“Anomalies and Interpretation –

Companies Act 2013”

“Anomalies and Interpretation –
Companies Act 2013”
[Context - Key Managerial Personnel]
-

By CS Makarand Joshi
-

-makarandjoshi@mmjc.in
Coverage
1. About appointment
2. About remuneration
3. Remuneration of WTD /MD in private company
4. What is meaning of ‘whole time’ ?
5. Whether KMP should be an ‘employee’?
6. How many positions can be held by KMP?
7. Whether KMP can hold non KMP position in other company?
8. Whether ONE person can hold post of CS and CFO ?
9. Se. 189 (2) read with se. 184(1) Vs. Section 184(5)
10. Whether CFO appointed by pvt. co. is KMP?
11. Liabilities of KMP?
Appointment
Approval by Audit Committee [se.177]

“(4) (iv) approval or any subsequent modification of

transactions of the Company with related parties “

Related Questions
 Whether ‘related party’ would include KMP?

Section 2(76) (ii) – “a key managerial personnel or his

relative” Or “KMP of holding company or his relative”

At the time of appointment person is not a KMP

and therefore not a related party.
Approval of Nomination
Remuneration Committee
Section 178 (2) & Cl. 49.IV.
 NRC shall identify person, who may be appointed in
senior management in accordance with criteria laid
down [Is it mandatory for Board to accept this person??]

Identify – “to recognize and be able to say who or what

they are”
“Senior Management” means personnel of the Company
who are members of its core management team excluding
board of directors comprising all members of management
one level below executive directors, including functional
heads”
Appointment by Board?
 Appointment or removal of KMP only by means of
resolution passed at meeting of the Board [Section
179 read with Companies (Meetings of Board and
its Powers) Rules 2014

 Section 203 (2)–

“Every whole time KMP shall be appointed by means
of resolution of the Board containing terms and
conditions of appointment including remuneration”
Approval by Audit Committee [se.177]

“(4) (iv) approval or any subsequent modification of

transactions of the Company with related parties “

Related Questions
 Whether ‘related party’ would include KMP?

Section 2(76) (ii) – “a key managerial personnel or his

relative” Or “KMP of holding company or his relative”
Meaning of TRANSACTION
 Meaning of ‘Transaction’ – “a piece of business done
between people, especially act of buying and
selling”
 Blacks Law - “something performed or carried out”
 AS 18 - Related party transaction – “a transfer of
resources or obligations between related parties,
regardless of whether or not a price is charged.”
 Para 20 – “In particular, attention is focussed on
transactions with the directors or similar key
management personnel of an enterprise, especially
their remuneration”
Approval of Transaction
 Whether approval would include appointment?

Meaning of approval – “positive opinion of or the

feeling that it is good or acceptable”

 ‘Remuneration’ and ‘service’ is certainly a

‘transaction’
Audit Committee
 Approval and Modification of transaction with
related party requires approval of audit committee
 Meaning of modification – “to change”
 Transaction includes ‘service’ and ‘remuneration’
 Modification would include change in service or
remuneration
NRC And Board
 NRC shall recommend to Board “policy relating to
remuneration of KMP” [section 178 (3) and (4)
Clause 49.IV]
 Approval of salary is not required

