Who Must Sit in the Whole-Time Chairs? Key Managerial Personnel Under Section 203

A company can run for years with directors doubling as managers, until it crosses into the prescribed class and the law asks for whole-time officers. Section 203 of the Companies Act, 2013 names them (managing director, CEO or manager, or a whole-time director; a company secretary; and a Chief Financial Officer), fixes how they are appointed and restricts them from holding office across companies. It also gives the Board six months to fill a vacancy. The prescribed class decides who is caught; what follows is statutory procedure.

The three whole-time chairs

"Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,— (i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director; (ii) company secretary; and (iii) Chief Financial Officer" (s.203(1), Companies Act 2013).

Three chairs, all whole-time. The first has an either/or structure: a managing director, a CEO or a manager, and only where none of those exists, a whole-time director. The company secretary and the CFO chairs have no alternative. "Whole-time" is the operative word. A part-time consultant styled as CFO does not fill the CFO chair.

Which companies are caught: Rule 8 and Rule 8A

Section 203(1) applies to companies of a class "as may be prescribed", so the thresholds sit in the rules, not in the section. Two rules matter.

Public companies (rule 8). "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, Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014). In other words, every listed company, and every other public company with paid-up share capital of ₹10 crore or more, needs all three offices from section 203(1).

Private companies (rule 8A). Rule 8A was substituted with effect for financial years commencing on or after 1 April 2020, and now reads: "Every private company which has a paid up share capital of ten crore rupees or more shall have a whole-time company secretary" (rule 8A, as substituted by the Amendment Rules, 2020, G.S.R. 13(E), 3 January 2020). A private company at that level therefore needs a whole-time company secretary under this rule. The rule is about the secretary only; it does not by itself add the other two chairs for a private company.

Two practical points follow. First, paid-up share capital is a figure that changes with every allotment, so compliance teams should test the threshold each time capital changes and not only at year end. Second, a company that crosses the line has to appoint; there is no waiting year written into the text of the rules quoted above. Confirm the capital figure from the company's own records before deciding whether the company is in or out.

Chairperson and MD or CEO in one person

"An individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,— (a) the articles of such a company provide otherwise; or (b) the company does not carry multiple businesses" (s.203(1), first proviso).

Combining the roles is the exception, allowed where the articles permit it or where the company is not in multiple businesses. There is a second route for multi-business groups. The bar does not apply to "such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government" (s.203(1), second proviso). Check the articles before every appointment of a chairperson or MD, because the articles are the first escape from the bar.

Appointment is by Board resolution, with terms

"Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration" (s.203(2)).

The Board appoints, not the general meeting. The resolution has to carry the terms and conditions "including the remuneration". A resolution that names the person but leaves pay to be fixed later does not follow the sub-section. Whatever remuneration the person is to receive, record it in the appointing resolution itself. If the person is also being appointed as a director or managing director, other provisions of the Act apply to that role, and those should be checked separately.

One company at a time

"A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time" (s.203(3)).

The CFO of a holding company may also be the CFO of its subsidiary. That person cannot at the same time be the whole-time CFO of an unrelated company. The same sub-section has three provisos:

• Directorships elsewhere. "Nothing contained in this sub-section shall disentitle a key managerial personnel from being a director of any company with the permission of the Board" (first proviso). Board permission opens non-executive directorships; it does not open a second whole-time office.
• Transition at commencement. Persons already holding whole-time KMP office in more than one company on the date the Act commenced had six months from commencement to choose one company (second proviso). That window has long closed, but it explains why the sub-section looks the way it does.
• A shared managing director. "A company may appoint or employ 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 or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India" (third proviso). Consent of every director present, plus specific notice of both the meeting and the resolution to all directors in India, is needed. A simple majority on ordinary notice is not enough, and the permission covers one other company only.

Vacancies: six months, at a Board meeting

"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" (s.203(4)).

Resignation, removal, death or any other cause that vacates the office starts the clock. Two features of the wording matter. The refill must be done by the Board "at a meeting of the Board", so a plan that relies on signatures by circulation should be tested against that wording before it is used. And the period runs from "the date of such vacancy", so the date should be diarised on the day the office falls vacant, with the six-month outer limit worked out at once.

A short illustration. A company's CFO resigns in October. The Board has until the same date in April, six months later, to hold a meeting and appoint a successor. A resolution that is only noted at a later meeting after the six months have passed does not rescue the position.

What a default costs

"If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees" (s.203(5)).

There are three layers:

The daily component means a vacancy left open for months costs materially more than the flat amounts suggest, until the cap is reached.

Three moments that test the section

The crossing year. The company's capital reaches the rule 8 or rule 8A level. The Board must now appoint the required whole-time officers by resolution, each stating terms and remuneration. Treat the capital threshold as a trigger in the compliance calendar and not as something noticed at audit.

The mid-year resignation. An officer leaves. The date of vacancy is recorded the same day, the six-month limit is calculated, and a Board meeting is scheduled with the appointment on its agenda. The fresh appointment needs its own resolution with terms and remuneration, as in section 203(2).

The group share. A holding company's CFO is asked to take on the books of a new subsidiary. The subsidiary exception covers this. It does not cover a third, unrelated company, and it does not turn a second whole-time post into something else by relabelling it. If the arrangement is for the same person to be managing director of two companies, the third proviso procedure above applies, with unanimous consent of the directors present and specific notice to directors in India.

What to do now

• Test the threshold. Check the company's paid-up share capital against ₹10 crore (rule 8 for public companies, rule 8A for private companies) and note whether the company is listed. Rule 8: "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 8A: "Every private company which has a paid up share capital of ten crore rupees or more shall have a whole-time company secretary."
• Fill any empty chair by Board resolution. The resolution must contain the terms and conditions including remuneration (s.203(2)).
• For a vacancy, diary the six-month limit from the date of vacancy and hold a Board meeting before it ends (s.203(4)).
• Consequence of delay. ₹5,00,000 on the company, ₹50,000 on each director and key managerial personnel in default, and ₹1,000 per day of continuing default up to ₹5,00,000 (s.203(5)).

Have a CA review your facts before you act or file.

FAQ

Which officers must a company in the prescribed class have?
A managing director, or Chief Executive Officer or manager, and in their absence a whole-time director; a company secretary; and a Chief Financial Officer, all whole-time (s.203(1)). For a private company within rule 8A, the rule speaks of a whole-time company secretary.

Can the chairperson also be the MD or CEO?
Only if the articles provide otherwise, or the company does not carry multiple businesses (s.203(1), first proviso). The bar is also lifted for notified classes engaged in multiple businesses that have appointed CEOs for each business (second proviso).

Who appoints key managerial personnel?
The Board, by a resolution containing the terms and conditions including the remuneration (s.203(2)). It is not a general meeting decision.

Can one person be whole-time key managerial personnel (KMP) of two companies?
Only in a subsidiary company, in addition to the first company (s.203(3)). Directorships elsewhere are allowed with the permission of the Board. A person can be managing director of two companies only under the unanimous-consent and specific-notice procedure in the third proviso.

How quickly must a vacancy be filled?
By the Board, at a meeting of the Board, within six months from the date of the vacancy (s.203(4)). Continuing default adds a daily penalty (s.203(5)).

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See Also

• CSR under section 135: the board's annual cycle, from trigger test to unspent-amount transfers
• Secretarial Audit Under Section 204: Who Needs It, What the Board Must Answer, and What Non-Compliance Costs
• Declared a Dividend? The Five-Day Deposit, the Thirty-Day Unpaid Account, and the Seven-Year IEPF Clock