The curious case of the "Chief Executive Officer" under the Companies Act,2013

One of the innovations in the Companies Act,2013 (hereinafter referred to as “The Act”) is that it has given rise to a new genre of corporate personnel who are collectively referred to as “key managerial personnel”(KMP). The KMP is  collectively defined under Section 2(51) of the Act to mean in relation to a company the following personnel:

• the Chief Executive Officer or the managing director or the manager;
• the company secretary;
• the Whole-time director;
• the Chief Financial Officer;and
• such other officer as may be prescribed.

Through the Companies ( Amendment) Act 2017, the contours of the above definition stands extended to include through a  revised clause (v) and the insert of a new clause (vi) respectively,such other officer  ,who stands at a level which is  not more than one level below the directors of the company  ,  who is in whole-time employment and  is designated as KMP by the Board and  such other officer as may be prescribed.

It is pertinent to note that the aforesaid amendments to Section 2(51) have been notified for application  effective from May.7, 2018 in consequence of which it is now possible for the Board to appoint as KMP, any officer holding a position other than what is stated in Clauses(i)to (iv) who stands at a hierarchy which is one level below the Board, is in the whole-time employment of the company and is designated as KMP. Apart from this, the MCA reserves the right to prescribe such other officer who may be brought within the ambit of the definition of “KMP”. As we write these lines, the MCA has not yet widened the scope of the definition.

Chief Executive Officer(CEO) defined

We have seen above that the CEO has been placed in the same pedestal as the Managing director or Manager of the company. Be that as it may, the Chief Executive Officer has been defined by Section2(18)to mean an officer of the company who has been designated as such by it.

A plain reading of the definition suggests that the incumbent shall be an officer of the company and he shall be so designated by the company. The definition does not contemplate that the CEO, inter alia,  has to be appointed by the Board pursuant to the requirements of Section 203 of the Act based on the recommendation of the Nomination and Remuneration Committee in cases where such a Committee has to be constituted in terms of Section 178 of the Act.

Section 203 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 stipulates that every listed company and every other public company having  a paid-up share capital of Rupees ten  crore or more shall have whole-time key managerial personnel which shall  include the Managing Director , or Chief Executive Officer or Manager and in their absence, a whole-time Director.

CEO need not be on the Board

The definition of KMP in Section 2(51) as also the definition of CEO in Section 2(18) make it clear that the Act does not contemplate that the CEO has to be necessarily on the Board of the Company. This postulate is also reinforced by the fact that Section 134(1) of the Act, interalia, directs the CEO of the company to sign the financial statements along with others referred to in the Section if he is a director of the company. It is pertinent to note that by the Companies(Amendment )Act, 2017 Section 134(1)has been substituted by a new sub-section which has the consequence of allowing the CEO to sign the audited financial statement of the company even if he is not on the Board as a director. As we write these lines, the above amendment in the law is yet to be notified.

Manager and Managing Director defined-Section 2(53) and Section 2(54)

Under Section 2(53)the term “Manager” is defined to mean an Individual who, subject to the superintendence, control and direction of the Board has the Management of the whole or substantially the whole of the affairs of a Company. The term also includes a Director or any other person occupying the position of the Manager by whatever named called whether such appointment is under a contract of service or not.

The definition of Managing Director under Section 2 (54)is similar to that of the Manager except that the incumbent has to necessarily be a Director on the Board and be entrusted with substantial powers of management of the affairs of the company. In contrast to the Manager, the Managing Director is not obliged to function, subject to the superintendence, control and direction of the Board.

CEO does not have substantial powers of management under the Act

Inexplicably despite the fact thatunder the Act, the CEO stands shoulder to shoulder with the Managing Director or the Manager  in terms of corporate hierarchy, he is not clothed with the substantial powers of management to manage the affairs of the company.  It is pertinent to note that much the same way that a Manager need not be a director of the company under the Act, the CEO too can be one who is not part of the Board. The failure in the Statute to arm the CEO with the powers of management is paradoxical, given that the Statute expects him to play the pivotal role in the company as the lynchpin operating in an executive capacity. Considering the above glaring lacuna in the law, it is necessary that if a company were to appoint a CEO who is not part of the Board, the Board should empower him suitably in terms of powers of management lest his office should be reduced to that of a sinecure. It is humbly submitted that the Law is suitably amended to eliminate the above aberration thus ensuring that the legal status of the CEO remains the same as that of the Managing Director or Manager or a whole=time Director where the company does not a Managing director.

CEO is also an “Officer in default”

Under Section 2(60) as the CEO falls within the ambit of the definition of KMP u/s 2(51), he shall be held responsible, inter alia, as an officer in default for any non-compliance with the provisions of the Act. The additional responsibility thrust on him under the Act makes it imperative that he should be clothed with powers of management , given the executive responsibilities he has to discharge.

Appointment and Remuneration of CEO does not come under Chapter XIII of the Act

Sections 196,197 and 198 of the Act contain provisions relating to the appointment and remuneration payable to the Managerial personnel. These provisions are to be read in conjunction with Schedule V of the Act.Part I of Schedule V sets out the conditions that are to be fulfilled for appointment of a Managing or Whole-time Director or a Manager without the  approval of the Central Govt.In this part of Schedule V, the Managing director or Whole-time Director or Manager are collectively referred to as” Managerial personnel”.

