‘Key managerial personnel’ defined to broaden liability

By Rashmi Pradeep, Cyril Amarchand Mangaldas
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“Key managerial personnel” (KMP) as a separate identified group of persons was introduced under the Companies Act, 2013, with the objective of holding accountable, for actions or inactions of the company, not merely the directors of a company, as has traditionally been the case, but also persons who are responsible for the day-to-day affairs of the company.

Rashmi Pradeep Partneer Cyril Amarchand Mangaldas
Rashmi Pradeep
Partneer
Cyril Amarchand Mangaldas

The term KMP has been defined to mean the chief executive officer (CEO), managing director, manager, company secretary, whole-time director, chief financial officer (CFO) and any other officer of a company, as may be prescribed by the government.

Keeping in mind the interest of public shareholders, the 2013 act requires every listed company and every other public company having a paid-up share capital of ₹100 million (US$1.5 million) or more to appoint: (i) a managing director, or CEO or manager, and in their absence, a whole-time director; (ii) a company secretary (required for a company having paid-up share capital of ₹50 million or more); and (iii) a CFO, as its KMPs.

KMPs are required to be appointed by the board of directors of a company and the details of KMPs and remuneration payable to them is required to be disclosed in the company’s annual returns. If the business proposed to be transacted at a general meeting relates to a company in which any KMP has more than a 2% shareholding, this must be disclosed in the statement annexed to the notice of the general meeting. KMPs are also required to disclose details relating to their interest in contracts entered between the company and others within 30 days of their appointment.

To avoid possible conflicts of interest, a person whose relative is employed as a KMP in a company is prohibited from being appointed as that company’s auditor. Similarly, individuals cannot be appointed as independent directors of a company if they, either themselves or through a relative, hold or have held the position of a KMP of that company or any of its holding, subsidiary or associate companies in the three financial years immediately preceding the date of the proposed appointment.

Interestingly, the restrictions that are generally applicable to managerial remuneration are not applicable to the CEO, CFO and the company secretary (unless such persons are also appointed as directors).

The 2013 act provides that KMPs are only liable in circumstances where the wrongful act or omission in question occurred with their knowledge, connivance, consent or where they failed to act with diligence. However, KMPs are exposed to personal liability without any limitation if it is found that a KMP has taken undue advantage or benefit, whether in the form of any asset, property, cash or in any other manner, in a case of fraud committed by the company. Where a case of fraud is established, penalties are imposed on the defaulting KMP.

The concept of KMPs under the 2013 act has been introduced in order to hold persons who are responsible for the day-to-day functioning of a company accountable for their actions. In contrast, the Companies Act, 1956, did not define the term KMP and instead relied solely on the concept of “officer in default” to hold liable managing directors, whole-time directors, the manager and the secretary in case of default and omitted professional managers who were not directors.

The 2013 act, keeping with global trends, takes a more realistic view on accountability, by including KMPs within the definition of “officer in default”, thereby making officers such as the CEO and CFO also liable for their actions and inactions, and has raised the standard of accountability.

The introduction of the concept of KMPs has resulted in the responsibility for the affairs of the company and liability for non-compliance becoming more broad-based. This provides for an additional layer of checks and balances and it is hoped that it will serve as a catalyst for the achievement of a higher level of transparency and improved corporate governance.

Cyril Amarchand Mangaldas is India’s largest full-service law firm. Rashmi Pradeep is a partner at the firm.

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