APPOINTMENT & REMUNERATION cover.p65

APPOINTMENT AND REMUNERATION OF
KEY MANAGERIAL PERSONNEL
Introduction
The executive management of a company is responsible for the
day to day management of a company. The companies Act, 2013 has
used the term key management personnel to define the executive
management. The key management personnel are the point of first
contact between the company and its stakeholders. While the Board
of Directors are responsible for providing the oversight, it is the key
management personnel who are responsible for not just laying down
the strategies as well as its implementation.
Chapter XIII of the Companies Act, 2013 read with Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014
deal with the legal and procedural aspects of appointment of Key
Managerial Personnel including Managing Director, Whole-time
Director or Manager, managerial remuneration, secretarial audit etc.
Key Managerial Personnel
The Companies Act, 2013 has for the first time recognized the
concept of Key Managerial Personnel. As per section 2(51) “key
managerial personnel”, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the
manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed.
Managing Director
Section 2(54) of the Companies Act, 2013, defines ‘managing
director’. It stipulates that a “managing director” means a director
1
2 Appointment and Remuneration of Key Managerial Personnel
who, by virtue of the articles of a company or an agreement with the

company or a resolution passed in its general meeting, or by its Board
of Directors, is entrusted with substantial powers of management of
the affairs of the company and includes a director occupying the
position of managing director, by whatever name called.
The explanation to section 2(54) excludes administrative acts of a
routine nature when so authorised by the Board such as the power to
affix the common seal of the company to any document or to draw
and endorse any cheque on the account of the company in any bank
or to draw and endorse any negotiable instrument or to sign any
certificate of share or to direct registration of transfer of any share,
from the substantial powers of management.
Whole Time Director
Section 2 (94) of the Companies Act, 2013 defines “whole-time
director” as a director in the whole-time employment of the company.
Manager
Section 2(53) of the Companies Act, 2013 defines “manager” as
an individual who, subject to the superintendence, control and direction
of the Board of Directors, has the management of the whole, or
substantially the whole, of the affairs of a company, and includes a
director or any other person occupying the position of a manager, by
whatever name called, whether under a contract of service or not.
Chief Executive Officer & Chief Financial Officer
Section 2(18)/(19) of the Companies Act, 2013 defined “Chief
Executive Officer”/ “Chief Financial Officer” as an officer of a company,
who has been designated as such by it;
Company Secretary
Section 2(24) of the Companies Act, 2013 defines “company
secretary” or “secretary” means a company secretary as defined in
clause (c) of sub-section (1) of section 2 of the Company Secretaries
Act, 1980 who is appointed by a company to perform the functions
of a company secretary under this Act;
Appointment of Managing Director, Whole-Time Director
or Manager
Section 196 of the Companies Act, 2013 provides that no company
shall appoint or employ at the same time a Managing Director and a
Manager. Further, a company shall not appoint or reappoint any person
Appointment and Remuneration of Key Managerial Personnel 3
as its Managing Director, Whole Time Director or manager for a term

exceeding five years at a time and no reappointment shall be made
earlier than one year before the expiry of his term.
Section 196(4) of the Companies Act, 2013 provides that subject
to the provisions of section 197 and Schedule V, a managing director,
whole-time director or manager shall be appointed and the terms and
conditions of such appointment and remuneration payable be approved
by the Board of Directors at a meeting which shall be subject to approval
by a resolution at the next general meeting of the company and by
the Central Government in case such appointment is at variance to
the conditions specified in Schedule V. Approval of the Central
Government is not necessary if the appointment is made in accordance
with the conditions specified in Schedule V to the Act.
Therefore, the appointment of a managing director or whole-time
director or manager and the terms and conditions of such appointment
and remuneration payable thereon must be first approved by the Board
of directors at a meeting and then by an ordinary resolution passed at
a general meeting of the company.
A notice convening Board or general meeting for considering such
appointment shall include the terms and conditions of such
appointment, remuneration payable and such other matters including
interest, of a director or directors in such appointments, if any.
A return in the prescribed form viz. MR.1 is required to be filed
with Registrar within 60 days from the date of such appointment.
Section 196(5) provides that subject to the provisions of this Act,
where an appointment of a managing director, whole-time director or
manager is not approved by the company at a general meeting, any
act done by him before such approval shall not be deemed to be invalid.
Appointment with the Approval of Central Government
In case the provisions of Schedule V of the Companies Act, 2013
are not fulfilled by company, an application seeking approval to the
appointment of a managing director (Whole-time director or manager)
shall be made to the Central Government, in e-Form No. MR.2.
As per section 200, the Central Government or a company may,
while according its approval under section 196, to any appointment
of a managing director, whole-time director or manager, the Central
Government or the company shall have regard to—
(a) the financial position of the company;
4 Appointment and Remuneration of Key Managerial Personnel
(b) the remuneration or commission drawn by the individual

concerned in any other capacity;
(c) the remuneration or commission drawn by him from any other
company;
(d) professional qualifications and experience of the individual
concerned;
(e) such other matters as may be prescribed.
As per Rule 6 for the purposes of item (e) of section 200, the Central
Government or the company shall have regard to the following matters
while granting approval to the appointment of managing director
under section 196:
(1) Financial and operating performance of the company during
the three preceding financial years.
(2) Relationship between remuneration and performance.
(3) The principle of proportionality of remuneration within the
company, ideally by a rating methodology which compares
the remuneration of directors to that of other executive
directors on the board and employees or executives of the
company.
(4) Whether remuneration policy for directors differs from
remuneration policy for other employees and if so, an
explanation for the difference.
(5) The securities held by the director, including options and details
of the shares pledged as at the end of the preceding financial
year.
Disqualifications
Section 196(3) of the Act makes a specific prohibitory provision
with regard to the appointment of managing director, whole time
director or manager. The section lays down that no company shall
appoint or continue the employment of any person as its managing
director, whole time director or manager who—
(a) is below the age of twenty-one years or has attained the age of
seventy years:
Provided that appointment of a person who has attained the
age of seventy years may be made by passing a special resolution
in which case the explanatory statement annexed to the notice

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APPOINTMENT AND REMUNERATION OF

KEY MANAGERIAL PERSONNEL

who, by virtue of the articles of a company or an agreement with the

as its Managing Director, Whole Time Director or manager for a term

(b) the remuneration or commission drawn by the individual

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