Key Managerial Personnel (KMP) and their Remuneration – Company Law Important Questions

Key Managerial Personnel (KMP) and their Remuneration – Company Law Important Questions

Question 1.
Write a short note on Managerial Remuneration. (June 2009) (4 marks)
Answer:
1. Section 197(1) of the Companies Act, 2013, Total managerial remuneration payable by a public company to its directors in respect of any financial year shall not exceed 11% of the net profit. Net profit for this purpose will be calculated as per Section 198.

However, the company in general meeting may authorize the payment of remuneration exceeding 1196 of the net profit, subject to the provisions of Schedule V.

2. Maximum remuneration to managing director or whole-time director or manager: Except with the approval of the company in general meeting the remuneration payable to any one managing director, or whole-time director or manager shall not exceed 596 of the net profits and if there is more than one such director remuneration shall not exceed 1096 of the net profit to all such directors and manager taken together.

3. Maximum remuneration to the part-time director (non-executive director): Except with the approval of the company general meeting the remu¬neration payable to the part-time director (non-executive director) shall not exceed:

  • 1 % of the net profits, if there is a managing or whole-time director or manager
  • 396 of the net profits in any other case.

4. Sitting fee not to be included in remuneration [Section 197(2)]: The percentages aforesaid shall be exclusive of any sitting fees payable to directors for attending the board meetings.

Question 2.
Heal Ltd. owns a chain of hospitals in Mumbai. Dr. Aman, a practicing surgeon, has been appointed by the company as its non-executive ordinary director and wants to pay him fees on case to case basis for surgeries performed by him on patients at the hospital. Advise the company, whether payment of such fees to him would amount to payment of managerial remuneration to a director under the Companies Act, 2013. (December 2014) (4 marks)
Answer:
1. As per Section 197(4) of the Companies Act, 2013, The remuneration payable to the directors including managing or whole-time director or manager shall be inclusive of the remuneration payable for the services rendered by him in any other capacity except the following:
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee (if applicable) or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

2. In the given case, Heal Ltd. owns a chain of hospitals in Mumbai Dr. . Aman, a practicing surgeon, has been appointed by the company as its non-executive ordinary director and wants to pay him fees on case to case basis for surgeries performed by him on patients at the hospital.

In view of the above facts, Heal Ltd. can pay fees to Dr. Aman for his professional services for surgeries performed by him on patients at the hospital if the Nomination and remuneration Committee is of the opinion that the director possesses the requisite qualification for the practice of the profession for which additional remuneration is payable.

Question 3.
Ms. Jyotl Is the Managing Director of Wise (India) Ltd., incorporated under the Companies Act, 2013. The Board of Directors of the company presents the following financial data extracted from the company’s financial statements as at 31st March, 2015:

Particulars (INR in Crores)
Authorised equity share capital 60
Paid-up equity share capital 10
Debenture redemption reserve 10
Securities Premium Account 20
Profit and Loss (Loss) 10
Revaluation Reserve 20

Due to losses in the financial year 2014-15, the company is not in a position to pay any remuneration to Ms. Jyoti, Managing Director of the company. As per the agreement of service between Ms. Jyoti and the company, in case of losses or inadequacy of profits in any financial year, she is to be paid remu¬neration on the basis of ‘effective capital’ of the company.
Based on the provisions of the Companies Act, 2013, decide the maximum remuneration payable to Ms. Jyoti for the financial year 2014-2015 without the approval of the Central Government. (December 2015) (4 marks)
Answer:
1. “ Effective capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc, and other short-term arrangements) as reduced by the aggregate of any investment (except in case of investment by an investment company whose principal business is the acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expense not written off.

2. Computation of effective Capital for managerial remuneration:

Particulars INR in Crores
Paid-up Capital 10
Debenture Redemption Reserve (not specifically excluded by the definition of “Effective capital”) 10
Securities premium account 20
Profit and Loss Account (10)
Revaluation reserve (specifically excluded by the definition of “effective capital”)
Effective capital 30

3. Remuneration payable by companies having no profit or inadequate profit without central government approval [Section II of Part II of the Schedule V]:
Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval pay remuneration to the managerial person not exceeding the limits given below:

Remuneration based on effective capital:

Where the effective capital is Limit of Yearly remuneration payable shall not exceed
Negative or less than INR 5 Crores INR 64 Lakhs
INR 5 Crores and above but less than INR 100 Crores INR 84 Lakhs
INR 100 Crores and above but less than INR 250 Crores INR 120 Lakhs
INR 250 Crores and above INR 120 lakhs plus 0.01% of the effective capital in excess of INR 250 Crores.

