The Companies Act, of 2013, sets out a requirement for certain categories of companies to appoint Key Managerial Personnel (KMP). They are a group of individuals responsible for overseeing the company’s day-to-day operations. Additionally, they play an important role in decision-making and act as a point of contact between the company and its stakeholders. This article is a complete guide on KMP including provisions relating to their appointment and duties in a company.
Meaning of Key Managerial Personnel
Section 2(51) of the Companies Act, 2013 defines Key Managerial Personnel (KMP). Accordingly, the KMP of a company means its –
- Chief Executive Officer or Managing Director or Manager;
- Company Secretary ;
- Whole-Time Director;
- Chief Financial Officer;
- Other officers who are in full-time employment, work not more than one level below the directors and are designated as KMP by the Board of Directors of the company; and
- Other officers as may be prescribed.
Let us understand the meaning and role of the above KMPs one by one.
Chief Executive Officer or Manager or Managing Director
According to the Companies Act, 2013 –
Chief Executive Officer (CEO) means an officer designated as the CEO of the company.
Manager means an individual who manages the whole affairs of the company under the direction, control, and superintendence of the Board of Directors. The term ‘Manager’ also includes a company director who occupies the position of its manager, whether under a contract of service or not.
Managing Director means a director who substantially manages the company’s affairs and includes a director who occupies the position of managing director even under any other name. A Managing Director can be appointed through –
- The Articles of Association (AOA) of the company; or
- An Agreement between the person and the company; or
- A resolution passed in the general meeting of the company; or
- By the Board of Directors of the company.
Therefore, the primary role of a CEO, Managing Director, or Manager is to oversee and manage the operations of the company.
The Companies Act, 2013 defines a ‘Whole-Time Director’ or ‘WTD’ as a director who is in whole-time employment of the company. He is a type of executive director who is actively engaged in day-to-day decision-making and management of the company.
Chief Financial Officer
According to the Companies Act, 2013, ‘Chief Financial Officer’ or ‘CFO’ means a person who is appointed as the CFO of a company.
A CFO is responsible for managing the financial aspects of a company. It includes activities like planning, budgeting, forecasting, strategic decision-making, etc.
Section 2(24) of the Companies Act, 2013 defines a Company Secretary. Accordingly, ‘Company Secretary’ or ‘Secretary’ means a company secretary as defined in Section 2(1)(c) of the Company Secretaries Act, 1980 who is appointed by the company to perform the functions of a company secretary.
According to the Company Secretaries Act, of 1980, a Company Secretary is a person who is a member of the ICSI i.e., the Institute of Company Secretaries of India.
A Company Secretary ensures that a company complies with all the applicable rules and regulations. Additionally, they offer advice to the board of directors regarding corporate governance and represent the company before regulatory authorities.
Role and Responsibilities of KMP
The role and responsibilities of KMP depend on the size and structure of the company. However, the following are some common responsibilities of all KMPs of a company –
Strategic Decision Making
Strategic decision-making is the primary responsibility of KMP, in particular the Managing Director and the Whole-Time Director. They are actively engaged in the formulation and execution of the strategic plans and policies of the company. They set the direction and vision for the employees working at the middle and lower levels of the company.
KMP plays an important role in risk management which includes the identification, assessment, and mitigation of different risks such as financial risk, operational risk, regulatory risk, etc. They oversee compliance, develop risk-mitigation strategies, and communicate risk-related information to stakeholders.
KMP is also responsible for facilitating effective communication within the company as well as with the stakeholders. They communicate the strategic direction of the company, maintain transparency, and promote an open, feedback, and accountability culture.
They should act as communication leaders throughout the organization, fostering trust, alignment, and a positive work environment.
By engaging with the board, employees, shareholders, suppliers, customers, regulators, etc., KMP helps in maintaining positive stakeholder relations. They promote trust & collaboration with them and contribute majorly to the company’s overall success.
Crisis management is another important role of KMP. During times of crisis or emergencies, they are expected to lead the company and resolve the situation. They help the company recover from the situation while maintaining the confidence of stakeholders.
Which Companies are Required to Appoint KMP?
According to Section 203 of the Companies Act, 2013 and Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the appointment of KMP is mandatory for the following companies –
- Listed Companies; and
- Unlisted Public Companies having a paid-up share capital of Rs. 10 crores or more.
Such companies shall appoint –
- Chief Executive Officer or Manager or Managing Director and in their absence, a Whole-Time Director;
- a Company Secretary; and
- a Chief Financial Officer.
