Article by Sanskriti Agarwalla, Edited by Drishti Saigal.
Who are The Key Managerial Personnel
The Key Managerial Personnel are employees of a company who are statutorily given or vested with the most important roles and functionalities of a company. They are basically the first point of contact for any stakeholder to contact the company and in most cases, you need to appoint them for your company.
They are responsible for the regulations and formulation of strategies and its implementation in the company among its employees.
In Indian companies as provided under the Companies Act, 2013 , they are basically the group of people who are in charge of maintaining any sort of operation within the company. They are the people having authority as well as the responsibility for any sort of planning, directing and controlling any sort of activities of the reporting enterprise.
Why the Key Managerial Personnel came into being?
The Indian Companies Act of 1956 was replaced by the Indian Companies act of 2013 which is now considered as the landmark legislation with several new inputs and ideas with the intention of raising the accountability in the corporate sector and also to increase the level of professionalism in the company.
One such new concept was that of the Key Managerial Personnel.
The reasons behind having Key Managerial Personnel in Indian companies include:
- Better Corporate Governance: KMPs play a significant role in maintaining transparency and accountability within the organization. They ensure that the company’s operations are conducted ethically and in accordance with the applicable laws and regulations.
- Decision Making and Strategy Development: KMPs are responsible for making critical decisions that impact the company’s growth and profitability. They help develop and implement the company’s strategy, ensuring that the organization achieves its objectives.
- Compliance with Legal Requirements: The Companies Act, 2013, mandates the appointment of certain Key Managerial Personnel, such as Managing Directors, Whole-Time Directors, Chief Executive Officers, Chief Financial Officers, and Company Secretaries. These individuals are responsible for ensuring that the company complies with various legal requirements and avoids penalties and legal issues.
- Representation of Stakeholder Interests: Key Managerial Personnel act as a bridge between the company’s management and its stakeholders, including shareholders, employees, customers, suppliers, and regulators. They ensure that the interests of all stakeholders are adequately represented and taken into consideration in the decision-making process.
- Risk Management: KMPs play a crucial role in identifying and managing the risks associated with the company’s operations. They help develop and implement risk management strategies to mitigate potential threats to the company’s performance and reputation.
- Financial Management and Reporting: KMPs, particularly Chief Financial Officers (CFOs), are responsible for managing the company’s finances, ensuring accurate financial reporting, and maintaining investor confidence. They also play a vital role in strategic financial planning and resource allocation.
In summary, Key Managerial Personnel are essential for the efficient functioning and growth of Indian companies. They play a crucial role in decision-making, strategy development, risk management, financial management, and ensuring compliance with legal requirements.
Their presence helps improve corporate governance and transparency, thereby enhancing the company’s reputation and stakeholder confidence.
An Inside into the Legality Surrounding the Position of a Key Managerial Personnel in Indian Companies
Who Are the Key Managerial Personnel?
The Key Managerial Personnel under Section 2(51) of the Companies Act 2013, is comprised of the following individuals in a company-
- Chief Executive officer;
- Managing director;
- Company Secretary;
- Whole Time Director;
- Chief Financial officer;
- Any other specified officer.
These are referred to a group of people who are basically in charge of managing and formulating the operations of the company. They are responsible for all the acts such as planning, directing and controlling the functions of a company.
The Companies Act 2013 gives an elaborate definition of the Key Managerial Personnel as the Companies Act of 1956 limited the scope to Managing directors, Whole Time Director and Manager.
But in the current Companies Act 2013, there has been an inclusion of Chief Executive Officer, The Manager, The Managing Director, The Company Secretary, The Whole Time Director, The Chief Financial Officer and such as many other officers are prescribed.
The term ‘personnel’ refers to a group of people working together, instead of working alone. They can also be considered as the decision makers, they are accountable for smooth functioning of the company.
Functioning of the Key Managerial Personnel
#1. Managing Director is one of the most important Key Managerial Personnel in Indian Companies
Section 2(54) of the companies Act of 2013 defines the “managing director” as the director who is held responsible for the substantial powers of the management of the company and its affairs. He/she is appointed by an agreement after a resolution is passed in a general meeting.