 Every whole time KMP shall be appointed by means

of resolution of the Board containing terms and
conditions of appointment including remuneration
[Section 203 (2)]
Section 197
 Sub section (1) which provides for restrictions i.e.
11%, 5% or 10% are applicable to public
company
 Sub section (3) which talks about in adequate or no
profit, refers to “Company”
 Section 196 (4) states appointment of MD, WTD,
Manager shall be subject to section 197 and
Schedule V
 Schedule V has 4 parts. Part I deals with eligibility
of person AND Part II deals with remuneration
Literal Rule OR Harmonious
Construction
 The first rule of construction is that the words used in a section
must be given their plain grammatical meaning; and when we
are dealing with two sub sections of a section it is necessary
that the said two sub sections must be construed as a whole,
each portion throwing light if need be on the other. The two
sub sections must be read as a part of an integral whole and
as being inter-dependent; and an attempt should be made to
reconcile them if it is reasonably possible to do so, and to
avoid repugnancy.
Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Limited
[1962] 32 Comp Cas 604 (SC)
Sub Section (3)
 By combined reading,
 If there is no ceiling specified in se. 197(1), sub
section (3) has to be read in the context
 And therefore, requirement of compliance of
Schedule V, PART II may not be relevant
Section 196
 It is well settled that any interpretation which leads
to absurdity should not be accepted. An
interpretation which rendered a provision not only
meaningless and redundant but manifestly
misleading cannot be accepted.
S.R. Batra and Anr. V. Smt. Taruna Batra AIR 2007 SC 1118
B.D. Gupta, J. for himself and S.N.Katju, J. in Rajendar Prasad Oil Mills
V. Chunni Devi ALL (FB) 1969 (39)cc 193:1968 (2) Comp LJ 137.

 Another Principle “Special Provision will override

over general provision”
Section 196 – Schedule V
 Section 196(4) requires compliance of Schedule V
 Part II deals with remuneration ceiling. Whether
applicable to private company?
 Part I and III does not deal with remuneration.
Would be applicable to private Company
 Means appt of MD / WTD / Manager requires
compliance of Part I [Eligibility]
 Appt. of MD / WTD / Manager requires
shareholders approval
Whole time
 Whole Time = “Full Time” [Webster's Dictionary]
 Whole time means who gives full time attention [to the
company or to function?]
 The phrase "whole-time" was considered by the
Bombay High Court in the context of whole-time
director and it has been held that “the expression
‘whole-time director’ must refer to a director who
spends his whole-time in the management of the
company” [Ramaben A. Thanawala v. Jyoti Ltd ]
State of Gujarat v. Coromandal
Investment Pvt. Ltd
 It was held that “no requirement to be in
employment”
 Has not elaborated on the word “whole time”
 This judgment is prior to insertion of proviso to sub
section (1) to section 383A, which has used the word
“employ”
Employment Vs. Deputation
 Section 203 (1) has not used word ‘employ’
 Full time vs. employment. Law maker has used word
“whole time” and not “employment” OR “employ”
 It has used the word ‘employ’ and ‘employment’ in 3rd
proviso to sub section (3)
Provided also that 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
 “We need not add our words to the statute”
Multiple Posts
 Section 203(3)
A whole-time key managerial personnel shall not hold
office in more than one company except in its
‘subsidiary company’

1. Whether ‘singular’ includes ‘plural’?

2. Whether purposive interpretation is relevant?
3. What is the intent of this provision?
Whether singular includes ‘plural’?
 Section 203(3) states “a whole time Key
Managerial Personnel shall not hold office in more
than one company except in subsidiary company at
the same time”
 In all central Acts and regulations unless there is
anything repugnant in the subject or context –
words in the singular shall include the plural and
vice versa [section 13 of General Clauses Act, 1897
 PURPOSIVE INTERPRETATION
33

 While the literal interpretation is the rule,

purposive interpretation is an exception.
 The literal rule is the primary rule when the words
of a statute are clear and unambiguous; the
purposive interpretation rule is resorted to when the
words in a statutory provision are unclear, vague or
ambiguous and admit of more than one meaning or
when literal interpretation results into absurd
interpretation of the provision.
 PURPOSIVE INTERPRETATION
34

 In this situation, the court attempts to find out the true

purpose that the Legislature wanted to achieve, by
using other (external) aids such as background of the
provision; statement of objects and reasons or notes
on clauses appended to the bill; debate on the Bill in
Parliament; other provisions of the Act; a mischief
that the Legislature wanted to plug; report of a
committee on whose recommendation the provision
was enacted; etc
Other provisions of Statute
 A whole time Key Managerial Personnel shall not
hold office in more than one company except in
subsidiary company at the same time;
 3rd Proviso – “Provided that company may appoint
or employ a person as its Managing Director, if he
is the managing director or manager of one and
not more than one, other Company ….”
Section 203
 Every Company belonging to such class or classes of
companies as may be prescribed shall have the
following whole time key managerial personnel, -
1. Managing Director or CEO or Manager in their absence,
a whole time director;
2. Company secretary; and
3. Chief Financial Officer
What is meaning of “shall have”?
[Literal Rule]
 In one case, Gujarat High Court interpreted the words
Every company having such paid-up share capital as
may be prescribed shall have a whole-time secretary, in
s. 383A of Companies Act 1956, and held that -

