Compliance Risk on KMPs in a Company

Blog   wpadmin   February 26, 2019

Group of personnel who are responsible for managing and controlling the affairs of the company are generally considered as Key Management Personnel (KMP).

In India before enactment and notification of Section 203 of new Companies Act, 2013 in April 2014, under Companies Act, 1956; the responsibility of managing operations of the company was recognised for Managing Director, Whole Time Director and Manager only, but Section 203 of revised statuette has introduced term of KMP, which not only covers above stated positions as person responsible for managing company operations but also includes key functional people like Chief Executive Officer, Chief Financial Officer, Company Secretary, and other Key operation heads. The new act also introduced collective responsibility of KMPs rather than individual roles & responsibilities.

KMP as per Companies Act, 2013

As per Section 2(51) of the Companies Act, 2013, the definition of term KMP is:

Major managerial employees, with respect to a company, implies:

  • The managing director or the (CEO) Chief Executive Officer
  • The company secretary (CS),
  • The whole-time director (WTD),
  • The Chief Financial Officer (CFO) and
  • Such other officer as may be prescribed

The definition given in statute is comprehensive but point number (v) gives freehand to the competent authority or government official to consider any other office of the company as part of Key Managerial Personnel as may be considered appropriate at the time of assessment.

Companies are needed to employ KMP, as a compulsory necessity

Section 203 of the Companies Act, 2013, to be scrutinized with the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following categories of Companies shall have whole-time key managerial personnel:

  • Every Listed company and
  • Every second public firm that has paid the share capital of Rs. 10 Crores or more

A company shall file a return of appointment of following positions within sixty (60) days of the appointment, with the Registrar in Form Number MR.1 together with such fee as may be particular for this reason:

  • Managing Director, or Whole-Time Director or Manager,
  • Company secretary and
  • Chief Financial Officer

Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, also mandates, a company having paid up share funds of Rs. 5 Crores or more will have an entire moment Company Secretary, also type of firms discussed above.

Role & Responsibilities of KMP

On a perusal of the various provisions of the Act, it can be seen that onerous responsibilities, obligations, and liabilities have been cast on KMP and that they are also included in the definition of ‘officers in default’ and ‘related party’ under the Act. Under Companies Act, 2013 some of the key provisions related to KMP are outlined below:

  • Section 2 (59): KMP is included in the definition of ‘officer’,
  • Section 2(60): KMP is included in the definition of ‘officer who is in default’,
  • Section 2 (76): KMP and his relatives are included in the definition of ‘related party’
  • Section 102: The nature of concern or interest of KMP on the matters proposed to be transacted in a meeting, are to be disclosed in the explanatory statement to the notice of such meeting,
  • Section 141: A relative of KMP is not eligible to be appointed as auditor,
  • Section 149: A KMP or his relative cannot be appointed as an independent director,
  • Section 170 and rules made thereunder: The details of securities held by each KMP in the company or its holding, subsidiary, subsidiary of company’s holding company or associate companies is to be recorded in a separate register,
  • Section 177: KMP shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote,
  • Section 178: The Nomination and Remuneration Committee shall formulate and recommend to the Board a policy, relating to the remuneration for the KMP,
  • Section 179: The appointment or removal of KMP shall be made in a board meeting,
  • Section 189: Every KMP shall, within a period of thirty days of his appointment, or relinquishment of his office, disclose to the company his concern or interest in the other associations or such other information relating to himself as may be prescribed,
  • Section 194: KMP is prohibited from forwarding dealings in securities of the company,
  • Section 195: KMP shall not enter into insider trading,
  • Section 196 read with Section 170: For appointment of KMP, a return in Form DIR-12 & MR-1 is required to be filed with the Registrar of Companies within 60 days of appointment,
  • Section 203:
    • A whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time,
    • Whole-time KMP holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such inauguration, select one firm in which he desires to carry on to hold the office of KMP,
    • If the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting within a period of six months from the date of such vacancy,
    • Notice of meeting ordered by tribunal pursuant to a proposed compromise and arrangement shall be accompanied by a statement explaining its effect on KMP.
  • Section 232: A report adopted by the directors of the merging companies explaining the effect of compromise on each KMP shall be circulated by the company for the meeting ordered by the Tribunal pursuant to proposed merger or division of the company.

Keeping these requirements in mind, the law cannot be read to permit the exclusion of certain KMPs from their prescribed obligations and liabilities by designating only one person as KMP. Thus, where a company has appointed both a CEO and an MD and the company is given the option to name one of them to be KMP, it would amount to excluding the other from the ambit of officer in default or related party, which cannot be the intention of law and although the word used under section 2(51) (i) and section 203(1) (a) of the Act, is ‘or’ yet it must be read as ‘and’ so as to carry out the intention of the legislature.

Thus, in case a company has appointed MD and CEO or CEO and manager, both will be treated as KMP with no regard to the question because whether such company is mandatorily required to appoint KMP in terms of section 203 of the Act or not and whether the appointment of MD and CEO or CEO and manager, is made on whole time or part-time basis.

KMPs are also identified as ‘officers’ of the company, by virtue of which, KMPs may be made liable for contraventions by a company depending on the facts of each case.

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