#2. Whole- time Director is another Essential Key Managerial Personnel for Indian Companies
Whole time director of a company can be defined under the Section 2(94) of the Companies Act which means a director in whole-time employment of the company.
Manager, as defined under the section 2(53) of the Companies Act is an individual who works under the control and directions of the Board of the Directors and is entrusted with the management of the whole affairs of the company.
This position is under the control of the Board of Directors and is responsible for managing the business of the company.
They are also appointed by the Board of Directors at a meeting which shall be subject to resolution passed at the next level of a general meeting of the company. The resolution consists of the terms and conditions for the appointment and remuneration to be paid to the manager which was initially laid down by the Board of Directors.
Any act done by the manager without or before the approval of the Board, the passing of resolution shall be deemed as invalid.
Related Read: How to Appoint Directors in a Company
According to section 196(3) of the Act, there are certain qualifications and criterias to be eligible for the appointment of a manager and they are-
- The manager can not be above 70 years of age and can not be below 21 years.
- He/she can not be an insolvent or adjudged as insolvent.
- He/she must not be convicted for any sort of offence having a punishment providing for a duration of imprisonment for more than six months.
- He/she should not have defaulted to his/her creditors.
#4. Company Secretary
A Company Secretary or a Secretary is mentioned under the section 2(24) of the Companies Act, 2013, whose function is to report to the board about any sort of non-compliance of the provisions of the Act and other rules in relation to this act.
The key managerial personnel, company secretary also ensures whether the company is complying with the secretarial standards or not. Here the central government has also prescribed under clause (c) of the section 205, the roles of the secretary in a company for ensuring the following things-
- To facilitate meetings of the Board Members and the general meetings.They also maintain the time duration of the meeting.
- To assist the Members of the Board in the company affairs.
- To perform the prescribed duties by the members of the Board.
- To represent the company before various tribunals, authorities etc.
#5. Chief Financial Officer (CFO)
According to the section 2(54) of the Companies Act 2013, a person appointed as the Chief Financial officer of a company is generally a person who leads all the finances and treasury functions of the company.
The person appointed as the Chief Financial officer is considered as the Key Managerial personnel. A Chief Financial officer of a company should be appointed as the Chief Financial officer only and should not be engaged in any other manner or any other designation.
#6. Chief Executive Officer (CEO)
Section 2(18) of the Companies Act mentions about the appointment of the Chief Executive Officer.
#7. Officer who is in default
According to the section 2(60) of the Companies Act, an ‘officer who is in default’ is the officer who will be held liable for any sort of penalty or punishment by way of imprisonment or fine for any misdoings by the company. The officers may be selected from-
- Key Managerial Personnel
- Whole- time Director
- Any person responsible for maintenance, filing or distributing records or accounts.
- Any Director aware of the activities taking place which is in contravention of the law or the provisions and yet indulges in or participates actively in it.
Functions of an Officer who is in Default is-
- He or she must make sure that the officers are acting in the best interests of the company.
- He or she should perform the tasks in good faith.
- He or she makes the key officials more responsible for the company.
Officer who is in default is generally appointed by his or her consent to work under such designation and the board of directors have to pass a resolution in order to appoint him or her as the ‘Officer who is in default’.
Any director, manager, key managerial personnel or any person who works under the direction and guidance of the board of directors is an officer under Section 2 (59) of the Companies Act, 2013.
- All about Independent Directors under Indian Company law
- All you need to know about appointing Directors for your Company in India
The Functions of the Key Managerial Personnel
The Key Managerial Personnel are basically responsible for taking all the important decisions and they are also responsible for managing employees. They can even be held liable if anyhow they do not follow any of the compliances laid down by the Companies Act 2013.
The effectiveness of the Key Managerial Personnel makes sure that the growth and development of the company does not cause for excessive risk-taking at the cost of the shareholders. The main responsibility and the function of the Key Managerial Personnel are:
- Section 170 of the Companies Act, provides that the details of the shares and/or stock held by the Key Managerial Personnel in the company or its holdings and subsidiaries which should be registered and disclosed in a Register, to be kept at the company’s registered office.