The above limit shall be doubled if the resolution passed by the shareholders is a special resolution.

If a period less than one year, the limits shall be prorated.

Thus, Ms. Jyoti, Managing Director of Wise (India) Ltd. can be remunerated in the following ways without the approval of the Central Government: The Company’s effective capital is between INR 5 crores and above but less than INR 100 Crores, Ms. Jyoti can be paid annual remuneration of INR 84 Lakhs ie. monthly INR 7 Lakhs. If the Company passes a special resolution, remuneration can be doubled i.e. INR 168 Lakhs per annum ie. INR 14 Lakhs per month can be paid.

Question 4.
Distinguish between: Whole-time chairman and Part-time chairman. (June 2010) (4 marks)
Answer:
The board of Directors comprises of whole-time directors and part-time directors.

A chairman of the Company or managing director may or may not be a whole-time director whereas the director, who is not a whole-time director of the company is called the part-time director.

Whereas in the case where the chairman is a managing director, then chairman-cum-managing director of the company, he acts as chairman of the meetings of the Board of Directors only when they are held. During the intervals, he occupies the chair of the managing director. A chairman is never a whole-time chairman. He is always a part-time chairman. Thus, the term whole-time chairman is vague.

Question 5.
Distinguish between: managing director and whole-time director. (June 2013) (4 marks)
Answer:

Basis of Distinction Managing Director Whole-time director
Definition As per Section 2(54), ‘‘managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. As per Section 2(94) “whole-time director” includes a director in the whole-time employment of the company;
No. of Companies A person can be managing director in one and of not more than one company. [Section 202(3)] A person cannot be a whole-time director in more than one company.
Simultaneous appointment with the manager of the Company A managing director and manager cannot be appointed simultaneously. A whole-time director and manager can be appointed simultaneously.
Entitlement of Employment The managing director is not in full-time employment of the Company. The whole-time director is on full-time of the Company.

Question 6:
Distinguish between: Key Managerial Personnel (KMPs) and Managing Director. (June 2017) (4 marks)
Answer:

Basis of Distinction Key Managerial Personnel (KMPs) Managing Director
Definition Section 2(51) of the Companies Act, 2013 “key managerial personnel”, in relation to a company, means:

  1. the Chief Executive Officer or the managing director or the manager;
  2. the company secretary;
  3. the whole-time director;
  4. the Chief Financial Officer;
  5. such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
  6. such other officer as may be prescribed.
As per Section 2(54) of the Companies Act, 2013, “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
Tenure of Appointment A company can appoint or re-appoint any person as to its KMP except Managing Director for a term exceeding five years at a time. A company shall not appoint or re-appoint any person as to its Managing Director for a term exceeding 5 years at a time. Refer Section 196(2).
Managing Director Position Every Key Managerial Personnel is now a managing director. Every managing director is Key managerial Personnel
Requirement of holding Directorship Every Key Managerial Personnel did not be a director. The managing Director is essentially a director. If the managing director ceases to be a director then he automatically ceases to be the managing director.

Question 7.
Distinguish between: Chief Executive Officer and Managing Director. (June 2018) (4 marks)
Answer:

Basis of Distinction

Managing Director

Chief Executive Officer

Definition As per Section 2(54) of the Companies Act, 2013, “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. As per Section 2(18) of the Companies Act, 2013, “Chief Executive Officer” means an officer of a company, who has been designated as such by it
Procedure for Appointment In case of appointment of Managing Director in addition to approval of Board at its meeting, approval of shareholders at a general meeting is also necessary. Chief Executive Officer is appointed by the Board at its meeting.
Power   Managing Director has substantial powers of management of the affairs of the Company. Chief Executive Officer exercises the powers delegated by the Board of directors.
Requirement of holding Directorship The managing Director is essentially a director. If the managing director ceases to be a director then he automatically ceases to be managing director           Chief Executive Officer need not be a director.

