(1)(I)in the same pedestal as the MD or the Manager and in their absence,the WTD, inexplicably the definition of CEO as provided by Section 2(18) does not offer any such insight.The definition clause merely states that he is an officer of the company who has been designated by it.Evidently he has to be designated as such by the company and not by the Board.However, in as much as Section 179(3) read with Rule 8 of the companies (Meetings of Board and its powers)Rules, 2014  provides that the appointment or removal of KMPs represents a power which is exercisable  by the collective wisdom of the Board of Directors at a duly convened Meeting, it follows that the CEO has to be so designated and appointed by the Board , based on the recommendation of the Nomination and Remuneration Committee in accordance with the requirements of Section 178.

CEO has no powers of management under the Act

Despite his elevated status which equates him with the MD, inexplicably the CEO is not bestowed under the Statute with substantial powers of Management nor does the Act expect him to function under the direction and supervision of the Board.it is pertinent to point out that Sections2(54) and 2(53) respectively bestow on the MD and Manager , the powers to manage the whole or substantially the whole of the affairs of the company.This is a paradox in the law ,given the elevated status of the CEO and it would be appropriate that the law be suitably modified before long , yielding to the CEO the powers that are extended to the MD and the Manager.

CEO need not be a director of the company

The Act does not contemplate that the CEO of the company has to be inducted into the Board as  a director.Section 134(1) of the Act ,provides, inter alia ,   that the financial statement of the company need not be signed by the CEO unless he is a director on the Board.It is ironic that while the Statute takes cognizance of the fact that he is the executive head of the organization, standing shoulder to shoulder with the MD and WTD,he is not authorized to sign the financial statement of the company since he need  not necessarily be a Director.This is a paradox in the law with which we have to contend with for the present.

Mercifully the above aberration in the law has been taken note of for rectification   in the Companies (Amendment) Bill, 2016 which provides that the CEO can authenticate the financial statement irrespective of whether he is a director or not.

CEO’s remuneration is not subject to regulation

We have observed above that the CEO need not be appointed either as Managing Director or Whole-time Director of the company.In such a scenario, the remuneration payable to a CEO who is not designated wither as MD,WTD or as the Manager shall not be subject to regulation under Section 197 and 198 of the Act read with Schedule V of the Act.It is pertinent to note that under the Statute, remuneration payable to MD,WTD and the Manager constitutes part of “managerial remuneration” .If the arguement adduced  to  justify the elimination of  the remuneration of the CEO who is not a director from the ambit of Sections 197 and 198 is on the avowed ground that he is not a director,the same  does not hold water, given the fact that even though a Manager of a company is not  part of the Board of the company , yet his remuneration is to be monitored by the shareholders under the aforesaid provisions and in applicable cases , subject to approval of the Central Govt.

We would reiterate that as the CEO is the executive head of the company, his remuneration in all fairness, should be subject to members’ approval notwithstanding that he is not a part of the Board.Having said that, we would hasten to add that the CEO’s remuneration will however require the approval of the Board, based on the policy laid down by the Nomination and Remuneration Committee pursuant to the requirements of Section 178 of the Act.

Appropriateness of thresholds under Section 203 for appointment of KMPs

Section 203 calls for the appointment of whole-time KMPs in the case of companies which belong to a certain genre.Rule 8 of the Companies(Appointment and Remuneration of Managerial personnel)Rules, 2014 clarifies that the Section shall apply to every listed company and to every other public company which has a paid up capital of Rupees Ten Crores or more.As a private company which is a subsidiary of a public company , for all intents and purposes of law is a deemed public company, the section shall apply to such a company if its paid up share capital exceeds the prescribed threshold.

Applicability to a Listed Company

The term “Listed Company” has been defined by Section 2(52) to mean a company which has any of its securities listed on  any recognized stock exchange.The above definition is not restricted to only a public company whose equity shares are listed on a stock exchange.Under the Statute although a private limited company is debarred from inviting public subscription to its capital, there is no fetter on it   issuing on private placement, debt securities which can be listed for trading on any stock exchange.As the first limb of the criteria under Rule 8 ibid does not bear any reference to the size of its share capital , a private company which issues debt securities which are listed for trading on an exchange will be obliged to appoint KMPs even if it does not have the threshold size of capital.

In our view, as only equity capital is a permanent form of capital ,  the criteria under Rule 8 should have been restricted to cover only those companies which have their equity capital listed.Listing of debt securities is an episodic and transient phenomenon and the status of a company which has only issued listed debt securities will be ambivalent, with  its status being  relegated to that of an unlisted company once  the listed  debt instruments are extinguished.  