- The Key Managerial Personnel has the right to voice their opinions especially in meetings. However, they don’t have a voting right.
- The Section 189 of the Companies Act mentions that Key Managerial Personnel should disclose their interests in other companies and associations with which the company is entering into transactions, examples being mergers and acquisitions, stock purchase or share purchase, finance lease and sub-lease etc.
Appointment of Key Managerial Personnel
According to the Section 203 of the Companies Act 2013, Key Managerial Personnel are appointed by the Board members.
The Board of Directors are responsible to fill any vacancies in the Key Managerial Personnel within a period of six months.
Do You Need to Appoint a Key Managerial Personnel?
It is mandatory for any listed company to appoint a whole time Key Managerial Personnel.
Public companies having a share capital of at least Rs. 5 crores must appoint KMPs.
Further any company with a paid up capital of more than or even equal to 10 Crores must appoint key managerial personnels.
Section 203(1) of the Companies Act makes it clear that only certain prescribed classes of the companies are mandatorily required to appoint a whole-time Key Managerial Personnel. Rule 8 of the Companies (Key Managerial Personnel) Rules 2014 requires every listed company and every other public company having a paid-up share capital of 10 Crores or more to appoint an Key Managerial Personnel.
Further, Rule 8A of the Key Managerial Personnel Rules provides that a company other than a company covered under rule 8 which has a paid-up capital of 5 Crores rupee or more shall have a whole time CS.
But it doesn’t mean that any other company can not appoint a Key Managerial Personnel. A company not covered under section 203(1) can, therefore, voluntarily appoint any or all Key Managerial Personnel.
How to Appoint a Key Managerial Personnel
Every whole-time Key Managerial Personnel of a company shall be appointed as per the terms and conditions set by the Board in the resolution passed by it in its Board meeting.
In the broader sense the Section 179(3) of the Companies Act of 2013, if read along with the Companies (Meeting of Board and its Powers) Rules, 2014 provides that business related to the appointment or the removal of the Key Managerial Personnel shall be transacted by the board in the meetings.
Further, a whole – time Key Managerial Personnel is required to be appointed in a board meeting by the means of a resolution containing the terms and conditions of appointment, including remuneration.
In terms of requirements of Section 196 of the Companies Act of 2013, in case of the appointment of the Managing Director, manager or Whole –time Director by a public company other than a government or private company, the appointment shall be approved by the shareholders as well in the next general meeting held after their appointment by the board of directors.
Compensations for the loss of office of the Key Managerial Personnel
According to the Section 202 of the Companies Act, which provides for the loss of the office of the Key Managerial Personnel, the company can make payment by the way of compensation for the loss of office or consideration for retirement from the office to a managing or whole time director or manager but not any other director.
However, no payment shall be made in the following cases:
- If the Director resigns from the office due to amalgamation of the company or its merger with any other corporate body.
- If the office of the Director is vacated under Section 167(1).
- If the company is winding up on the orders of a tribunal or voluntarily and the winding up was due to the negligence of the director.
- If in any case the director is guilty of fraud or any sort of misrepresentation or breach of trust or gross negligence or gross mismanagement of the conduct of the company or any subsidiary company.
- If the director has instigated or was involved in bringing out the termination of his or her office.
Managerial Remuneration for KMPs
Managerial remuneration is considered as the money paid to the managerial personnel to incentivize them to work more for the benefits and growth of the company for the best interests of it. These incentives are required to drive the workforce to perform their task diligently and in good faith.
Remuneration of the managerial personnel– Section 197 of the Companies Act 2013 provides for the remuneration that is to be provided to the managerial personnel.
According to the section, the managerial personnel is entitled to receive a maximum of 11% of the net profit of the company, but this can also be changed by the consent of the Board.
The remuneration payable to the directors who are neither managing nor whole-time shall also be decided by the board members which shall not exceed 1% for managing directors or whole-time directors and 3% in other cases.
