Key Managerial Personnel and the Secretary
Chapter Forty-Nine
Syllabus topic 2, "ORGANISATION AND MANAGEMENT"
Pages 270 to 274 of 998
In one line
The Act names a small group of officers who must be employed whole-time in companies of a prescribed class, holds them personally responsible throughout the statute, and requires bigger companies to have their compliance audited by an outside company secretary whose adverse remarks the Board must explain.
In exam wording: under section 2(51) key managerial personnel means 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; and under section 203(1) every company of a prescribed class shall have whole-time key managerial personnel consisting of 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.
Why the law has this at all
Two problems of accountability meet here, and the Act's answer to each is a person rather than a procedure.
The first is identification. Throughout this Act, obligations attach to "the company" and, penally, to "every officer who is in default". Section 2(60) makes key managerial personnel officers in default automatically, so unless the Act names who the KMP are and requires them to exist, enforcement fails at the first step: the regulator does not know whom to proceed against. Section 203 fills the offices; s.2(51) names them.
The second is competence in compliance. Company law is now large enough that ordinary directors cannot know it, and the audit of accounts under Chapter X says nothing about whether meetings were properly called, registers kept, resolutions filed or approvals obtained. Sections 204 and 205 answer that by creating a compliance profession inside the company, the company secretary, and a compliance audit from outside it, the secretarial audit, whose adverse remarks the Board must publicly explain.
The elegance is worth naming in an answer: the financial statement is audited by a chartered accountant and the company's compliance by a company secretary in practice, and the Board answers to the members for both.
Section 203: the offices
203(1): who must be appointed. Every company of a prescribed class shall have the following whole-time key managerial personnel: (i) a managing director, or Chief Executive Officer or manager, and in their absence a whole-time director; (ii) a company secretary; and (iii) a Chief Financial Officer.
The chairperson proviso. An individual shall not be appointed or reappointed as chairperson of the company in pursuance of the articles and as its managing director or Chief Executive Officer at the same time, unless (a) the articles provide otherwise, or (b) the company does not carry on multiple businesses. A further proviso disapplies the first for a class of companies engaged in multiple businesses which has appointed one or more Chief Executive Officers for each such business as notified by the Central Government.
Key Managerial Personnel and the Secretary
That proviso is a governance rule in disguise, and it deserves a sentence. Separating the chair from the chief executive divides the person who runs the company from the person who runs the board that supervises him. The Act does not impose the separation absolutely; it makes combination the exception, available where the articles allow it or where the company is a single-business enterprise.
203(2): how they are appointed. Every whole-time key managerial personnel shall be appointed by a resolution of the Board containing the terms and conditions of the appointment, including the remuneration.
203(3): one company only. A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time. Provisos permit him to be a director of any company with the Board's permission, allow a person already holding the office of managing director or manager in more than one company at the commencement to continue in the manner the section provides, and permit a company to appoint or employ a person as its managing director if he is the managing director or manager of one, and of not more than one, other company, 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.
203(4): vacancy. If the office of any whole-time KMP is vacated, the resulting vacancy shall be filled by the Board at a meeting within a period of six months from the date of the vacancy.
203(5): penalty. Contravention exposes the company and every director and key managerial personnel in default to the penalties the sub-section provides.
Section 204: secretarial audit
204(1) requires every listed company and companies of such other class as may be prescribed to annex to the Board's report under s.134(3) a secretarial audit report given by a company secretary in practice, in the prescribed form.
204(2) imposes a duty on the company to give all assistance and facilities to the company secretary in practice for auditing the secretarial and related records.
204(3) requires the Board, in its report under s.134(3), to explain in full any qualification, observation or other remark made by the company secretary in practice in the secretarial audit report.
204(4) penalises the company, any officer of the company, or the company secretary in practice who contravenes the section.
Key Managerial Personnel and the Secretary
The parallel with the statutory audit is exact and should be drawn: an outside professional examines, the report is annexed to what goes to members, and the Board must answer any qualification in public. What differs is the subject matter: not whether the accounts give a true and fair view, but whether the company has complied with the law.
Section 205: what the company secretary does
205(1) provides that the functions of the company secretary shall include:
(a) to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company; (b) to ensure that the company complies with the applicable secretarial standards; and (c) to discharge such other duties as may be prescribed.
The Explanation defines "secretarial standards" as those issued by the Institute of Company Secretaries of India constituted under s.3 of the Company Secretaries Act 1980 and approved by the Central Government.
205(2) provides that ss.204 and 205 shall not affect the duties and functions of the Board, the chairperson, the managing director or the whole-time director under this Act or any other law.
Three points for an answer. Clause (a) is remarkably wide: the secretary reports on compliance with other laws applicable to the company, not merely the Companies Act, which makes him the company's general compliance officer. Clause (b), read with s.118(9), is one of the few places where a professional body's standards are made legally binding. And s.205(2) prevents the secretary's existence from diluting the responsibility of the Board: compliance is delegated for performance, never for answerability.
