Tuesday, June 17, 2014

Guest Post: Identifying KMPs under Companies Act, 2013

[The following post is contributed by Shampita Das, who is an Associate at Vinod Kothari & Company. She can be contacted at shampita@vinodkothari.com]
                                                                      
Amendments from the Ministry of Corporate Affairs (MCA) to the hurriedly introduced Rules (under the Companies Act, 2013) continue to flow. Now, the MCA has come out with an amendment to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 dated 9 June 2014 to introduce Rule 8A pertaining to appointment of whole-time company Secretary. The text of the Rule is provided below:

“8A. Appointment of Company Secretaries in companies not covered under rule 8. - 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.”

Rule 8 to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 follows from Section 203 (1) of the Companies Act, 2013 and provides for appointment of key managerial personnel (‘KMP’) in companies as follows:

“Every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel.”

Rule 8 specifies two sets of companies – (1) Listed Companies and (2) Other Public Companies. For other public companies, the threshold limit for the section to be applicable is Rs. 10 crore paid up capital.

Looking at the language of the newly inserted Rule 8A, one can just lament on the loose drafting of MCA, which has once again created confusion instead of clarifying the position. Rule 8A suggests that companies not falling under Rule 8 would be required to appoint a whole-time company secretary. Now there are two ways interpreting it:

(a)        First, this may mean that only private companies with paid up capital of 5 crores or more are covered under Rule 8A since the existing Rule 8 talks about two types of companies viz. listed companies and other public companies.

(b)       Another way of reading it is that Rule 8 covers all listed companies and other public companies with paid up capital of 10 crores or more. Accordingly Rule 8A covers all private with paid up capital of 5 crores or more and unlisted public companies with paid up capital between 5 to 10 crores.

In our opinion, scenario (b) seems more logical since the intent of the MCA was surely not to burden private companies with paid up share capital of Rs. 5 crores to appoint a whole-time company secretary while leaving public companies with paid up capital between 5 crores to 10 crores unattended. Public companies have a greater need for a whole-time company secretary in view of the additional compliance responsibilities.

Though it is open to interpretation as to how one would read the language of Rule 8A, we are of the view that both the scenarios create a paradox of sorts. Rule 8A suggests that though companies falling under it may remain headless without the requirement of appointment of a CEO / MD / CFO, it necessarily needs to appoint a company secretary.

Will the company secretary be a KMP for the company?

Another point worth mentioning here is that the definition of Key Managerial Personnel under section 2(51) includes a company secretary. Thus where a company appoints a company secretary, whether mandated by law or not, such officer will be treated as a KMP. Accordingly, the company secretary appointed pursuant to Rule 8A would be treated as a KMP of the Company and such a person would need to abide by the provisions of Section 205 of the Companies Act, 2013 (relating to functions of company secretary). Such a person would also be treated as an officer in default and the liabilities of a KMP would be equally applicable.

Comparison with Section 92 of the Act, 2013 pertaining to Annual Returns

Section 92 (1) of the Companies Act, 2013 requires a company to get its annual return signed by a company secretary or where there is no company secretary, by a company secretary in practice. Further sub-section (2) of the said section 92 read with Rule 11 of the Companies (Management and Administration) Rules, 2014 provides that every listed company and companies having paid-up share capital of Rs. 10 crore or more or turnover of Rs. 50 crore or more, shall be certified by a Practising Company Secretary. Here the law does not distinguish between public and private companies.

One would have come to a logical conclusion here that the requirement of having a company secretary arises when the paid up capital exceeds 10 crores. This view was retained under Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. However private companies were left out from the purview. This was reinstated by the introduction of the new Rule 8A, which additionally covers public companies with paid up capital between 5 – 10 crores.

Making sense of various classes of companies

The following checklist for various categories of companies which will clarify the revised position on the appointment of KMPs in view of said Rule 8A:

1.         Listed Company

Will be required to appoint all three categories of KMP on a whole-time basis:
(i)            CEO / MD / WTD / Manager
(ii)           CS
(iii)          CFO
2.         Unlisted Public companies with paid up capital of Rs. 10 crore or more

Will be required to appoint all three categories of KMP on a whole-time basis:
(i)            CEO / MD / WTD / Manager
(ii)           CS
(iii)          CFO

3.         Unlisted Public companies with paid up capital between 5 - 10 crores

Will be required to appoint only a whole-time CS, who will serve as a KMP of the company.

