Section 203: Appointment of Key Managerial Personnel

Introduction

Section 203 of Companies Act, 2013, is part of chapter XIII that deals with appointment and remuneration of managerial personnel. This section primarily lays down the provision with respect to appointment of key managerial personnel. Section 203 of the act, 2013 read with Rule 8 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 makes it mandatory for every listed company and every other public company with a paid-up share capital of 10 crore rupees or more, to have managing director/ CEO/ manager (in their absence a whole time director), company secretary and CFO, as its whole time key managerial personnel. This section regulates dual appointment of key managerial personnel.

Purpose of Section 203

This section of the act, 2013 lays down the regulations for appointment of key managerial personnel as follows in brief:

• This section lays down that every listed company and every other public company having a paid-up share capital of ten crore rupees or more, must have whole-time key managerial personnel comprising of managing director, chief executive officer or manager and in their absence, a whole time director, company secretary and chief financial officer (CFO)[1].
• A company other than a company under section 8 of the act, 2013, with paid up share capital of five crore rupees or more must have a whole-time company secretary [2]. Thus, private companies and public companies with a paid-up share capital of five crore rupees or more can now appoint a whole-time company secretary. However, companies covered under section 8 (not for profit companies) would be exempted from this requirement.
• An individual cannot be appointed or reappointed as the chairperson of the company as well as the managing director or CEO of the company at the same time unless, the articles provide otherwise or if the company does not carry multiple businesses. However, such class of companies engaged in multiple businesses and which has appointed one or more CEOs for each such business may be exempted from the aforesaid provision by the Central Government through a notification.
• Public companies having paid-up share capital of rupees one hundred crore or more and annual turnover of rupees one thousand crore or more, which are engaged in multiple businesses and have appointed Chief Executive Officer for each such business will constitute the class of companies [3].
• Every whole-time key managerial personnel shall be appointed by means of Board resolution containing the terms and conditions of the appointment including the remuneration. He shall not hold office in more than one company except in its subsidiary company at the same time. However, he may be appointed as director of any company with the permission of the Board.
• A company may appoint a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company and such appointment is approved by Board resolution with the consent of all the directors present at the meeting. This provision will apply to all companies, be it public or private companies.
• If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of six months from the date of such vacancy according to this section.
• In case of default, following penalties/ punishments will be imposed: (a) Company, shall be, punishable with  fine of five lakh rupees (b) Every director and key managerial person in default shall be punishable with fine which may extend to fifty thousand rupees and where the contravention is continuing one with a further fine, which may extend to thousand rupees for every day after the first during which the default continues but not exceeding five lakh rupees.

This section must be read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, which supplement the provisions of this section. According to the rules, every listed company and every other public company having paid up share capital of ten crore rupees or more shall have whole time key managerial personnel in their company [4]. Further a company other than a company covered under rule 8 which has a paid-up share capital of five crore rupees or more shall have a whole-time company secretary [5].

Further the Companies (Appointment and Qualification of Directors) Rules, 2014, provide that a company is required to file Form DIR-12 with the Registrar of Companies within 30 days from the appointment of key managerial personnel and within 30 days of any change-taking place in such appointment [6].

A Transition period had been provided before enforcement of this provision, and thus this provision was enforced on September 30, 2014 (i.e. six months from the commencement of the provisions of this section), to give such whole-time key managerial personnel who are already holding office in more than one company, time to choose one company in which they wish to continue to hold the office of key managerial personnel.

Situation Before Enactment of Section 203

This section corresponds to section 316 (Number of companies of which one person may be appointed managing director), section 383A (Certain companies to have secretaries) and section 386 (number of companies of which a person may be appointed manager) of the 1956 Act. There are no drastic differences between provision of the act, 2013 and the act, 1956. Position under the act, 1956 under various sections now, stands streamlined and clubbed together at one place. Further the penalties stand substantially increased.

Application of Section 203

This section basically lay down the certain requirements of appointment that needs to be fulfilled by any company, be it public or private. This section comes into application when a company fulfils the mandatory requirement of appointing key managerial personnel. The procedure and requirements as laid down under this section, read with supplementing rules have been adhered by every company.

Amendments to 203

This section has been recently amended by Companies (Amendment) Act, 2019. The penal clause of the section has been slightly amended, making the punishment for the company in default more stringent. The lower limit of fine of one lakh for the company has been done away with, and now a company in default will have to pay a fine of five lakh rupees. For key managerial personnel and director for continuing offence, they will be liable to fine of thousand rupees for each day of default but now after amendment a cap of five lakh is provided on this penalty.

Cases at a Glance

M/s. Castrol India Ltd., Technopolis Knowledge Park case [7]: In this case the applicant- a company files a compounding application seeking to put the matter at rest. The company has a whole-time company secretary according to section 203 of the act, 2013, who resigned, and the company defaulted in fulfilling the position for a year. The six months’ time is provided under the act, to conduct a board meeting and pass a resolution, to appoint a new secretary to fulfil the vacated position, thus the company was in default for a few months. The company had now appointed a new whole-time company secretary and thus requested the court to rest the matter. The court looked at the registrar’s report and held that a minimum fine of five thousand is enough to create a detrimental effect and put the matter to the rest because the company had already compiled with the requirement before the case was disposed of.

Concluding Summary

This section is very important as it lays down the requirement and procedure for appointment of key managerial personnel in any company. Key managerial personnel are people responsible for managing the company and taking important decisions, which can affect not only the interest of the company but also shareholders interest. Thus, the requirement of this section as supplemented by various rules is important and every company needs to adhere to the same.

[1] Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, r. 8 (MCA)

[2] Notification GSR 390(E) dated 9th June 2014 (MCA).

[3] Notification S.O. 1913(E) dated 25th July 2014 (MCA).

[4] Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, r. 8 (MCA).

[5] Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, r. 8A (MCA).

[6] Companies (Appointment and Qualification of Directors) Rules, 2014, r. 18 (MCA).

[7] M/s. Castrol India Ltd., Technopolis Knowledge Park (2017) SCC Online NCLT 10323

Also read, Company Liquidator’s report on Progress of Winding Up: Process.