Officers & Key Managerial Person
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The definition of “Officer” in the new Act has been
extended to include Key Managerial Personnel
(KMP).
Key Managerial Persons (KMP) as defined in
Section 2(51) of the Act, includes, inter alia, CEO,
Managing Director, Manager, Whole-time Director
and Chief Financial Officer (CFO).
Section 2(51) has been notified.
Appointment of KMP
2
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The new Act provides for mandatory appointment
of certain whole time KMP for every listed company
and every other public company having a paid-up
share capital of INR 10 crore or more [Rule 8 of
Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014 ]:
 Managing director, or chief executive officer or
manager and in their absence, a whole-time director
 Company Secretary (CS)
 Chief Financial Officer (CFO)
Appointment of KMP
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Further, the 2013 Act also states that an individual
cannot be appointed or reappointed as the
chairperson of the company, as well as the
managing director or chief executive officer of the
company at the same time except where the articles
of such a company provide otherwise or the
company does not carry multiple businesses.
If the office of any whole-time KMP is vacated, the
same can be filled up at the Board Meeting within
6 months.
Appointment of MD, Whole-time
Director or Manager
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The eligibility criteria for the age limit has been revised
to 21 years as against 25 years in the 1956 Act.
Further, the 2013 Act lifts the upper bar for age limit
which means an individual above the age of 70 years
can be appointed as KMP by passing a special
resolution.
The re-appointment of a managerial person cannot be
made earlier than one year before the expiry of the
term instead of two years as in the 1956 Act. However,
the term for which managerial personnel can be
appointed remains as five years.
Number of Directors
5
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Private Company [Section 149]
The maximum number of directors (permissible without
approval from Cent. Govt.) increased from 12 to 15.
 Minimum 2 directors (except for OPC)
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Public Company
The maximum number of directors (permissible without
approval from Cent. Govt.) increased from 12 to 15.
 Minimum 3 directors.
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Remuneration of KMP and Directors
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The 2013 Act requires constitution of a Nomination and
Remuneration committee which will formulate and
recommend to the Board of Directors, the company’s
policies, regarding remuneration for the directors and
KMP and criteria for determining qualifications, positive
attributes and independence of a director [Section
178(1)].
Approval of Central Government is now required for
certain managerial remuneration.
The provisions relating to limits on managerial
remuneration provided in the 1956 Act are retained.
Remuneration and Insurance
7
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MD or Whole-time Director of the company who is in
receipt of any commission from the company will not be
disqualified from receiving any remuneration /
commission from its holding company or subsidiary
company subject to necessary disclosures in the
Director’s report.
Insurance premium paid by company for indemnifying
specified KMPs against the liabilities for negligence,
breach of duty etc. of such specified KMPs will not be
treated as part of remuneration of such KMPs.
Duties and Liabilities of Directors
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The duties of the directors were not specifically
provided in the old Act. Section 166 of the new Act
provides certain duties of the directors. If a director
contravenes the provisions of this section he/she can
be penalized with fine of INR 1 lakh to 5 lakhs.
If any default is made in complying with the order
of the Tribunal in Rectification of Register of
Members, Officer-in-Default can be penalized by
way of imprisonment up to 1 year or fine of INR 1
lakh to 3 lakhs or both. [Section 59(5)]
Officer-in-Default
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Section 2(60) of the new Act defines “Officer-in-Default”. The
meaning of this term has now been widened so as to include KMP as
well as every director who is aware of any contravention by virtue
of receipt of board proceedings or participation therein without
raising any objection or where non-compliance has taken place with
his consent or connivance. Such an officer can be penalized by way
of imprisonment, fine or otherwise.
Also, when it is proved that the affairs of the company were
conducted fraudulently, every officer in default can be penalized by
way of imprisonment of 6 months to 10 years and also fine which
will not be less than the amount involved in the fraud extending up
to three times of the amount involved in the fraud. Also, where the
fraud in question involves public interest, the term of imprisonment
shall be minimum 3 years.
Officer-in-Default: Liabilities
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If a company issues shares at discount, the Officerin-Default can be penalized by way of
imprisonment up to 6 months or fine of INR 1 lakh to
5 lakhs or both. [Section 53]
Any violation of section 68 regarding purchase its
own securities or any regulation made by SEBI for
the purposes of clause (f) of sub-section(2) can
make Officer-in-Default liable for imprisonment up
to 3 years or fine of INR 1 lakh to 3 lakhs or both.