Further, as per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, every private company that has a paid-up share capital of Rs. 10 crores or more shall appoint a full-time company secretary.
Appointment of KMP
The following are the necessary compliance procedures for the appointment of Key Managerial Personnel (KMP) as per the Companies Act, 2013 –
The appointment and removal of Key Managerial Personnel is done as per Section 203 of the Companies Act, 2013 as well as Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014.
Accordingly, every KMP shall be appointed through a resolution passed in the meeting of the Board of Directors. The resolution shall contain the terms and conditions of appointment as well as the remuneration of the KMP.
Approval of Members
In the case of listed companies and unlisted public companies, the appointment of a Managing Director, Whole-Time Director, or Manager shall be approved by members in the next general meeting of the company. A resolution shall be passed in this regard.
Filings with ROC
Listed companies and unlisted public companies shall file the board resolution with the Registrar of Companies (ROC) in Form MGT–14 along with prescribed fees. It shall be filed within 30 days of passing the resolution.
Additionally, they should file Form MR-1 along with fees for the appointment of Managing Director/ Manager/ Whole-Time Director. It shall be filed within 60 days of their appointment.
Further, every company should file Form DIR-12 along with fees with the ROC for the appointment of KMP, within 30 days of such appointment.
Restrictions Regarding Appointment of KMP
The Companies Act, 2013 along with the governing rules impose the following restrictions on the appointment of KMPs in a company.
Persons Who Cannot be Appointed as KMP
According to Section 196(3) of the Companies Act, 2013, a person cannot be appointed as the Managing Director/ Manager/ Whole-Time Director of a company if –
- he is below the age of 21 years or more than 75 years old; or
- he is an undischarged insolvent or has been adjudged as an insolvent at any time; or
- he has suspended the payment to creditors or made a composition with them at any time; or
- he has been convicted for an offence by a court and sentenced to more than 6 months.
However, a person who is more than 75 years old can be appointed as the Managing Director/ Manager/ Whole-Time Director of the company if any of the two conditions are fulfilled –
- a special resolution is passed in the general meeting of the company; or
- a special resolution is not passed but the votes cast in favour of the resolution are more than the votes cast against it and the Central Government has approved such appointment.
The following are some other restrictions regarding the appointment of KMPs –
- A company cannot appoint a managing director and a manager at the same time.
- A person cannot be appointed as both the chairperson and the Managing Director/ CEO of a company simultaneously unless it is allowed in the articles of the company or the company operates only one business.
- However, public companies engaged in multiple businesses and having paid-up share capital of Rs. 100 crores or more along with an annual turnover of Rs. 1000 crores or more can have more than one CEO for each such business.
- A whole-time KMP can only hold office in one company, except in its subsidiary company. However, they can be a director in another company with the Board’s permission.
- A company can appoint a person as its Managing Director even if he already holds this position in another company if his appointment is approved by a board resolution with consent from all the Directors present in the meeting, or in case of resolution by circulation if specific notice was given to all Directors in India.
- A managing director or a manager can be appointed/ reappointed for a maximum term of 5 years and reappointment should not be made earlier than 1 year before the expiry of their term.
Vacancy of KMP
As per Section 203(4) of the Companies Act, 2013, in case the position of a KMP becomes vacant, it shall be filled by the Board of Directors within 6 months from the date of such vacancy. Also, the appointment shall be made at a meeting only and not through resolution by circulation.
Register of KMP
Section 170 of the Companies Act, 2013 provides that every company shall maintain a register of its directors and KMPs. It should contain the basic details about the directors and KMPs like name, father’s name, date of birth, nationality, etc. along with particulars of their appointment.
In addition, it should contain the details of securities held by the directors or the KMPs in the company, its subsidiary, holding, or associate. Further, the register should be kept at the registered office of the company.
Does KMP can be considered as Officer in Default?
Yes, KMPs are considered as Officers in Default for the purpose of different provisions of the Companies Act, 2013 and the governing rules. It is because they are actively engaged in the day-to-day operations and decision-making of the company.
Accordingly, they are liable for penalties, punishment, and fines if the company commits a default.
Penalty for Non-Compliance
If a company fails to comply with the provisions of Section 203 of the Companies Act, 2013, it shall be liable to a penalty of Rs. 5 lakhs.
In addition, the directors and KMPs of the company, who are in default, shall also be liable to a penalty of Rs. 50,000. In case of continuing default, a further penalty of Rs. 1000 per day up to Rs. 5 lakhs can be levied.