-the words “shall have” cannot be read as “shall be in

the employment “; so a company secretary need not
be in the employment of a company but may be
engaged on a contractual basis.
Mischief Rule [Purposive Interpretation]
 What is the mischief which is trying to be corrected?
 Earlier only CFO was not officer in default
 Now CS is not directly covered in officer in default
 But both CS and CFO + MD / CEO / Manager are
officer in default
 2013 Act covers CFO as KMP and officer in default
 Mischief does not appear about one person acting
as CFO and CS
Other comparable provisions to
arrive at conclusion….
 Section 203 says company should have following Whole
Time Key Managerial Personnel – MD, WTD, Manager, CS
and CFO…
 Se 203 provides Chairman can not be MD in certain cases
 Se. 203 allows KMP in holding and Subsidiary company
 Act defines who can be MD / CS etc.
 No express bar on one person holding 2 posts in one
company
 Whether it is advisable or not? … answer is subjective
Disclosure of Interest
 Se. 184(1) – “every director shall …. Disclose his
concern or interest in any company …”
 Companies (Meetings of Board and its Powers)
Rules 2014 (Rule 16) – “provided that the
particulars of the Company or companies or bodies
corporate in which a director himself together with
any other director holds 2% or less of the paid up
share capital would not be required to be made
entered in the register”
Disclosure of Interest
 Section 184(5) (b)“nothing in this section shall
apply to contract or arrangement entered into or
to be entered into between two companies where
any of the director of one company or two or more
of them together holds or hold not more than 2 %
of the paid up share capital of other company”
[does not talk about disclosure]
 Section 189(2) “every director or KMP shall within
30 days of his appointment or relinquishment of his
office disclose to the company particulars specified
u/s 184(1) ….”
Whether KMP need to disclose his
other directorship and shareholding?
 Section 184 does not cover KMP [unless Director]
 Section 189 covers KMP
 KMP needs to disclose about appointment and
relinquishment of office within 30 days
 2% criteria is not relevant for KMP
Key Managerial Personnel [KMP]
 Section 2 starts with words “in this act, unless the
context otherwise requires ….”
 Section 2 (51) defines KMP
 Section 203 defines which companies require KMP
 Context of “companies which mandatorily require
KMP and who do not require KMP” is it relevant?
What is role of definition?
 The function of a definition is only to clarify or explain
the meaning of a word or phrase used in a statute and
avoid repetition and a definition is not an operative
provision in the sense that a definition of a word used in
a section is to be used only to understand the meaning
of the word or phrase used in a section which contains
operative provision. circumstances.

 A construction which is likely to defeat the purpose of

the act has to be ignored. [KV Muthu v. Angamuthu
Ammal AIR 1997 SC 628]
Officer in default
 Se. 128 and 129 makes MD, WTD, CFO liable
 Se. 205 – CS to report to the Board about
compliance with provisions of the Co. act, other laws
 Se. 205 – CS to ensure company complies with
secretarial standards
 Section 205(2) – role of CS shall not affect duties
and functions of Board, Chairperson, Managing
Director or Whole Time Director [this does not
include CFO?]
 Se. 2(60) defines KMP as officer in default
Officer in Default
 For KMP “mens rea” may not be relevant
 Se. 5 of 1956 act uses the word “all the following
officers …”
 Se. 2(60) of 2013 act uses the word “any of the
following officers..”
 If acted honestly, reasonably and that having
regard to all the circumstances of the case, …, he
ought fairly to be excused, the court may relieve
him … [section 463]
THANK YOU.
Lets help Industry to be compliant

makarandjoshi@mmjc.in
098205 03721
022 – 2167 8100