Implications of Rule 8A inserted through Amendment Rules

As the second limb of Rule 8 restricts its applicability to only public companies with a  paid up capital base of Rupees Ten crores or more , it follows,prima facie, that unlisted public companies with a capital base less than the above will not come within the ambit of Section 203.

However the insert of Rule 8A to the above Rules vide an amendment thereto  effective from 9.6.2014 to stipulate that a company other than a company covered under Rule 8 which has a paid up capital of Rupees five crores or more  but less than Rupees Ten Crores ,has to appoint a company secretary has given rise to  a situation whereby both  a public and  private company  with  a  capital base of Rupees five crores but less than Rupees Ten crores need to  appoint compulsorily a company secretary .The above amendment has the effect  therefore of restoring the status quo ante where it comes to the appointment of a company secretary under Section 383A of the erstwhile  1956 enactment.

 In our view, the above amendment was triggered off as a knee-jerk reaction to assuage the sentiments of young Company secretaries who feared loss of employment arising out of the revised requirement that only companies with a capital of Rupees Ten crores or above need appoint company secretaries.

Company Secretary appointed under Rule 8A is not a KMP

As Section 203 applies only to listed companies and to public companies  with a paid up share capital of Rupees Ten Crores or above, as per Rule 8 ibid,, the question that arises is whether a person who has been appointed as  a company secretary in a private  or public company which has a capital of Rupees five Crores or more  at the behest of  the requirements of Rule 8A  can  be considered as a KMP.In our view, the answer is in the negative as Rule 8A does not provide for the appointment of persons other than the company secretary who are to be designated as KMPs.

Appointment of KMP by Board approval only

Section 203 (2)makes it clear that the appointment of KMP shall be by means of a resolution of the Board setting out the terms and conditions  of the appointment including the remuneration payable.However, the sub-section does not spell out that such approval should be at a meeting of the Board.Section 179(3) read with Rule 8  of the Companies (Meetings of Board and its powers)Rules , 2014,clarifies that the power to appoint or remove KMP is exercisable only by the collective wisdom of the Board at a duly convened Meeting.As a prelude to the appointment by the Board, the incumbent’s candidature as KMP has to be recommended by the Nomination and Remuneration Committee as per its terms of reference under Section 178.

KMP not to hold office in more than one company except in its subsidiary company at the same time

Section 203(3)debars a KMP from holding office as KMP in any other company.This is a logical requirement given that the KMP is expected to devote his time only for the company with which he is associated as KMP.However, the sub-section makes an exception in so far as the appointment of the KMP as a KMP in its subsidiary company Is concerned.

The above exception gives rise to a question whether the KMP can be associated with more than one subsidiary as a KMP.This question emanates from a plain reading of Section 13 of the General clauses Act,1897, which provides that words importing the masculine gender shall be taken to include females and that words in the singular shall include the plural and vice-versa.

It is pertinent to note that Section 13 of the General clauses Act cannot be invoked if there is anything in  the Statute which is repugnant or inconsistent to the context.The erroneous consideration of section 13 in the context of Section 203 of the Act will give rise to a situation where a KMP may be appointed as KMP of more than one Subsidiary which would defeat the very purpose in the law which provides for appointment of whole-time KMPs. In fact , in our considered view, the concession allowed by section 203(3)to  a subsidiary company is misplaced and deserves to be obliterated.

Appointment of person as Managing director or Manager of two companies

The third proviso under section 203(3) is an exact replication of Section 316 of the 1956 Act.The proviso allows a person who is already a Managing director or Manager of a company to be appointed as Managing Director or Manager of another company subject to his appointment in the other company being approved unanimously at a Meeting of the Board of the first company.

In our view, given the fact Section 203 of the Act has given birth to the requirement of appointing whole-time KMPs , the above proviso is not in synchronization with the  intention of the law.

Can the same person hold two positions of KMP in the same company

Thequestion whether the same person can wear two hats in the same company as KMP ,namely as a Company Secretary and CFO or as Company Secretary and Manager has been raised often times.In our view, there is nothing in the Statute which prevents such an arrangement.However, from the standpoint of governance as also considering the fact that particularly in the context of large companies in which holding a single designation as a KMP is demanding enough, it is preferable that a person be asked to don the mantle of the position of KMP with a single designation only.

Conclusion

We have endeavoured in the above discussion a number of contentious issues for which there are no clear cut answers.The law on the subject needs to be refined further to refine some of the contradictions.Notwithstanding,corporate India has by now  got accustomed to contend  with the requirement of appointing KMPs.