CMA Intermediate · Business Laws and Ethics

Key Managerial Personnel: formula sheet

Full chapter guide

Key formulas

KMP under Section 2(51): KMP = CEO / MD / Manager + Company Secretary + Whole-time Director + CFO + Other officer designated by the Board (whole-time employee, not more than one level below the directors) + Other officer as prescribed; Learn this as a list of posts. The Board-designated officer and the prescribed officer are two separate limbs. The Board-designated officer must be in whole-time employment and not more than one level below the directors.
Director vs KMP test: Director = member of the Board; KMP = holder of a listed executive post; some persons are both; MD and whole-time director are both. Independent, non-executive and nominee directors are directors only. Company secretary and CFO are KMP only, unless also appointed to the Board.
Meaning of 'in relation to a company': Section 2(51) defines KMP for a company, so the posts are tested against that particular company; The same person can be KMP of one company only because of the post held in that company.
Mandatory whole-time KMP (s. 203(1)): MD or CEO or manager (else whole-time director) + Company Secretary + CFO; Applies to prescribed classes of companies only.
Mode of appointment (s. 203(2)): Board resolution stating terms and conditions, including remuneration; Applies to every whole-time KMP.
Holding office in more than one company (s. 203(3)): Not more than one company, except its subsidiary company; A KMP may be a director of any company with Board permission. A company may appoint as MD a person who is MD or manager of one and not more than one other company, by Board resolution with consent of all directors present, after specific notice to all directors then in India.
Filling a vacancy (s. 203(4)): Board meeting; within 6 months from the date of vacancy; Applies to whole-time KMP offices.
Chairperson and MD/CEO (first proviso): Same person cannot be both, unless articles provide otherwise or company does not carry multiple businesses; Does not apply to notified multiple-business companies that have appointed a CEO for each business.
Penalty (s. 203(5)): Company: ₹5,00,000. Each director and KMP in default: ₹50,000, plus ₹1,000 per day after the first for continuing default, capped at ₹5,00,000; The daily penalty cap applies to the further penalty.
MD and manager (s. 196(1)): No company shall appoint or employ at the same time a managing director and a manager; Separate section, often asked together with s. 203.
Register and return (s. 170(2)): Return of KMP to Registrar within 30 days of appointment and within 30 days of any change; Section 170(1) requires a register at the registered office.
Duty to keep register (Section 170(1)): Every company → register of directors and KMP → at registered office; Particulars are as prescribed and must include details of securities held in the company, its holding, subsidiary, fellow subsidiary or associate companies.
Return to Registrar (Section 170(2)): File within 30 days of appointment and within 30 days of any change; Applies to every director and KMP. The return contains the prescribed particulars and documents.
Securities covered: Company + holding + subsidiary + subsidiary of holding company + associate companies; Five categories. Students often remember only the company itself and the holding company.
Inspection of registers (Section 94(2)-(3)): Members, debenture-holders, other security holders, beneficial owners: free inspection and free extracts. Others: on payment of prescribed fees; Section 94 deals with registers under section 88 and annual return copies. Do not say it names the Section 170 register. The prescribed particulars not open to inspection are excluded by proviso to Section 94(3).
Refusal of inspection (Section 94(4)): ₹1,000 per day, maximum ₹1,00,000, on the company and every officer in default; Applies where inspection, extract or copy under Section 94 is refused.
Status of Section 194: Section 194 = omitted by Companies (Amendment) Act, 2017, w.e.f. 9-2-2018; No prohibition and no penalty under this section now. State this first in any answer.
Old scope (for history only): Director or KMP + forward dealing + securities of company / holding / subsidiary / associate; This was the idea behind the old bar. Use it only to explain what was removed.
Register of directors and KMP (Section 170(1)): Register at registered office, including securities held in company, holding, subsidiary, subsidiary of holding, associate; This is the live provision on insider shareholding.
Return to Registrar (Section 170(2)): File within 30 days of appointment and within 30 days of any change; Applies to every director and KMP.
Whole-time KMP of a prescribed company: MD or CEO or manager (else a whole-time director) + Company Secretary + CFO; Applies to companies of the class prescribed. Check the company's class before saying a post is mandatory.
Appointment of whole-time KMP: Board resolution stating terms and conditions, including remuneration (Section 203(2)); A Board resolution is needed. Shareholder approval is not the route stated in this section.
One company limit: Whole-time KMP may hold office in only one company, except its subsidiary (Section 203(3)); Board may permit the KMP to be a director of any company. An MD may also be MD or manager of one other company, with consent of all directors present and specific notice to all directors in India.
Filling a vacancy: Vacancy in whole-time KMP office to be filled by the Board at a Board meeting within 6 months (Section 203(4)); The six months run from the date of vacancy.
Chairperson and MD/CEO: Same person cannot be chairperson and MD/CEO unless the articles provide otherwise or the company does not carry multiple businesses (Section 203, first proviso); The proviso does not apply to notified companies in multiple businesses that have appointed one or more CEOs for each business.
Penalty for default under Section 203(5): Company: ₹5,00,000. Each director and KMP in default: ₹50,000, plus ₹1,000 per day after the first while default continues, further penalty capped at ₹5,00,000; Read the cap as applying to the daily further penalty.
Disclosure in explanatory statement: State nature of concern or interest of every director, manager, other KMP and their relatives (Section 102(1)(a)); Applies to each item of special business. In an AGM, ordinary business such as accounts, dividend, retiring directors and auditors is not special.
Penalty for default under Section 102: Higher of ₹50,000 or 5 × benefit accruing to the promoter, director, manager, KMP or relatives (Section 102(5)); Also, the benefit is held in trust for the company and must be compensated (Section 102(4)).
Shareholding disclosure: If special business affects another company, set out shareholding of every promoter, director, manager and KMP in it where it is not less than 2% of paid-up capital (Section 102 proviso); Two per cent or more is the trigger.