If in a financial year a company does not gain any sort of profit or even if the profit seems inadequate, the company shall not pay the Managerial Personnel any remuneration except in accordance to the approval of the central government.
If the managerial personnel draws or receives excess of remuneration prescribed either directly or indirectly without prior approval of the central government, then she or he shall return or refund the amount in the company’s favour.
Unfortunately, if in any case a company is required to restate its financial statements due to fraud or any violation of the law, then the company must have to recover remuneration from any of the managerial personnel.
Who fixes the remuneration limit?
Section 200 of the Companies Act, provides that in respect of the cases where the company has no profits or any sort of inadequate profits, the Central government or the company any of them may fix the remuneration limit under the specified limits of the Companies Act 2013.
They shall make sure they look into the-
- The financial condition of the mentioned company.
- Remuneration or commission drawn by an individual in other capacity apart from the key managerial personnel capacity.
- Professional qualification and experience of an individual.
The key Legalities related to Key Managerial Personnel in the Indian Companies Act 2013 are-
- In the definition of the “officer in default” a key managerial personnel is included in the Companies Act.
- The key managerial personnel or an officer may sign any document or proceeding made by or on behalf of the Company.
- Details of the Key Managerial Personnel changes and the remuneration paid are to be disclosed in the Annual Return.
- Explanatory statement has to disclose the nature of interest or finances of the key managerial Personnel.
- A person whose relative is employed as a Key Managerial personnel cannot be appointed as an auditor in the company.
- A person is generally disqualified to be appointed as a director if he or his relative holds a position in the Key Managerial Personnel of a company.
- Company should maintain a register of the Key Managerial Personnel at its registered office with all the important particulars and details about the holdings,subsidiaries etc of the company.
- Recruitment and change in the Key Managerial Personnel should be filed and recorded within 30 days.
- Key Managerial Personnel shall have a right to be heard in the meetings of audit committees but it does not have the right to vote in an audit report.
- Key Managerial Personnel’s remuneration policy is to be recommended by the nomination of committees and they should also ensure that the policy involves a balance between the incentive and a fixed pay reflecting short and long term performance.
- Key Managerial Personnel are prohibited to make any deal or trading staking the securities of the company.
- The chairperson of the company shall sign the financial statements of the company or it may also be signed by the managing director and the chief executive officer.
Removal of the Key Managerial Personnel
In case a Director has to be removed in terms of the provisions of the Companies Act 2013 under Section 169 and also the Nomination & Remuneration committee shall recommend the removal to the board with reasons recorded in writing.
In case any other among the Key Managerial personnel has to be removed the same process needs to be followed as of the removal for the director, i.e. the Nomination & Remuneration committee has to recommend the removal of the member with the recorded written reasons in front of the Board members.
Penalties by the Company or the KMP
According to the Section 203 of the Companies Act 2013, the company shall be punishable with the fine of Rupees 1 lakh to 5 lakh and each director or Key Managerial Personnel in default shall be punishable with up to Rupees 50k for any contravention of the section and in case if the contravention continues, the fine shall increase by Rupees 1k per day.
Wrapping it up
Key Managerial Personnel holds a key place in the company and help in facilitating the smooth functioning of any business. These group of people are basically responsible for the growth and development of a company.
It does check the true spirit of a corporate firm and looks at the profit as well as the loss of the company. They formulate every rule and regulation in the company and make sure that the firm flourishes.
The necessity of approval of the central government is no longer in effect which has reduced the burden of company and therefore the delay in further transactions of the company has been considerably reduced.
Division of powers among the personnel helps ensure proper functioning of the company and improves corporate governance, as well.
If you have any questions, let me know by leaving your comments down below. And if you liked this article, do give it a share!
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Author Bio: Sanskriti Agarwalla is a B.A, LLB(H) student at Amity University, Kolkata. Connect with her on LinkedIn.
Editor Bio: Drishti Saigal is a Bachelor of Laws – LLB student at Svkm’s Jitendra Chauhan College, Mumbai. Connect with her on LinkedIn.