A worked example
Konkan Marine Limited is a listed company. Its founder, Mr. Rao, is chairperson under the articles and wishes also to be appointed managing director. The company employs a company secretary, who is also asked to act as company secretary of an unrelated group entity.
The offices. Being of a prescribed class, the company must have whole-time KMP: a managing director or CEO or manager, and in their absence a whole-time director; a company secretary; and a Chief Financial Officer, s.203(1). Each is appointed by a Board resolution stating the terms and remuneration, s.203(2).
The chairperson question. Mr. Rao may not hold both offices unless the articles provide otherwise or the company does not carry on multiple businesses, first proviso to s.203(1). If the company runs several businesses and the articles are silent, the combination is barred, and the answer is either an amendment of the articles or a separate managing director.
The secretary's second job. He may not hold office as a whole-time KMP in more than one company except a subsidiary, s.203(3). The unrelated entity is not a subsidiary, so the appointment is bad; he may, with the Board's permission, be a director of another company, which is a different thing.
Key Managerial Personnel and the Secretary
A resignation. The Chief Financial Officer resigns in March. The Board must fill the vacancy at a Board meeting within six months, s.203(4).
The compliance audit. Being listed, the company must annex a secretarial audit report by a company secretary in practice to its Board's report, s.204(1), and must give him all assistance and facilities, s.204(2). Suppose he reports that three Board meetings were held on shorter notice without an independent director present or ratifying, contrary to the proviso to s.173(3). The Board must explain that qualification in full in its report, s.204(3), so the members learn of it from the company itself.
And the secretary's own duty. He must report to the Board on compliance with this Act, the rules and other applicable laws, and ensure compliance with the secretarial standards issued by the ICSI and approved by the Central Government, s.205(1), those standards being binding on meetings by force of s.118(9). None of that reduces the Board's own responsibility, s.205(2).
Distinctions
| Statutory audit, Chapter X | Secretarial audit, s.204 | |
|---|---|---|
| Who audits | A chartered accountant appointed under s.139 | A company secretary in practice |
| Subject | The financial statements, true and fair view | Compliance with the Act, rules and applicable laws |
| Report goes to | The members, s.143(2) | Annexed to the Board's report under s.134(3) |
| Board's duty on adverse remarks | Explanations under s.134(3)(f) | Explain in full any qualification, observation or remark, s.204(3) |
| Who must have it | Every company | Listed companies and prescribed classes |
What it does NOT mean
Not that every company must appoint KMP. Section 203(1) binds companies of a prescribed class; the classes are in the Rules.
Not that a KMP may never hold another office. He may hold office in a subsidiary, and may be a director of another company with the Board's permission; and the managing-director proviso permits a second managing directorship on a unanimous Board resolution with specific notice.
Not that the secretary carries the Board's responsibility. Section 205(2) preserves the duties and functions of the Board, the chairperson, the managing director and the whole-time director.
Quick revision
s.2(51): KMP means the CEO or managing director or manager, the company secretary, the whole-time director, the CFO, and prescribed officers. s.203(1): prescribed classes must have whole-time MD or CEO or manager (or, absent them, a whole-time director), company secretary and CFO; chairperson may not also be MD or CEO unless the articles allow or the company has a single business, with a notified exception for multi-business companies having a CEO for each business. s.203(2): appointment by Board resolution with terms and remuneration. s.203(3): one company only, except a subsidiary; may be a director elsewhere with Board permission; a second managing directorship needs a unanimous Board resolution with specific notice. s.203(4): vacancy filled within six months. s.204: listed and prescribed companies annex a secretarial audit report by a company secretary in practice to the Board's report; company gives assistance; Board explains any qualification in full; penalties for contravention. s.205: the secretary reports on compliance with this Act, the rules and other applicable laws, ensures compliance with secretarial standards issued by the ICSI and approved by the Central Government, and discharges prescribed duties; the Board's duties are unaffected.
Key Managerial Personnel and the Secretary
Test yourself
1. Who are the key managerial personnel? Under s.2(51): 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, not more than one level below the directors in whole-time employment, as may be prescribed.
2. May one person be both chairperson and managing director? Not unless the articles provide otherwise or the company does not carry on multiple businesses, first proviso to s.203(1); and a notified class of multi-business companies with a CEO for each business is excepted from that proviso.
3. May a company secretary hold that office in two companies? Only where the second is a subsidiary of the first, s.203(3); he may separately be a director of another company with the Board's permission.
4. What must the Board do about an adverse secretarial audit report? Explain in full any qualification, observation or other remark made by the company secretary in practice, in its report under s.134(3), s.204(3).
5. What are the statutory functions of the company secretary? To report to the Board on compliance with the Act, the rules and other laws applicable to the company; to ensure compliance with the applicable secretarial standards issued by the ICSI and approved by the Central Government; and to discharge such other duties as may be prescribed, s.205(1).
The rest of this subject
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