Quick revision

Whole-time KMP under section 203(1): MD or CEO or manager (in their absence a whole-time director), company secretary and CFO.
Section 203 applies to companies of the class or classes prescribed.
A whole-time KMP is appointed by a Board resolution that states the terms and conditions, including remuneration.
A whole-time KMP cannot hold office in more than one company at the same time, except in its subsidiary.
A KMP may be a director of any company with the permission of the Board.
A vacancy in a whole-time KMP office must be filled by the Board at a Board meeting within six months.
Default under section 203: company ₹5,00,000; each officer in default ₹50,000; ₹1,000 per day of continuing default, capped at ₹5,00,000.
Section 170: the register of directors and KMP is kept at the registered office and includes their securities held in the company, its holding, subsidiary and associate companies.
The return of directors and KMP goes to the Registrar within thirty days of appointment and within thirty days of any change.
Section 189(2): a director or KMP discloses interests within thirty days of appointment or of relinquishing office.
Section 194 on forward dealings by directors and KMP is omitted with effect from 9 February 2018.
Section 178: the Nomination and Remuneration Committee recommends a remuneration policy for directors, KMP and other employees.

Common mistakes

Treating every director as KMP. Fix: Only the managing director and whole-time director are KMP among directors. Independent, non-executive and nominee directors are not.
Forgetting the company secretary and CFO. Fix: Remember CS and CFO are named in Section 2(51) even though they are not directors by virtue of the post.
Saying every company must appoint KMP under Section 203. Fix: Write that the section applies to such class or classes of companies as may be prescribed.
Treating MD, CEO and manager as three separate mandatory posts. Fix: They are alternatives for one slot. A whole-time director fills it only in their absence.
Writing sixty days for the Section 170 return. Fix: Link Section 170 with 30 days and Section 92(4) with 60 days from the date of the AGM.
Saying the 30 days run only from appointment. Fix: Say it twice: within thirty days of appointment and within thirty days of any change.
Writing that Section 194 currently prohibits forward dealings and quoting a penalty. Fix: Always check the status. Say the section was omitted w.e.f. 9-2-2018 and no penalty applies under it.
Saying the Companies Act has no provision at all on directors' securities. Fix: Mention Section 170: the register must record the securities each director and KMP holds in the company and related companies.
Saying shareholders appoint whole-time KMP by ordinary resolution. Fix: Remember that the Act requires a Board resolution with terms and remuneration for whole-time KMP.
Stating that a KMP can never hold office in two companies. Fix: Add the exceptions: a subsidiary, Board permission to be a director of any company, and the MD proviso for one other company with unanimous consent of directors present.

Exam tips

MCQs often give a mix of directors and officers. Look for non-executive, independent or nominee directors and reject them.
In a written answer, list all the Section 2(51) posts in order and name the section. This earns the definition marks.
For a distinction question, use two columns of points in sentences: meaning, appointment, nature, examples, and the overlap.
If the Board-designated officer appears, quote all three conditions. Keep the prescribed officer as a separate limb. Missing these costs marks.
Write the section number with the heading: s. 203 for mandatory KMP, s. 196 for MD, WTD and manager, s. 170 for register and return.
In MCQs, watch for the numbers: six months for vacancy, thirty days for the return, five years maximum term under s. 196(2).
In case questions, state the rule first, apply it to the dates or roles given, then conclude.
Always mention the penalty amounts when the facts show a default, with the company and officer figures separate.