Question 8.
Explain the meaning of the term ‘Key Managerial Personnel in relation to the company as introduced by the Companies Act, 2013, and also state the manner in which they are appointed. (June 2015) (2 marks)
or
What is Key managerial Personnel (KMP)? State the manner in which they can be appointed in a company. (December 2015) (4 marks)
Answer:
Section 2(51) of the Companies Act, 2013 “key managerial personnel”, in relation to a company, means-

  1. the Chief Executive Officer or the managing director or the manager;
  2. the company secretary;
  3. the whole-time director;
  4. the Chief Financial Officer; such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
  5. such other officer as may be prescribed.

As per Section 203(2) of the Companies Act, 2013, 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.

Question 9.
A Managing Director of a company stood as surety for the repayment of loan taken by it for which he was paid guarantee commission. Does this commission amount to managerial remuneration? Support your answer with decided case law, if any. (June 2009) (5 marks)
Answer:
In the decided case law, Suessen Textile Bearings Ltd. v. Union of India [1984] 55 Com Cases 492 (Delhi), the guarantee commission received by the director is for personal liability which the director undertakes.

In the given case, A Managing Director of a company stood as surety for the repayment of loan taken by it for which he was paid guarantee commission. Therefore, Guarantee commission is not remuneration within the meaning of Section 197 of the Companies Act, 2013.

Question 10.
Mrs. Beautiful, aged 40 years, is the Managing Director of Beauty Care Products Limited. She has received contributions to the superannuation fund and leaves encashment during her tenure with the company during the financial year ending 31st March 2017. The Manager (Accounts) of the company is not very confident if these perquisites are to be included in the computation of ceiling on remuneration specified in the Companies Act, 2013. Referring to the provisions of the Act, Advise the Manager (Accounts). (June 2017) (4 marks)
Answer:
As per Section IV of the Schedule V to the Companies Act, 2013, a managerial remuneration person shall be eligible for the following perquisites which shall not be included in the Computation of the ceiling on remuneration specified in Section II and Section III.
(a) Encashment of leave at the end of the tenure.
(b) Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and
(c) Contribution to provident fund, superannuation fund, or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act, 1961.

Question 11.
A whole-time director of a company made an invention during the course of his employment with the company. He patented the invention in his own name and appropriated the benefits to himself. Can he do so? Cite case law, if any. (June 2009) (5 marks)
Answer:
The directors are liable to the Company for all personal profits or gain made by them taking advantage of their position as directors.

A director was held liable when a director patented and exploited in his own name an invention made during the course of his employment with the Company. [Cranleigh Precision Engineering Ltd. v. Bryan, (1964) All ER 289].

Thus, in reference to the above-discussed case law, a whole-time director of a company made an invention during the course of his employment with the company. He patented the invention in his own name and appropriated the benefits to himself.

Question 12.
Kapil is branch head of a Limited Company. The Company proposes to elevate Kapil to the Board. Enumerate the steps involved in such a proposal. (June 2013) (4 marks)
Answer:
To elevate Kapil to the Board following steps/provisions are required to be observed:

  1. Check that Kapil is not disqualified for the appointment of director. [Sec¬tion 164 of the Companies Act, 2013] and the Kapil shall inform the Company about his disqualification under Section 164(2) of Companies Act, 2013 in Form DIR-8 before he is appointed.
  2. Kapil shall furnish his Director Identification Number (DIN) to the Com¬pany before the appointment.
  3. After taking into Board to the Kapil, a number of directors should not exceed 15. [Limit specified under Section 149 of the Companies Act, 2013]
  4. Kapil will be appointed as an additional director. [Section 161(1) of the Companies Act, 2013], In next AGM he can be appointed as a regular director.
  5. Kapil can be appointed for a term not exceeding 5 years at a time if he is appointed as a whole-time director. [Section 196(2) of the Companies Act, 2013]
  6. Kapil shall furnish to the Company a consent in writing to act as such in Form DIR-2.
  7. The Company shall within 30 days of the appointment of Kapil as a di¬rector, file such consent with the Registrar in Form DIR 12 along with prescribed fees.
  8. After the appointment of Kapil as a director, an entry has to be made in “Register of Directors and Key managerial personnel and their shareholding”. [Section 170 of the Companies Act, 2013]

Question 13.
It has been found that Mrs. Shweta, director of a company, has drawn remuneration in excess of the prescribed limits. The Chief Financial Officer of the company has sought your advice on the matter. As the Secretary of the company, advise the Chief Financial Officer, the course of action that may be taken in this regard. (December 2016) (4 marks)
Answer:
1. Refund of Excess Remuneration [Section 197(9) of the Companies Act, 2013]:
If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.