KMP Holding Office in more than one
Company
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A Whole-time KMP cannot hold office in more than one
company at the same time unless (a) one of the companies is
a subsidiary company, and (b) he is MD of both companies
and has been so appointed with the consent of all the
directors present at the Board meeting.
A Whole-time KMP holding such positions at the
commencement of the new Act will be required to choose
one company for their appointment within six months.
Contravention of this provision can result in fine up to INR
50,000 and where the contravention is continuing one with a
further fine which may extend to INR 1000 for every day
after the first violation during which the contravention
continues.
Purchase of Shares by KMP
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KMP of a company cannot buy in the company, its
holding, subsidiary or associate company –
a.
b.
a right to call for delivery or a right to make delivery
at a specified price and within a specified time, of a
specified number of relevant shares or a specified
amount of relevant debentures; or
a right, as he may elect, to call for delivery or to
make delivery at a specified price and within a
specified time, of a specified number of relevant
shares or a specified amount of relevant debentures.
Insider Trading & Prohibition on
Forward Dealings
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The new Act, vide S. 195, for the first time defines
“insider trading” and “price-sensitive information”
and prohibits any person including the director or KMP
from entering into insider trading. Violation of S. 195
can result in imprisonment up to five years or fine from
INR 5 lakhs to 25 crores or three times the amount of
profits made from such act, whichever higher, or both.
The new Act, vide S. 194, also prohibits directors and
KMP from forward dealings in the company or its
holding, subsidiary or associate company. This section
has been notified. Violation of S. 194 can result in
imprisonment up to two years or fine from INR 1 lakh to
5 lakhs or both.
Deposit
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One would have to examine the Companies
(Acceptance of Deposits) Rules, 2014 and identify
the amounts which will not be regarded as a
deposit.
If a non-exempted company has accepted a
deposit, it will have to organize for its repayment
within 1 year from the date of commencement of
the new Act. The penalties for non-compliance are
severe for the KMPs and such personnel should take
adequate steps to ensure adequate compliance.
Loans to Directors & Investment by
Company
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As per Section 185(2) of the new Act, no company can,
directly or indirectly, advance any loan to any of its
directors or to any other person in whom the director is
interested. Any contravention of this provision will make
Officer-in-Default liable for imprisonment up to 6
months or fine of INR 5 lakhs to 25 lakhs or with both.
Any investments of Company has to be held in its own
name. Any violation of the same can make Officer-inDefault liable for imprisonment up to 6 months or fine
of INR 25,000 to 1 lakh or with both.
Annual Returns, Books of Accounts,
Financial Statement
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The new Act requires remuneration of directors and KMP and any
penalty or punishment imposed on the directors or officers to be
included in the Annual Return. [Section 92(1)].
In case a company fails to file its annual return, the Officer-inDefault can be penalized by way of imprisonment up to 6 months or
fine of INR 50,000 to 5 lakhs or both.
Similarly, if the Company fails to keep the Books of Accounts, the
Officer-in-Default can be penalized by way of imprisonment up to 1
year or fine of INR 50,000 to 5 lakhs or both.
At every AGM, the BoD is required to lay financial statements for
the financial year and any contravention or it can make make
Officer-in-Default liable for imprisonment up to 1 year or fine of
INR 50,000 to 5 lakhs or both.
General Meetings
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The 2013 Act intends to improve corporate governance
by requiring disclosure of the nature of concern or
interest of every director, manager, any other KMP and
relatives of such director, manager or any other KMP in
each item of special business in the notice of the
meeting [Section 102 (1)].
Where any benefit accrues to promoter, director,
manager, KMP, or their relatives, either directly or
indirectly as a result of non-disclosure or insufficient
disclosure then such persons will hold such benefit in
trust for the company and can be held liable to
compensate the company to the extent of the benefit
received by him/her.
General Meetings
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Also, the threshold of disclosure of share holding
interest in the company to which the business relates
of every promoter, director, manager and KMP has
been reduced from 20% to 2% [Section 102 (2)]
Section 173(2) of the new Act allows directors to
attend the meetings even by way of video
conferencing/ audio visual conferencing.
Related Party
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As per the new Act, related party will inter alia includea.
b.
c.
d.
e.
f.
g.
