Meaning of KMPs under the Companies Act 2013 has come up for interesting debate, particularly the apparent mismatch between its definitions under various sections
Key managerial personnel (KMP) sounds like the most important person of a company. And why not, they do have an important role to play in the success of any company. However, the meaning of KMPs under the Companies Act, 2013 (the Act) has come up for interesting debate, particularly the apparent mismatch between the definition in section 2 (51) of the Act, the requirements of section 203 of the Act, and Accounting Standards (AS) 18 on related party transactions.
Definition in Section 2 (51) of the Act | Section 203 (1) of the Act | AS 18 - Related Party Transactions |
“Key managerial personnel”, in relation to a company, means:
| 203. Appointment of KMP (1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel: (ii) company secretary; and (iii) chief financial officer :
| 10.8 Key management personnel - those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. |
Definition in Section 2 (51) of the Act defines the term; however there is no substantive provision laid by the definition section. Hence, the managing director (MD), CEO, every whole time director, CFO and CS are treated as KMPs.
Section 203(1) Act mandates only specified class of companies to have a whole time KMP.
As per draft rule 13.6 of Chapter XIII;
“For the purposes of sub-section (1) of section 203, every listed company and every other company having a paid-up share capital of five crore rupees or more shall have whole-time key managerial personnel.”
Thus, a company not covered under Section 203 (1) may not be required to appoint a CFO/ CS, but it may still have a CFO/CS. It is clear that whether Section 203 applies or not, if the company has a CS, or CFO, or a whole time director, they are all KMPs.
Now the interesting conclusion from this is that every manager, whole-time director (WTD), and the MD as well as the CEO (as per Section 203, the company needs only one of these), will be treated as a KMP.
Hence, all the substantive requirements of law pertaining to KMPs apply to each WTD, and the MD. The mandatory provisions of Section 203(1) do not control the meaning of the term given in Section 2 (51).
There is no conflict between this and AS 18, as far as MD and WTDs are concerned. However, a CFO or CS is surely not KMPs as per AS 18. Hence, when it comes to disclosures of transactions with related parties in financial statements, the requirements of the AS will prevail.
As said earlier, even if a company is not required to have KMPs under Section 203, but if at all they appoint the MD, CEO, WTD, CFO and CS they automatically become KMPs. Thus, apart from the duties and responsibilities, this KMPs will attract the liability provisions of the Act as well.
Duties and Liabilities of KMP:
Section | Pertains to | Obligations of KMPs | Fine / Penalty in case of non compliance |
|---|---|---|---|
102 | Statement to be annexed to the notice | The statement concerning each item of special business to be transacted at a general meeting, annexed to the notice to include the nature of concern or interest, financial or otherwise, in respect of each items of KMP and their relatives. Any benefit accrued to the KMP or their relatives either directly or indirectly shall be held in trust for the company and be liable to compensate the Company. | Fine which may extend to Rs50,000 or five times the amount of benefit accruing to such KMP or their relatives, whichever is more. |
194 | Prohibition on forward dealings in securities of company by director or key managerial personnel. | KMP shall not buy in the company, or in its holding, subsidiary or associate company—
| Imprisonment for a term which may extend to two years or with fine which shall not be less than Rs1 lakh but which may extend to Rs5 lakh or with both |
195 | Prohibition on Insider trading of securities. | KMP of a company shall not enter into insider trading | Imprisonment for a term which may extend to five years or with fine which shall not be less than Rs5 lakh but which may extend Rs25 crore or three times the amount of profits made out of insider trading, whichever is higher, or with both. |
203 | Appointment of KMP | A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time | Fine which may extend to Rs50,000 and where the contravention is continuing one with a further fine which may extend to Rs1,000 for every day after the first during which the contravention continues |
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(Both Vinita Nair and Pooja Rawal are practicing company secretaries at Vinod Kothari & Co, and can be contacted at [email protected] and [email protected], respectively)
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Is there is any Provision in the new Act regarding monitoring the companies who don't appoint KMP according to Companies Act 2013?
default shall be punishable with fine which may extend to fifty thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.
2. Further there is no mechanism as such to monitor whether a Company has appointed KPM, however one can ascertain the same by viewing the annual return of that particular company, which has the details of the Paid up capital, Whether the company is listed or no and also the details KMPs.