SECTION 203 OF THE COMPANIES ACT FOR THE APPOINTMENT OF KMP

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SECTION 203 OF THE COMPANIES ACT FOR THE APPOINTMENT OF KMP
 

The Companies Act 2013 has been the catalyst for many new and innovative amendments compared to the previous Act. One of the most novel aspects is the compulsory designation of "key managerial Personnel"(KMPs) for certain companies.

The Key Management Personnel, or KMP, are employees who hold the most important functions and roles. They are the first point of contact between the company's stakeholders and its management. They are responsible for the formulation and implementation of strategic plans. Certain companies are required to have such employees as per the Companies Act. 
This article examines this designation as a key part of the Companies Act of 2013.

The Definition Of Key Managerial Personnel

The idea of naming Key Managerial Personnel (KMPs)in the context of certain types of companies has found its way into the statute book for the first time with the addition of Section 203 in the Companies Act (herein later known as "The Act"). Before we look at the substantive law on this matter, let's examine section 2(51) in the Act, which provides the complete definition of KMP.
In relation to a company, a KMP means-

  • The Chief Executive Officer (CEO)or the Managing director, or the Manager. 
  • The company Secretary 
  • The whole time director. 
  • The Chief Financial Officer (CFO).

Appointment Requirements for KMP

Section 203 of the Companies Act of 2013, along with the rules 8 and 9 of Companies Rules, 2014 (Appointment and Remuneration of Management Personnel) The following class of the company shall appoint KMP:

  • Every listed company 
  • A Public Company having Paid-Up Capital of Rs.10 crores or more

Additionally, rule 8A of Companies (Appointment and Remuneration of Managerial Personnel) (Amendment) Rules,2020 states that every private company with a paid-up capital of Rs.10 crores or more shall mandatorily appoint a full-time company secretary.

Mandatory Requirements
 

  • A company is not eligible to appoint or employ a Managing Director and a Manager simultaneously.
  • A company cannot appoint or re-appoint managing director, whole time director or manger for a term more than five years.
  • The re-appointment cannot be made earlier than one year before the expiration of the term.

The company is not permitted to make an appointment or continue the employment of anyone as a managing director, whole time director or manager when he:

  • is below twenty-one years of age or has attained the age of seventy-one years.
  • is an insolvent who has not been discharged or has at any time been adjudged to be an insolvent.
  • at any time, suspended the payment of creditors or made any arrangement with them.
  • has been found guilty by a court of an offence and sentenced to imprisonment  for a period greater than six months.
     

A whole time KMP cannot be in office for more than one company, except within its subsidiary company at the same time. If he holds office at more than one company simultaneously on the date of the first day of commencement of this Act, then, within six months after the beginning, select one of the companies in which he wants to keep the office.

The company shall adopt a Special Resolution to authorize the appointment of Managers in the following circumstances only.

  • If the person designated as managing director, whole time director or manager is over 70 years of age.
  • If the amount due to the managerial person is greater than the limit set by law.

Approval from the Central Government shall be required in cases where

  • Appointment of managing director, whole time director or manager is not in accordance with the terms and conditions set out in Schedule V.
  • If there is no Special Resolution passed to appoint the managing director, whole time director or manager of a person who has attained 70 years of age.
     

Roles & Responsibilities of KMP
 

  • Non-compliance with any provision under the Companies Act 2013 will result in the KMPs being held responsible.
  • KMPs are responsible for the management and decisions of the company.
  • Section 170 provides detailed information about securities. This information will be provided to KMPs and recorded into the company's register.
  • KMPs will have the right to be heard by the audit committee to consider the audit report. They can't vote.
  • KMPs must inform their concern and interest within 30 days after their appointment, as per section 189 (2).
     

Norms for appointment

After obtaining the Board of Directors' consent at a meeting, the appointment of KMPs must take place through a board resolution. This resolution must include details about remuneration and the terms and conditions for appointment. Within sixty days after the appointment, the company must file a return to the Registrar in the prescribed form.

Listed Company to appoint KMP, even if it has less than Rs. Ten crores of paid-up share capital. A listed company has its equity capital listed on any stock exchange. This perspective shows that the definition of a company listed in Section 2(522) is flawed. Accordingly, the Companies (Amendment) Bill, 2020, a review of this definition might result in a company's status being limited to those whose equity capital is listed.

1. Maintaining the Register

Each company under this provision must maintain a register that includes details of directors and KMPs. It is mandatory to keep the register at the company's registered office. This document must include details about securities that each director holds in the company, its holding, subsidiary, or subsidiary of the holding company of the company, and associate companies. Additional requirements for its contents are listed in Rule 17 of Companies (Appointment & Qualification of Directors) Rules, 2014.

2. KMP cannot hold office in more than one company except in its subsidiary company at the same time

Section 203(3) debars a KMP from being a KMP for any different company. This is a reasonable obligation since the KMP is expected to dedicate his time solely to the company he works for as a KMP. However, the section allows for an exception so in the case of the appointment to the KMP for a subsidiary company is concerned. This exception leads to the issue of whether the KMP can be linked to more than one company as a KMP. 

This question arises from the plain interpretation in Section 13 of the General Clauses Act of 1897, which states that any words that refer to the masculine gender will be considered to mean females and that words used in the singular will include plurals and vice versa. It is important to remember that section 13 of the General Clauses Act can not be invoked when there is something in the Statute that is deemed offensive or in contradiction to the context. The mistaken interpretation of section 13 within Section 203 of the Act can result in the possibility that KMPs can be appointed for more than one subsidiary, which would violate the law's intent that allows for the appointment of full-time KMPs. 

3. Filling The Vacancy

Board must fill the vacant office of KMP within six months of the occurrence. Section 203 (4) requires that the board take action to fill a casual vacancy at a duly convened meeting. In all cases, the board's approval must be preceded by the procedure of seeking the NRC's recommendation, if necessary, for the proposed appointee.

Conclusion
KMP is an integral part of the company. They are responsible for the company's daily operation and help achieve the company's objectives. The ministry made the appointment of KMP to the company of corporate affairs mandatory. The Company Act, 2013 allows specific law for the appointment of KMP, allowing the company to operate within the law's spirit.
 


Author : Sakshi

Date     : 13-Jul-2022


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