The Companies Act, 2013 (‘Act’) mandates that certain classes of companies have to appoint Key Managerial Personnel (KMP). KMP is a group of people in charge of the company’s operations. They are the decision-makers and responsible for the company’s smooth functioning. They are employees vested with certain essential functionalities and roles.
Definition of KMP Under the Companies Act, 2013
Section 2(51) of the Act defines Key Managerial Personnel (KMP). It states that the KMP of a company means:
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- Chief Executive Officer, manager or Managing Director
- Company secretary
- Whole-Time Director
- Chief Financial Officer
- Such other officers, designated by the Board as KMP but are not more than one level below the directors in whole-time employment
- Such other officer as may be prescribed
Chief Executive Officer, Manager or Managing Director
The Chief Executive Officer and Managing Director are responsible for running the company. The Managing Director has authority over all company operations. They are also responsible for growing and innovating the company to a larger scale.
Under the Act, the Managing Director is defined as a director having substantial powers over the company management and its affairs. A Managing Director is appointed through any of the following means:
- By the Articles of Association
- An agreement with the company
- A resolution passed in a general meeting
- By the company board of directors
The Act defines a manager as the individual who manages the whole company affairs, subject to the board of directors’ direction, control and superintendence. A manager also includes a director or a person occupying a manager position in a company, even under a contract of service. However, a company cannot appoint a managing director and a manager at the same time.
Company Secretary
A company secretary is responsible for looking after the efficient administration of the company. They take care of the company’s compliance and regulatory requirements. They also ensure that the instructions and targets of the board are implemented.
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As per the Act, a company secretary or secretary means a company secretary defined under Section 2 of the Company Secretaries Act, 1980. The Company Secretaries Act defines a Company Secretary as a person who is a member of the Institute of Company Secretaries of India (ICSI). The company secretary should ensure that the company complies with secretarial standards.
Whole-Time Director
Under the Act, a Whole-Time Director is defined as a director who is in whole-time employment of the company. A Whole-Time Director means a director who works during the entire working hours of the company. They are different from an independent director as they are part of the daily operation and has a significant stake in the company. A Managing Director can also be a Whole-Time Director.
Chief Financial Officer
A Chief Financial Officer is responsible for handling the company’s financial status. They keep a tab on cash flow operations, create contingency plans for financial crises and do financial planning. They lead the treasury and financial functions of the company.
Companies Required to Appoint KMP
Section 203 of the Act provides that certain classes of companies must appoint the KMP, which includes the Managing Director or manager or Chief Executive Officer, company secretary and Chief Financial Officer. The company must appoint a whole-time director if it does not have a Chief Executive Officer, manager or Managing Director.
Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides the class of companies that must appoint the whole-time KMP, which are as follows:
- Every listed company
- A public company having a paid-up share capital of Rs.10 crore or more
Further, a private company having a paid-up share capital of Rs.10 crore or more must appoint a whole-time company secretary.
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Every whole-time KMP is appointed through a resolution of the board containing the conditions and terms of appointment, including remuneration. A whole-time KMP must not simultaneously hold office in more than one company except its subsidiary company.
The board is responsible for filling the vacancies in the post of KMP within six months of the vacancy. A company can appoint or re-appoint a person as its managing director, whole-time director or manager for a maximum of five years.
Persons Who Cannot Be Appointed as KMP
The Act states that a company cannot continue the employment or appoint a managing director, whole-time director or manager when such person:
- Has attained 70 years or is below 21 years
- Has been convicted as an insolvent or is an uncharged insolvent
- Has suspended payment to the creditors at any time
- Has been convicted for an offence by a court and sentenced to more than six months period
Role and Responsibilities of KMP
The KMPs are responsible for taking crucial company decisions and managing the employees. They are also liable when the company does not follow the mandatory compliances laid down by the Act. The primary responsibilities and functions of the KMP are:
- As per Section 170 of the Act, the details about the securities held by the KMPs in the company or its subsidiaries must be disclosed and recorded in the Register.
- The KMPs have the right to state their opinion, especially in the Audit Committee meetings, but they do not have a voting right.
- As per Section 189(2) of the Act, the KMPs should disclose their interests in other associations and companies within 30 days of their appointment.
Penalty for Non-Appointment of KMP
When a company does not appoint KMP as provided in the Act, the company will be liable to pay a penalty of Rs.5 lakh, and every director and KMP, if any, of the company in default will be liable to a penalty of Rs.50,000. A further penalty of Rs.1,000 per day but not exceeding Rs.5 lakh will be imposed after the first day, during which such default continues.
The KMPs of the company are essential persons who look after the management and affairs of a company. The companies specified under Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, must mandatorily appoint KMP for the company management, or they will have to pay a penalty as provided under the Act.
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