Key Managerial Personnel - Some Key issues....

AN INSIGHT INTO KEY MANAGERIAL PERSONNEL (KMP) IN COMPANIES ACT 2013  

 

              

                                            By: CS. Ashwin Jayagopal 

Ø  The new Act has introduced the term Key Managerial Personnel. This is to take within its ambit a wider set of officials who are in today’s corporate framework playing an important role in the affairs of the companies.

WHO ARE TERMED AS KMP

1.    CEO / MD / MANAGER

2.    COMPANY SECRETARY

3.    WHOLE TIME DIRECTOR

4.    CHIEF FINANCIAL OFFICER

APPOINTMENT OF KMP

According to Sec 203(1) and Rule 13.6 every listed Company and every other company having a paid -up share capital of five crore rupees or more shall have whole-time key Managerial Personnel.

Please note that the Company must have appointed full time KMP as per the 4 categories mentioned above.In other words the Company can either have CEO/MD/Manager and it should mandatorily appoint CS, WTD and CFO.

As far as CS in employment are concerned, the 5 crore limit is similar to the limit given in erstwhile Sec. 383 A of the Companies Act 1956. However this limit is now given in the Draft Rules and we need to wait and watch what will be the final amount in this regard.

ROLE OF KMP:

Ø  KMP is treated as an ‘officer’ of the Company as well as ‘officer in default’. Thus he is entrusted with the task of ensuring that the provisions of the Act are complied with.

Ø  In certain cases, the role of each KMP is defined. For instance, in case of financial statement the role of CFO and CS is distinctly mentioned.

Ø  KMP AS AN AGENT OF THE COMPANY  

KMP can enter into contracts on behalf of the Company and has ostensible authority to act on behalf of the Company.  

It is certainly a provision which has to be welcomed with open arms as Company Secretary and CFO are entrusted with powers to sign the contracts on behalf of the Company and legislation gives this recognition to them.

Further there are instances where some clients used to insist for a Board resolution to show that the concerned  (Director, Company secretary or the Authorized signatory) is entitled to sign on behalf of the Company. Now, whenever such a question is raised, this provision can be shown and explained to them.  Thus, every contract need not be taken to the Board for its consideration.

POINTS ON APPOINTMENT OF KMP

Ø  Every KMP shall be appointed by means of a resolution of the Board containing the terms and conditions of appointment including remuneration.

Ø  A whole time KMP shall not hold office in more than one company at the same time. Two exceptions to this

·         He can act as KMP in the subsidiary Company at the same time.

·         He can be a director in any other company with the permission of the Board.

Ø  If a whole time KMP is holding office in more than one company at the same time on the date of the commencement of the Act, he has to choose one company and resign from the other companies within 6 months from the commencement of the Act.

Ø  This provision gives raise to a situation where a Company Secretary of the Holding Company can be the Secretary of its Subsidiary also. Currently both the Holding & Subsidiary Companies will have different Secretaries; but going forward corporate may prefer to have a single Secretary for the Holding & Subsidiary Company as well. Apart from affecting the employment opportunity to certain extent, a same person acting as Secretary can give raise to conflict of interest at times. So it will be better if MCA comes out with a clarification

KMP AS A RELATED PARTY

A KMP is now included within the definition of related party. This has dual implications namely he cannot enter into certain transaction and his relative’s interests and holding will have to be considered for determining qualifications of Independent director and auditor.

Ø  Relative of KMP shall not be eligible for appointment as an auditor of a company.

Ø  An Independent director cannot be a person who, either himself or any of his relatives, inter alia - holds or has held the position of KMP in the company in the three financial years immediately preceding the financial year in which he is proposed to be appointed.

Ø  The company is prohibited to give loan to KMP for purchasing or subscribing for fully paid- shares in the company or its holding company to be held by him by way of beneficial ownership.

PENALTY FOR NON- COMPLIANCE :

PARTY	PENALTY
Company	Minimum - One Lakh and Maximum- Rs.Five Lakh
Every director and KMP who is in default	Fifty Thousand For continuing offence - Further fine of Rs.1000 per day from the first day of the contravention.

OBSERVATIONS:

This Section along with its rules should bring smiles to the Company Secretaries in Employment because though Companies Act, 1956 had section 383 A the loophole in the section namely “it shall be a defence to prove that all reasonable efforts to comply with the provisions were taken or that the financial position of the company was such that it was beyond its capacity to engage a whole time secretary”. This provision was misused by the Companies. That is the reason we have seen very few compounding under Section 383A.

Also it has to be noted that the penalty under the earlier Sec. 383 A was only Rs. 500 per day, while the penalty here has been substantial.

  

The Ministry by removing those wordings has done a world of good to CS who are in employment.

Thus KMP provision is a step in the right direction in the Companies Act 2013.