It follows from the above, that where a company appoints an incumbent  as a Chief Executive Officer without giving the appointee  with the said designation the tag of a Managing or Whole-time Director or Manager, such appointment can be made  without seeking  approval of the shareholders or for that matter the Central Govt. in case the conditions laid down in Schedule V  are not satisfied by the incumbent. Further, the remuneration payable to the CEO who comes without the trappings of a Director or Manager would also be not subject to regulation under Section 198 read with Schedule V .Similarly the remuneration payable to the CFO and Company Secretary would not also come within the ambit of regulation despite the fact that they fall within the genre of the KMPs. It is thus possible for a company to remunerate a CEO without going through the process laid down in Sections 197 and 198 read with Schedule V .The scenario gets transformed completely when the intention is to appoint a Managing or Whole-time Director or Manager. In such a case the   entire gamut of procedure contemplated in the provisions stated above will have to be ensured and endured by the company.

It defies logic that the rigmarole under the law needs to be applied differently for appointing a vanilla CEO as opposed to appointing a Managing or Whole-time Director or Manager, notwithstanding that they belong to the same league, in a manner of speaking.

In our view, the Statute should have provided for an uniform procedure for the appointment and payment of remuneration to the Managing or Whole-time director or the Manager  as also for the CEO, given that the Statute considers these positions to be synonymous with each other.

Drafting anomalies in Section 197 and 199

We have observed that Schedule V of the Act regulates the appointment and remuneration payable to ‘Managerial personnel” which expression collectively refers to the Managing or whole-time director or Manager as stated in Part I thereto. Hence Sections 196.197 and 198 have application for only Managerial personnel  apart from setting out the ceiling in terms of the overall managerial remuneration and the remuneration ceiling for directors who are neither managing directors or whole-time directors.Yet Section 197(13) inexplicably  ropes in the positions of the CEO, the Chief Financial Officer and the Company Secretary and stipulates, inter alia, that where the company has taken any insurance on behalf of the above category of persons, apart from the Managing director, Whole-time Director and the Manager for indemnifying them against any liability in respect of any negligence ,default, misfeasance, breach of duty or trust for which they maybe guilty in relation to   the company, the premium paid by the company on such insurance shall not be treated as a part of the remuneration payable to any such personnel. Considering that the section and Schedule V  does not regulate the remuneration of the CEO, CFO and Company Secretary , a selective reference to the above positions in sub-section13 of section 197 is somewhat misplaced and discordant. This subsection where it comes to the above personnel should have  appropriately  found a place in our view in Section 203.

In the same vein, the reference in section 199 to the recovery of excess remuneration , if any, paid to the CEO by whatever name called which becomes necessary due to restatement of the financial statements due to occurrence of fraud, or non-compliance with any provisions of the Act is also inappropriate as no ceiling applies  in the first place under the Act where it comes to the CEO ‘s remuneration unless it is assumed that the reference in this Section is to a CEO who is also  wearing the hat of a Managing Director or Whole-time Director which would justify the use of the expression “by whatever name called” after the words CEO in the Section.

Status of CEO under SEBI (Listing Obligations and Disclosure Requirements)Regulations, 2015

Regulation2(e)states that the CEO or Managing Director or Manager shall mean the person so appointed in terms of the Companies Act, 2013. The Listing Regulations corroborate the position in the Act in so far as the status of the CEO is concerned.

The listed company Board can therefore appoint as CEO any person who is not necessarily part of the Board nor is the Manager of the company. Notwithstanding the above, given the fact that the CEO as the executive head of the company has responsibilities to discharge under the Listing Regulations, most listed companies follow the pattern of appointing the CEO also as the Managing director or Whole time director or even as the Manager in exceptional cases.

Appointment of KMPs mandated only for certain classes of companies under Section 203

Section 203 of the Act read with Rule 8 of the Companies(Appointment and Remuneration of Managerial personnel)Rules, 2014 makes it mandatory for every listed company and every other public company having a paid up share capital of Rupees ten cores or more to appoint  whole-time  key managerial personnel. It follows from the above that private companies do not have the obligation to appoint whole-time KMPs. We would hasten to add that Rule 8A was introduced to the above Rules effective from 9.6.2014 through the Companies(Appointment and Remuneration of Managerial personnel)Amendment Rules ,2014 to provide that a company other than a company covered under Rule 8 which has a paid-up share capital of Rupees five crores or more to have a whole-time Company secretary. Despite the above insert, companies which do not come within the ambit of Rule 8 ibid continue to be exempt from the requirement of employing full time KMPs save and except for a Company Secretary if the company’s paid up capital touches the threshold of Rupees five crores or above.

Conclusion

From the foregoing discussion, it is clear that the legal position of a CEO who is not anointed either as a director on the Board or as a Manager additionally is somewhat ambivalent. The law needs to be streamlined so that his legal status is articulated appropriately. Further, the provisions of Section 196,197 and 198 read with Schedule V should be made applicable  uniformly across the entire genre of KMPs. The  provisions under Section 197(13) and 199 as elaborated need to be rectified. Otherwise, the CEO bereft of the appendage of a Director or Manager would be left donning the mantle of the executive head of the company without being equipped appropriately with authority under the law which would be blatantly unfair to the  incumbent.