India: Managerial designations – Insight on lawful usage

published on 27 December 2022 | reading time approx. 5 minutes

Why to make a fuss about a designation? What harm could it bring? If these are the questions that are coming into your mind, then be assured that if you are using designation such as Managing Director/Chief Executive Officer/Chief Finance Officer/Whole time Director or any of your employee is using the same on the visiting cards/email signatures/letter heads, etc. without making necessary filings with the Registrar of Companies or if you are contemplating to appoint any of the aforesaid officer, then this article is for you!

Introduction »
Illustration »
Reality check »
Recommendation »

Introduction

The Indian Corporate law acknowledges and is based upon inter alia, the legal principle of “Separate Legal Entity” according to which the Indian limited company is considered as a separate entity than its shareholders. However, this separate legal entity cannot work on its own or take its own decisions. It needs a group of people that take managerial decisions and are accountable to the stakeholders. This supreme executive authority controlling the management and affairs of a company vests in the team of directors of the company, collectively known as its Board of Directors (“the Board”). However, a director cannot act on his own just because he is a director of the company. The Board by way of passing a board resolution delegates certain authorities to a director or a group of directors or to any other senior level personnel also known as Key Managerial Personnel (“KMP”), with or without authorisation to sub-delegation. Such directors and KMPs are bound to act within the parameters of such delegated authority.

The directors and KMPs are known by many names in the industry. It is customary to assign a congruent designation to a director and KMP depending on the role, responsibilities and duties assigned to him. For example, Managing Director (“MD”), Whole Time Director (“WTD”), Chief Executive Officer (“CEO”), Chief Finance Officer (“CFO”), Whole Time Company Secretary (“WCS“), etc.

It is pertinent to note here that all above stated designations for the directors and KMPs are defined designations under the Indian Companies Act, 2013 (“the Act”) including the word “KMP” itself. The intent of law by way of defining these designations separately under the Act is to ascertain the legal liability and to define their roles on account of them being the visionary and executive authority carrying out the policies and functions of the company.

It is not compulsory for every company to appoint a KMP. There are certain statutorily defined thresholds that mandate such appointment. Also, the set conditions, procedures and protocols are provided under the law pertaining to appointment of aforesaid, hence in certain cases just granting the designation would not be enough, rather certain procedural and filing formalities are also supposed to be fulfilled by the management. In the eye of law, any missing step with respect to appointment protocol can be considered as non-compliance and penal provisions may attract.

The designations also showcase the position of a director/KMP in the organisational hierarchy to the outer world. Hence, it is also possible that a designation incongruent to the role of the person increases the weight of his accountability under the law than real intention of the management or the person himself especially in case he has a limited role in the company.

Illustration

We can understand this aspect by way of an example and let us evaluate usage of designation “Managing Director”:

“Managing Director” (“MD”) is a defined term as per the law. To become an MD, a person first has to be admitted to the Board as a Director. Also, as per the Act, the MD is a director who has been entrusted with substantial powers of management of the affairs of the Company. These powers are also of more serious and superior nature and not limited to the power to carry out administrative acts of routine nature.
Also, an MD is considered as a KMP and officer of the company and in case of non-compliance, can be considered as an “officer in default”.
Also, appointing an MD is not an automated process rather there are formal steps defined under the Act which a company needs to adhere to while designating a director as an MD.
Since, “Managing Director” is a defined term, the designation of “Director” and “Managing Director” must not be used interchangeably.
A Managing Director cannot be equated with an ordinary director.

In nutshell, “Managing Director” is a Director but not every Director is a “Managing Director”.

Hence, following instances shall be considered as default cases with respect to the MD appointment:

designating an employee who is not a director as an MD
designating a director as an MD, who is not involved in day-to-day affairs of the company
designating a director who is involved in day-to-day affairs of the company but does not hold substantial power of the management
using designation MD without following statutory procedure for appointment
have a term of an MD fixed for more than five years at a time

Reality check

Contrary to the law, it has been observed in practice that in several Indian subsidiaries of foreign companies, the ordinary directors/KMPs freely use the aforesaid designations and call themselves “Managing Director” or “CEO” or “CFO” in the official correspondences/visiting cards/websites, etc. without actually undertaking any formal appointment as such.

It is also being noted that in a subsidiary of a foreign company, many times foreign directors (nominated by the parent companies) play their roles in background and are not really involved in the day-to-day working of the Indian company. In such cases, it is strictly not recommended to give such a designation, say, of Managing Director, for the reasons explained above.

Recommendation

Therefore, it becomes very important that the management uses and grants these designations prudently, especially those that are defined under the law. What may appear as a “pure translation” of a foreign title may in India actually have a specific legal meaning. It is also prudent to check with the Company’s consultant whether it is mandatory for the company to have a KMP at all. If yes, then which kind of KMP and if not, then to determine if the company would still like to appoint a person as a KMP or not.

Each situation must be separately evaluated so that a suitable and appropriate designation is assigned to the person that commensurate with this true role in the organisation. It is paramount that the designation must commensurate with the roles and duties assigned to a person and he also must be made aware of the statutory liability and responsibility attached to each designation under the law for the sake of transparency and alignment of expectation of both, the management and the person. Clarity avoids unexpected legal risks and provides a solid basis for questions or disputes.

Hence, it is a high time to introspect and ensure that all the designations commensurate with the roles and responsibilities of the officer, Employment Agreement covers appropriate job description that fits the designation, all compliances are in place otherwise corrective steps should be taken by the management.