Director or his relative;
KMP or his relative;
A firm in which director, manager or his relative is a partner;
A private company in which a director or manager is a member or
director;
A public company in which a director or manager is a director or
holds along with his relatives more than 2% of its paid-up share
capital;
Any body corporate whose BoD, MD or manager is accustomed to
act in accordance with the advice, directions or instructions of a
director or a manager (except in professional capacity);
Any person on whose advice, directions, or instructions a director or
manager is accustomed to act (except in professional capacity).
Related Party
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The definition of related party is very wide and so
is the definition of relative and these two read
together will make it extremely difficult for KMP
and directors to keep track of the business dealings
of not only their relatives but also the relatives of
their partners (in case of firms) and KMP (in case of
companies).
Related Party Transaction
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For entering into any related part transaction, every
company will require the consent of its BoD or Audit
Committee, vide a resolution passed at a board meeting
Related party transactions to also require prior
shareholder’s approval by special resolution for companies
having prescribed paid up capital or transactions
exceeding prescribed amounts.
Requirement of obtaining Central Government approval
for related party transactions no longer necessary.
The concept of Arm’s Length Transaction has been
introduced which means that transaction between two
related parties should be conducted as if they were
unrelated, so that there is no conflict of interest.
Resident Director
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As per Section 149(3) of the new Act, every
company shall have at least one director who has
stayed in India for a total period of not less than
182 days in the previous calendar year.
Independent Director
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As per Section 149(12) of the new Act, Independent
Directors can be held liable, only in respect of such
acts of omission or commission by a company which
had occurred with his knowledge, attributable
through Board processes, and with his consent or
connivance or where he had not acted diligently.
IDs can be reappointed after a gap of 3 years,
however, he/she should not be associated with the
company directly or indirectly in this gap.
Independent Director
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An independent director shall not be entitled to any
remuneration other then sitting fee, reimbursement
of expenses for participation in the Board and
other meetings and profit related commission as
may be approved by the members.
Central Govt. may prescribe different sitting fees
for different classes of companies and fees in for
attending meeting of BOD or committee thereof.
An independent director will not be eligible to get
stock options.
Woman Director
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The following category of companies now need to
have at least one woman director:
a.
b.
Every listed company (within one year from the
commencement of second proviso to sub-section (1)
of section 149) .
Every other public company having paidup share
capital of INR 100 crore or more, or a turnover of
INR 300 crore or more within 3 years from the
commencement of second proviso to sub-section (1)
of section 149.
Nominee Director
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Nominee director nominated by any financial
institution , or in pursuance of any agreement, or
appointed by any government to represent its
shareholding shall not be deemed to be an
independent director.
Board Committee
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Companies Act 2013 [clause 177 and 178]
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Besides Audit Committee, the constitution of Nomination and
Remuneration committee has also been made mandatory in the
case of listed companies and certain other class(es) of companies;
The Audit Committee shall consist of a minimum 3 directors with
independent directors forming a majority of members, including
its chairperson, shall be persons with ability to read and
understand the financial statement.
The Nomination and Remuneration Committee shall have 3 or
more non- executive directors out of which not less than one half
should be independent director.
Where the combined membership of the shareholders, debenture
holders, deposit holders and any other security holders is more
than 1000 at any time during the financial year, the company
shall constitute a stakeholders Relationship committee.
CSR Committee
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Companies Act 2013 [clause 135]
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Every company having net worth of Rs 500 Crore or more ,
or turnover of Rs 1000 crore or more or a net profit of Rs 5
crore or more during any financial year will have to
constitute a Corporate Social Responsibility Committee.
Such committee shall consist of three or more directors , out
of which at least one director will be an independent
director.
The Board of every such company shall ensure that the
company spends in every financial year at least 2% of the
average net profits of the company made during the three
immediately preceding financial years in pursuance of its
CSR policy.
Resignation of Directors
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Companies Act 2013
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Director who has resigned shall be liable even after his
resignation for offences which occurred during his tenure.
Where all the directors of company resign from their
offices, or vacate their offices under section 167, the
promoter or, in his absence, the Central Government shall
appoint the required number of directors who shall hold
office till the directors are appointed by the company in
general meeting.
Companies Act 1956
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No such provision existed in the old Act.
Political Contribution
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Similarly, punishment prescribed to an Officer-inDefault for Punishment for not complying with rules
laid down in section 182 regarding political
contributions is imprisonment up to 6 months and
fine to the tune of five times of the amount of
contribution.