CFO AS KEY MANAGERIAL PERSON: COMPANIES ACT, 2013

[Dr. Sanjiv Agarwal]

Chief Financial Officer [Section 2(19)]

 For the first time, the Act has defined the Chief Financial Officer under section 2(19) as “a person appointed as the Chief Financial Officer of the Company” and as discussed in subsequent paras, every listed company and every other public company having paid-up share capital of 10 crore or more is mandatory required to appoint a CFO on a whole time basis. Generally a person who leads the finance and treasury functions of a business enterprise is designated as “CFO”. The person appointed as the CFO under this Act is also considered as a Key Managerial Personnel (KMP).

How a Chief Financial Officer should be appointed ? He has to be a person appointed as the Chief Financial Officer of the Company. Thus the word “appointed” and “appointed as” assumes significance and has to be legally interpreted.

As per Law Lexicon Dictionary, following interpretations are relevant: 

The word “appointed” has been defined as to signify the selection of the personnel of the already constituted authority to exercise the appellate powers of that authority (State of Assam v Sristikar, 1957 (1) TMI 34 - Supreme Court of India ) 

“The regular employment of a person in a particular function, is equivalent to his being “appointed” to it, unless some special mode of appointment is prescribed”(Frost v Bolland, 5B & C 611)

The word “appointed as” refers to a situation where a person has been appointed after undergoing due procedure of selection (Ajaib Singh v Punjab university, AIR 2002 P&H 168, 179, para 30)

Therefore, a CFO of the company should be a person who is appointed as a CFO and not engaged in any other manner (retainer or consultant) or by any other designation.

Key Managerial Personnel [Section 2(51)]

Key Managerial Personnel (KMP) are a particular class of officers of the company. In legal terms, “officer includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.

The expression “Key Managerial Personnel” has been defined in Section 2(51) of the Companies Act, 2013.This is a new definition and was not provided in the erstwhile Companies Act, 1956.

In relation to a company, the Key Managerial Personnel shall include the following persons:   

1. the Chief Executive Officer (CEO) or the managing director or the manager.
2. the company secretary (CS)
3. the whole time director
4. the chief financial officer (CFO) and
5. such other officer as may be prescribed 

Therefore, if a company has appointed a CS, CEO, CFO or a whole time director, such person shall be considered as Key Managerial personnel for the purposes of the Companies Act, 2013.

Apart from aforementioned persons, viz, CEO/MD, CS, CFO or whole time director, the Central Government is empowered to prescribe any other person or officer as key managerial personnel. A  CFO shall invariably be considered as KMP of a company. Which class of companies shall have a CFO has been provided for in Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Being a KMP under the Act, the Chief Financial Officer can be appointed only through a board resolution which shall contain the terms and conditions of his / her appointment as CFO including the remuneration to be paid, tenure etc.

Every whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time. However, he can be a director of any other company with the permission of the Board.

There could be different modes of appointment of a person – as a regular employee on the rolls of company, contractual employment or engaging a person on retainership basis. However, retainership arrangement may not be considered as appointment as in such cases, no employer- employee relationship exists and both work on a principal to principal basis or under an agency arrangement.

Role of CFO:

The Companies Act, 2013 has prescribed the role of CFO which would entail lot of responsibilities on the CFO of a company under various provisions:

1. CFO is responsible and liable for penalty and/ or prosecution for non-compliance with various provisions such as maintenance of books of accounts, preparation & filing of annual accounts, disclosure of financial information in offer document, risk management, internal control etc.
2. CFO is mandatorily required to sign audited financial statements of the company along with those authorised by the board.
3. CFO is also responsible for providing various inputs for meeting the enhanced board report requirements.