The company shall not waive the recovery of any sum refundable to it under sub-section 9 mentioned above unless approved by the company by special resolution within two years from the date the sum becomes refundable.

2. The penalty [ Section 197(15) of the Companies Act, 2013]:
If any person contravenes the provisions of Section 197 of the Companies Act, 2013, he shall be punishable with a fine which shall not be less than INR 1, 00, 000/- but which may extend to INR 5, 00,000.

Thus, Mrs. Shweta cannot keep the excess remuneration. She shall refund such excess remuneration to Company. Until such refund is made, she shall hold it in trust for the Company. Further, the company cannot waive the recovery of excess remuneration.

Question 14.
Sand Ltd. wants to appoint River as Managing Director of the company for a period of three years with effect from 1st August 2018. The river has given a written statement to the company that he has paid INR 1,000 to the prescribed authorities for a conviction of an offense under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 on 30th June 2018. State whether River can be appointed as Managing Director of the company under the Companies Act, 2013. (June 2018) (4 marks)
Answer:
Conditions to be fulfilled for the appointment of managing on a whole-time director or a manager without the approval of the Central Government Appointments [Part I of the Schedule V]: A person shall be eligible for appointment as a managing or whole-time director or a manager of a company only if satisfies the following conditions, namely:

1. He had not been sentenced to imprisonment for any period, or to a fine exceeding INR 1,000 for the conviction of an offense under any of the following acts, namely-

  • The Indian Stamp Act, 1899
  • The Central Excise Act, 1944
  • The Industries (Development and Regulation) Act, 1951
  • The Prevention of Food Adulteration Act, 1954
  • The Essential Commodities Act, 1955
  • The Companies Act, 2013 or any previous company law
  • The Securities Contracts (Regulation) Act, 1956
  • The Wealth-tax Act, 1957 » The Income-tax Act, 1961
  • The Customs Act, 1962
  • The Competition Act, 2002
  • The Foreign Exchange Management Act, 1999.
  • The Sick Industrial Companies (Special provisions) Act, 1985
  • The Securities and Exchange Board of India Act, 1992
  • The Foreign Trade (Development and Regulation) Act, 1922
  • The Prevention of Money Laundering Act, 2002.

2. he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. However, where the central government has given its approval to the appointment of a person convicted or detained as given above, no further approval to the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detain subsequent to such approval.

In the given case, River has paid only a fine of INR 1000 for conviction under the Foreign Exchange and Prevention of Smuggling Activities Act, 1974; he has not detained for any period under the same act and thus he is not disqualified and previous approval of Central government is not necessary for his appointment as Managing Director.

Question 15.
ABC Corporation Ltd. has no managerial person acting in a professional capacity. During the current financial year, the company sustained a loss. How can the company remunerate its non-professional managerial personnel in such a situation? (June 2019) (4 marks)
Answer:
1. Remuneration payable by companies having no profit or inadequate profit without central government approval [Section II of Part II of the Schedule V]:
Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval pay remuneration to the managerial person not exceeding the limits given below:

Remuneration based on effective capital:

Where the effective capital is Limit of Yearly remuneration payable shall not exceed
Negative or less than INR 5 crores INR 64 Lakhs
INR 5 crores and above but less than INR 100 crores INR 84 Lakhs
INR 100 crores and above but less than INR 250 crores INR 120 Lakhs
INR 250 crores and above INR 120 Lakhs plus 0.01% of the effective capital in excess of INR 250 Crores.

The above limit shall be doubled if the resolution passed by the shareholders is a special resolution. If a period is less than one year, the limits shall be pro-rated.

2. In case of a managerial person who is functioning in a professional capacity, if such managerial person is not having any interest in the capital of the Company or its holding or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any, direct or indirect interest or related to the directors or promoters of the Company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate-level qualification with expertise and specialized knowledge in the held in which the company operates.

CS Executive Company Law Questions and Answers

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