What is the process for the appointment of Key Managerial Personnel (KMP) and their remuneration?

Introduction 

Key Managerial Personnel (KMP) or Key Management Personnel means the whole-time employee of the company, who deals with the formulation of strategies and implements them between the company and stakeholders. They are the decision-makers and are responsible for the company’s smooth functioning. Accounting Standard 18(AS-18) states that Key Managerial Personnel (KMP) are people, who have authority and responsibility for planning, controlling and directing the activities of the reporting enterprises. The definition of Key Managerial Personnel is provided under Section 2(51) of the Companies Act, 2013 and Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 deals with the legal and procedural aspects of the appointment of key managerial personnel including managing director, whole-time director or manager, managerial remuneration, etc. The conditions for appointment and remuneration of managing director, whole-time director and manager are provided under Sections 196 and 197 of this Act. Every listed company and other public company having paid up capital of rupees 10 crores or more are required to appoint KMPs including a whole-time company secretary according to Section 203(1) of this Act and Rule 8 and Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The first proviso of Section 203(1) of this Act states that an individual cannot be appointed or reappointed as both the chairperson and managing director or chief executive director of a company at the same time unless the Article of Association permits it or the company only deals in a single business or if deals in multiple businesses, then appoint one or more chief executive officers for each business.

Meaning of Key Managerial Personnel 

The key managerial personnel refers to the whole-time employee of the company, who deals in day-to-day business operations, they can be a chief executive officer, whole-time director, chief financial officer, company secretary or other officers not more than one level below the directors who is the whole-time employment in the company.

Appointment of Key Managerial Personnel

The appointments of key managerial personnel are provided under Section 203(1) of the Companies Act, 2013 and Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Every listed company is required to appoint key managerial personnel or other public companies having paid-up share capital of rupees 10 crores or more shall have to appoint the managing director or chief executive officer or manager or in their absence, a whole-time director, company secretary, or chief financial officer. However, Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 mandates every private company having a paid-up share capital of rupees 10 crores or more shall appoint at least one whole-time company secretary. The first proviso[1] of this section states that an individual shall not be appointed or reappointed as both the chairperson and managing director or chief executive officer of the company at the same time unless the article of association allows it and the second proviso[2] of this section states that if the company deals in multiple businesses, then appoint one or more chief executive officers for each business. Section 203(2) and Section 203(3) of this Act deal with the manner of appointment of key managerial personnel. Section 203(2) states that every key managerial personnel of a company shall be appointed by a board resolution including their terms and conditions and remuneration, and Section 203(3) states that key managerial personnel shall not hold the office in more than one company except in its statutory company at the same time. Key managerial personnel may become directors of any company with the permission of the board. A company may appoint or employ a person as its managing director if he is the managing director or manager of one other company and such appointment shall be approved by the resolution passed at the board meeting. Section 203(4) of this Act states that if the office of the key managerial personnel become vacant, the board of directors of a company shall fill that vacancy within 6 months from the date of such vacancy. In the case of Achutha Rai vs. Registrar of Companies[3], the Kerala High Court held that “the petitioner has two capacities combined, one that of a director and another that of a manager, his role as a manager cannot be ended by mere sending two resignations but it should be accepted by the company.” However, the appointment of a managing director, manager and whole-time director is provided under Sections 196 to197 of this Act. Section 196(1) states that the appointment of a managing director and a manager at the same time is not possible because both have the same responsibilities, duties and powers but the difference is that in the case of the managing director, the powers are derived from the Article and agreement and in the case of manager the powers are derived from the board, hence it makes no sense to have different people having the same power and duties. It will create conflicts which will result in mismanagement.

Role of Key Managerial Personnel 

The key managerial personnel are answerable for making decisions that are important for the operation of the company. They are also liable for compliances laid down by the statutory provisions. The primary roles and duties of the key managerial personnel are:

• Financial statement to be signed by the chief executive officer, any director, chief financial officer, or company secretary.
• Sign the document or proceedings on behalf of the company.
• Prohibited from insider trading or forward dealing in securities.
• Disclosure in the annual return about the key managerial personnel.
• Disclose interest to the company within 30 days of his appointment.
• Names fall under the register of key managerial personnel and their shareholding in holding or subsidiary or associate companies.
• Key managerial personnel have a right to be heard in Audit Committee meetings when the committee considers the auditor’s report but key managerial personnel shall not have the right to vote.
• Nomination and Remuneration Committee to recommend policy for remuneration of key managerial personnel.
• Any asset or personal liability obtained illegally or unethically by KMP, if undue influence is proved in the inspection of the company.
• If key managerial personnel hold more than 2% of shares in another company, then they are required to give disclosure of their shareholdings, if they fail to do so then they have to compensate up to the benefit received by the company.

Remuneration of Key Managerial Personnel

According to Section 197(1) of this Act the remuneration of key managerial personnel payable by a public company shall not exceed 11% of the net profits of the company per financial year and the manner of computation laid down under Section 198 of this Act, except the remuneration of directors shall not be deducted from the gross profits. However, the company may pay the remuneration to the managerial personnel exceeding its above-mentioned limit with the approval of members at the general meeting as per Schedule V[4]. In the case of private companies this section does not apply, these companies are free to pay remuneration at any rate to such KMPs in case of adequacy or inadequacy of profits.

Conclusion 

The appointment of key managerial personnel plays a significant role in managing the operations or day-to-day business functioning of the company. As per the Companies Act, 2013, key managerial personnel are individuals who hold responsibility within the company, as either managing director, manager, whole-time director, chief executive officer, chief financial officer, or company secretary. The Companies Act requires appointing the KMPs for every listed company, a public company with certain specified paid-up share capital and turnover of the company with certain specified roles, duties, and responsibilities. The remuneration of the KMPs is limited to 11% of the net profits of the public company, though this limit can be increased by getting approval from the general meeting; however, these limitations of remuneration are not applicable in private companies. Thus, the above-mentioned guidelines on key managerial personnel are important for disclosure requirements and lawful considerations, ensuring accountability and transparency in their management of the company.

[1]  ICSI Company Law & Practices 862.

[2]  ICSI Company Law & Practices 863.

[3]  [1995] SCC Online Ker 90.

[4]  ICSI Company Law & Practices 884.