Appointment of Key Managerial Personnel

Note the difference between clause (i) and the rest. In clause (i) the three offices are alternatives, joined by "or". Clauses (ii), (iii) and (iv) stand on their own.

And note who is not in the list. An independent director is not, and a nominee director is not, and that matters for section 149(12), which protects a non-executive director not being a promoter or key managerial personnel.

The four short definitions that support the list.

• Section 2(18): a Chief Executive Officer means an officer of a company who has been designated as such by it. So the office exists because the company says so.
• Section 2(19): a Chief Financial Officer means a person appointed as the Chief Financial Officer of a company.
• Section 2(94): a whole-time director includes a director in the whole-time employment of the company. It is an inclusive definition, not an exhaustive one.
• Section 2(24): a company secretary or secretary means a company secretary as defined in the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act. That definition is taken up in [The Company Secretary].

Which companies must have them: section 203(1)

Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel: (i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director; (ii) company secretary; and (iii) Chief Financial Officer.

Read clause (i) carefully. The company must have one of a managing director, a Chief Executive Officer or a manager; and only in their absence must it have a whole-time director. The whole-time director is the fallback, not a fourth alternative.

And note that the obligation is on a prescribed class, not on every company. The Act sets the pattern; the rules set the threshold.

The chairperson and the managing director: the first proviso

An individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles, as well as the managing director or Chief Executive Officer at the same time, after the commencement of the Act, unless:

• (a) the articles of the company provide otherwise; or
• (b) the company does not carry multiple businesses.

The purpose is the separation of the chair from the chief executive, which is the oldest recommendation in corporate governance: the person who runs the company should not also be the person who chairs the body that supervises him.

But notice how easily the bar is lifted. Either the articles say otherwise, or the company does not carry multiple businesses. Since a single-business company is outside the bar altogether, the rule bites mainly on diversified groups.

The second proviso further disapplies the first to such class of companies engaged in multiple businesses which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government.

How they are appointed: section 203(2)

Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration.

Three requirements in one sentence: a Board resolution, the terms and conditions, and the remuneration. An appointment by the managing director's letter alone does not satisfy the sub-section.

One company only: section 203(3)

A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time.

The exception is narrow. The other company must be a subsidiary of the first. Two companies in the same group that are not in a holding and subsidiary relationship do not qualify.

Three provisos qualify the rule.

First, directorships are not touched. Nothing in the sub-section disentitles a key managerial personnel from being a director of any company with the permission of the Board. So he may sit on other boards; he may not hold office as key managerial personnel in them.

Second, the transitional rule. A person holding office in more than one company on the date of commencement of the Act had six months to choose one company in which to continue.

Third, the managing director of two companies. A company may appoint or employ a person as its managing director if he is the managing director or manager of one, and not more than one, other company, provided the appointment is made or approved by a resolution passed at a Board meeting with the consent of all the directors present, and specific notice of that meeting and of the resolution to be moved has been given to all the directors then in India.

So the maximum is two companies, and the procedure is deliberately demanding: unanimity of those present plus specific notice to all directors in India. This is the same procedural pattern as section 179(3) and section 186(5), and it is worth noticing that the Act reserves it for decisions where one director might otherwise be pushed through quietly.

Vacancies: section 203(4)

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Two features. It must be filled by the Board at a meeting, not by circulation; and the period is six months from the date of the vacancy, not from its discovery.

Default: section 203(5)

As substituted, if a company makes any default in complying with the section:

• the company is liable to a penalty of five lakh rupees;
• every director and key managerial personnel in default is liable to a penalty of fifty thousand rupees; and
• where the default continues, a further penalty of one thousand rupees for each day after the first, not exceeding five lakh rupees.

Note that the continuing penalty is capped, and note that the persons liable are directors and key managerial personnel, not officers generally.

A worked example

Kalyan Polymers Limited falls within the prescribed class and must therefore have whole-time key managerial personnel.

What it must appoint. One of a managing director, Chief Executive Officer or manager, and only if none of those is appointed, a whole-time director; a company secretary; and a Chief Financial Officer. It appoints a managing director, a company secretary and a Chief Financial Officer, and that satisfies section 203(1).

How. Each appointment is made by a resolution of the Board containing the terms and conditions including the remuneration: section 203(2). A letter of appointment signed by the chairman, without a Board resolution, would not do.

The chairperson. The company's articles name a chairperson, and the Board proposes that the managing director also be chairperson. Kalyan Polymers carries three distinct businesses, so clause (b) of the first proviso does not help. Unless the articles provide otherwise, the same individual cannot hold both offices. If the company were a single-business company, the bar would not apply at all.

A second company. The Chief Financial Officer is offered the same office in Kalyan Speciality Chemicals Private Limited, a wholly owned subsidiary of the company. Section 203(3) permits it, the other company being a subsidiary. Had it been a fellow subsidiary of the same parent, and not a subsidiary of Kalyan Polymers itself, it would not be permitted.