4.         Unlisted Public companies with paid up capital of less than Rs. 5 crore

Will not be required to appoint any KMP.

5.         Private companies with paid up capital of Rs. 5 crore or more

Will be required to appoint a whole-time CS, who will serve as a KMP of the company.

6.         Private companies with paid up capital of less Rs. 5 crore

Will not be required to appoint any KMP

Conclusion

The aforesaid amendment has brought a lot of cheer to CS fraternity. However, a lot has been left unattended. As mentioned in the Article, the companies falling within the bracket of Rule 8A would not have to appoint any CEO / CFO, whose presence in the company are equally important for its proper management. Retaining one category of a KMP and ignoring the other categories may not serve the best of the company’s interest.

- Shampita Das

5 comments:

vswami said...

“....
Looking at the language of the newly inserted Rule 8A,
(b) Another way of reading it is.. Accordingly Rule 8A covers all and UNLISTED PUBLIC COMPNIES ...”

Beg your pardon! This type of companies, to one’s limited knowledge, does not seem to be thus far known or heard of.

The other basic points requiring to be emphasised are these:

A)Any person designated or otherwise, and internal or external, functioning as a ‘secretary’, has undeniably a crucial role to play, as even ever before. As such, even without the law having to say so, he has always been looked upon as/ expected to discharge his functions as a 'KMP'.

B)The idealogical view is that, in the larger interests of all the stakeholders, not merely the ‘shareholders’ , the utmost need requires to be urged for every corporate; for that matter, all entities coming within the administrative control of MCA,if not the rest, to have a ‘secretary’. Especially so, if the increasing number of ‘enactments (law) being churned out in a routine manner, coupled with the inevitable incomprehensibility/complicity of every one of them, with no exception, were to be kept in sharp focus.

C)Some of the common sense observations, if not all, reported to have been very recently made by the RBI Governor, disapproving of the idea of a single regulatory authority are perceived to be logically sound; hence worthwhile giving an in-depth consideration.

Read in Business Standard,@
"Rajan dismisses idea of unified regulator"






Anonymous said...

@vswami

Sir, what are you saying? first of all you are misquoting her. She said "Rule 8 covers all listed companies and other public companies"

and two, i can only assume that you are more familiar with us law where going public necessarily involves listing. In india, unlisted public companies are not a new concept at all!


vswami said...

@Anonymous
Pleading not guilty of “misquoting her”as alleged, may have to pinpoint that the words in inverted commas (in the opening of comments) are precisely the same as in the subject write-up. In case what Anonymous is saying, or wanted to say, is that there has been a misunderstanding of the import of the highlighted words, wish to tentatively make self clear that, going by an altruistic perception, the type of company he ostensibly has in mind,- as may be found if closely scouted around, - is denoted, rightly so, as a “publicly unlisted company”, as distinct from “public company”.

Incidentally, Mr Anonymous , though presumably quite more informed on Indian law (s), will do well to care and read through, among several others elsewhere in public domain, HERE , - Unlisted Public Companies - The Economic Times , which as read and understood by self , is seen to bring out the ‘ignominy’ of a special kind/ the economic risks the other concept of ‘publicly unlisted company’ is believed to entail.
Self open to, and always remain to, be ‘enlightened’, by the Experts at large as ever before.

vswami said...

To add (to my tentative rejoinder): On further thoughts, it might be worthwhile to make a study, in-depth, of the statutory definitions of "private company" and "public company" in the corp-law and expert comments in any leading text book .Also might be kept in focus the tax implications for which purpose the vital distinction lies /is based on whether a company is one in which the public are substantially interested or not.Plethora of Case law on the topic is sure to throw sufficient light for a proper and insightful study, by experts and non-experts alike, to come to incisively better conclusions.

Sreenivasarao somisetty said...

I agree with you.
Having only CS as KMP, will lead to unnecessary burden on CS.
Any way Whole time directors/MD also becomes KMPs u/s 2 (51) of the Act.