In the year 2005 the government of India constituted an expert committee headed
by Dr J.J. Irani to bring changes in the Companies Act, 1956. Pursuant to the
recommendations in the JJ Irani report, the Companies Act 2013 included the
concept of Key Managerial Personnel (KMP).
Under the earlier Companies Act, 1965, it provided for the appointment of key
managerial personnel (KMP) only in certain cases however with the advent of the
Companies Act 2013 it recognized the concept of KMP and for the first time
provided an exhaustive definition of KMP along provisions with respect to their
Key Managerial Personnel (KMP) play an integral role in the administration,
management and supervising the overall day to day functioning of the
companies. They act like the backbone of the company and through their
expertise, extraordinary acumen, they overcome the barriers and thereby aid in
the company's success. Key managerial personnel help in identification,
recruitment and retain qualified talent in order to achieve the entities goals.
They build strategies, provide resources and support needs to in order to make
the organization successful. The KMPs are responsible for signing contracts,
cheques and other important documents authorized by the board of directors on
behalf of the company.
Section 2(51) of the Companies Act 2013 mentions Key managerial personnel (KMP)
in a company.
The Key managerial personnel would constitute of the following
- Chief Executive Officer (CEO) or Managing Director (MD
- Chief Financial Officer (CFO),
- Company Secretary,
- Whole-Time Director,
According to the Companies Act 2013, it does not mandate a private company to
appoint a managing director, whole-time director or manager. It also does not
prohibit voluntary appointment of such designations by private companies for the
efficient management and supervision of the business entity.
Section 203 of the Companies Act deals with the appointment of KMP, limited to:
- Managing director or CEO or manager and in their absence, a whole-time
- Company secretary; and
- CFO and applied only to a specific class of companies.
It also states that the KMP shall not hold the office in
more than one company at the same time expect in its subsidiary company. Private
companies were excluded, the exception being Rule 8A of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014 which
requires that every private company having a paid-up share capital of ten core
rupees or more to have a whole-time company secretary.
Compliance of Section 203 of the Companies Act 2013 by Private Companies
As stated in Section 203 of the Companies Act, 2013, every listed company and
every other public company with a paid-up share capital of ten crore rupees must
have a CFO as a whole-time key managerial personnel. It is also states that a
whole-time key managerial personnel cannot hold an office in more than one
company at the same time exception of its subsidiary company. However, the act
does not mention anything with regards to private companies.
It is pertinent to note that section 203 does not require private companies to
appoint a KMP nor prohibits voluntary appointment of KMP. Hence the question
which arises is that whether section 203 applies to private companies appointing
a KMP on voluntary basis?
This was answered by in the case of "Hamlin Trust & Ors vs LSF 10 Rose
Investments & Ors"whereby NCLAT held that section 203 of the Companies Act
shall apply to private companies in cases where it voluntarily chooses to
Facts of the Case
Hamlin Trust and LSF 10 Rose Investment each were 50% shareholders respectively
in Rattan India Finance Private Limited. As per the Article of Association (AOA)
of the company, the right to appoint a CFO rest with Rose Investments however
the other 50% of the shareholders have the right to reject two candidates but
the third candidate so proposed by Rose Investments has to be accepted by all.
The candidates for the designation of CFO so proposed were individuals who were
already associated with other entities and not available full time for Rattan
Finance. The remaining 50% of the shareholders objecting the nomination on the
ground that the same is contrary to section 203 of the Companies Act, 2013.
The NCLT in a company petition filed by LSF 10 Rose Investment (50% shareholder
of Rattan India Finance Private Limited) in its ongoing Oppression and
Mismanagement petition held that since the AOA of Rattan Finance do not
stipulate any criteria for appointment of CFO and Rattan Finance being a private
company can therefore appoint anybody as the CFO even if such person is not a
full-time employee of such company.
The NCLAT set aside the order of NCLT for the appointment of CFO of Rattan
Finance. It was contended that the AOA of Rattan Finance did not stipulate any
prerequisites for the appointment of the CFO. The NLCAT held that if a private
company which is exempted from appointing a CFO chooses to appoint a CFO, then
the CFO being a KMP would have to comply with section 203 of the Companies Act.
It also laid down that the CFO is a whole- time KMP and is prohibited from
holding office in more than one company except in its subsidiary company at the
The NCLAT order also stated that in the absence of any eligibility criteria and
method of selection of the CFO in the AOA, it would be logical to take recourse
to Section 203 of the Companies Act in appointment of the CFO and thereby also
take into consideration the other provisions, Section 184 and 189 of the
Companies Act with regards to the eligibility of the KPM.
Therefore, the provisions of the AOA cannot override the provisions of the Act
and since the provisions of AOA are silent it is logical to consider the
provisions of the Act with regards to the eligibility criteria in appointment of
the KMPs. Hence directing the shareholders of the company to appoint a CFO in
accordance with the AOA while also complying with section 203 of the Companies
Hence if any company including private companies voluntarily appoints an
individual as a KMP then they will have to comply with the provisions applicable
to KMP according to the Companies Act.
Through this judgement passed by the NCLAT, it casted an onerous task resulting
in increased compliances and costs on private companies who voluntarily deemed
to appoint a KMP will hereby have to comply with the provisions of the Companies
Act for the same.
It was observed earlier in the Registrar of Companies (ROC) order on Landomus
Realty Private Limited dated February 7, 2022. It was found that a director
had filed a return by signing it in the capacity of the chairman and CEO.
However, there was no resolution passed nor the Form DIR-12 filed for change in
such designation. Hence it was held that even though Landomus did not fall under
the class of companies requiring to appoint a KMP, the designation of a CEO
without proper compliances is in violation of the Companies Act.
The ROC order on Landomus and the NCLAT order on Rattan Finance will have a
significant impact on private companies who deem to appoint a Finance
Information Officer, Chief Risk Officer, Chief Financial Officer, Managing
Director, Chief Executive Officer etc.
Thus, it appears that through this NCLAT order, private companies who seek to
appoint or continue the appointment of KMP on voluntary basis shall now comply
with section 203 of the Companies Act and thereby also take action to comply
with the requisite approvals, disclosures and other provisions pertaining to KMP
in accordance with the Companies Act. This might have an impact on numerous
companies who wish to avail appointment of such designations, they now will have
to reconsider the same.
- Dr. Jamshed. J. Irani, Report on Company Law (May 31st, 2005),
- Key managerial personnel under the Companies Act, 2013 (June 13th 2016),
- The Companies Act 2013
- Hamlin Trust & Ors vs LSF 10 Rose Investments & Ors, 2022 SCC Online
- Landomus Realty Private Limited, No. ROCB/Adj. Order/Sec.454/Section
170(2) r/w 203/Co.No.081640/2021/ 5818