A directorship. The company secretary is invited to join the Board of an unrelated company as a director. The first proviso permits it with the permission of the Board, because the sub-section restricts holding office as key managerial personnel, not directorships.

A managing director of two companies. Mr Kulkarni is the managing director of Thane Extrusions Limited and is proposed as managing director of Kalyan Polymers as well. The third proviso permits it, that being one other company and not more, but only if the appointment is made or approved by a resolution passed at a Board meeting with the consent of all the directors present, and specific notice of the meeting and of the resolution has been given to all the directors then in India. A resolution passed by a majority, or without that specific notice, does not satisfy the proviso.

Were he already managing director of two other companies, the appointment would be impossible, because the proviso allows one, and not more than one, other company.

A resignation. The company secretary resigns on 1 April. The Board must fill the vacancy at a Board meeting within six months, that is by 30 September: section 203(4). If it does not, the company is liable to a penalty of five lakh rupees, every director and key managerial personnel in default to fifty thousand rupees, and, the default continuing, one thousand rupees a day after the first, subject to a ceiling of five lakh rupees.

A designated officer. The Board designates the Head of Operations, who is in whole-time employment and is one level below the directors, as key managerial personnel under section 2(51)(v). From that moment he is within the class, so, for example, he must disclose his interests within thirty days under section 189(2), he is a related party of the company under section 2(76)(ii), and he is an officer in default within section 2(60).

Distinctions that carry marks

What this does NOT mean

It does not mean every company must appoint key managerial personnel. Section 203(1) applies to such class or classes of companies as may be prescribed.

It does not mean a company must have a managing director, a Chief Executive Officer and a manager. They are alternatives, and a whole-time director is required only in their absence.

It does not mean a key managerial personnel may never be connected with another company. He may be a director of another company with the Board's permission, and may hold office as key managerial personnel in a subsidiary.

It does not mean the chairperson can never be the managing director. He can, if the articles provide otherwise or the company does not carry multiple businesses.

It does not mean the vacancy may be filled by circulation. Section 203(4) requires the Board to fill it at a meeting of the Board.

Quick revision

• 2(51): key managerial personnel means the Chief Executive Officer or managing director or manager; the company secretary; the whole-time director; the Chief Financial Officer; any whole-time officer not more than one level below the directors designated by the Board; and such other officer as may be prescribed.
• Supporting definitions: a Chief Executive Officer is an officer designated as such by the company, section 2(18); a Chief Financial Officer is a person appointed as such, section 2(19); a whole-time director includes a director in the whole-time employment of the company, section 2(94).
• 203(1): prescribed classes shall have whole-time key managerial personnel: a managing director, or Chief Executive Officer, or manager, and in their absence a whole-time director; a company secretary; and a Chief Financial Officer.
• First proviso: the same individual shall not be chairperson under the articles and managing director or Chief Executive Officer, unless the articles provide otherwise or the company does not carry multiple businesses; second proviso, the first does not apply to notified classes engaged in multiple businesses that have appointed a Chief Executive Officer for each business.
• 203(2): appointment by a resolution of the Board containing the terms and conditions including the remuneration.
• 203(3): a whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary; he may still be a director elsewhere with the Board's permission; those holding two offices at commencement had six months to choose; and a person may be managing director of one other company, and not more than one, if approved by a Board resolution with the consent of all directors present and specific notice to all directors then in India.
• 203(4): a vacancy shall be filled by the Board at a meeting within six months of the date of the vacancy.
• 203(5): company five lakh rupees; every director and key managerial personnel in default fifty thousand rupees; continuing default one thousand rupees a day after the first, up to five lakh rupees.

Test yourself

1. Who are the key managerial personnel of a company? Under section 2(51), the Chief Executive Officer or the managing director or the manager; the company secretary; the whole-time director; the Chief Financial Officer; such other whole-time officer not more than one level below the directors as the Board designates; and such other officer as may be prescribed.

2. Which officers must a prescribed company appoint under section 203(1)? A managing director, or a Chief Executive Officer, or a manager, and in their absence a whole-time director; a company secretary; and a Chief Financial Officer, all of them whole-time.

3. May the same person be chairperson and managing director? Not after the commencement of the Act, unless the articles of the company provide otherwise or the company does not carry multiple businesses; and the bar does not apply to notified classes engaged in multiple businesses that have appointed one or more Chief Executive Officers for each business: provisos to section 203(1).

4. May a whole-time key managerial personnel hold office in another company? Only in a subsidiary of that company: section 203(3). He may be a director of another company with the Board's permission, and he may be managing director of one, and not more than one, other company if the appointment is approved by a resolution passed at a Board meeting with the consent of all directors present, specific notice of the meeting and the resolution having been given to all directors then in India.

5. Within what time must a vacancy be filled, and how? Within six months from the date of the vacancy, and by the Board at a meeting of the Board: section 203(4).

6. What is the penalty for default under section 203? The company, five lakh rupees; every director and key managerial personnel in default, fifty thousand rupees; and for a continuing default a further one thousand rupees for each day after the first, not exceeding five lakh rupees: section 203(5).