Penalty for appointing non-resident Managing Director without mandatory Central Government sanction

The Registrar of Companies, Bangalore, acting under the adjudication mechanism provided in the Companies Act, 2013, has imposed penalties on SUSHRUTA MEDICAL AID AND RESEARCH HOSPITAL LIMITED and one of its key managerial personnel for appointing a non-resident Managing Director without obtaining prior approval from the Central Government, as required by Section 196(4) read with Part I of Schedule V(e).

This order is a clear reminder that appointments of managerial personnel must strictly comply with eligibility criteria and approval requirements under the Companies Act, 2013, especially where a non-resident is involved.

Statutory framework and authority of the Adjudicating Officer

Appointment of Adjudicating Officer

The Ministry of Corporate Affairs, through Gazette Notification No. S.O. 831(E) dated 24/03/2015, appointed the Registrar of Companies, Bangalore, as Adjudicating Officer under Section 454 of the Companies Act, 2013. This empowers the ROC to:

  • Conduct adjudication proceedings, and
  • Levy penalties for violation of provisions of the Companies Act, 2013 and the rules framed thereunder,

in accordance with the Companies (Adjudication of Penalties) Rules, 2014.

General penalty provision – Section 450

Since the specific violation did not carry its own penalty under any particular section, the ROC invoked the residuary penalty clause under Section 450 of the Companies Act, 2013. This provision applies where:

  • A company, its officer, or any other person breaches a provision of the Act or rules, or
  • Fails to comply with any condition/restriction attached to an approval, sanction, consent, or exemption, and
  • No separate penalty is prescribed elsewhere in the Act.

Under Section 450, the liability is:

The company and every officer in default (or other person concerned) shall be liable to a penalty of ten thousand rupees, and in the case of a continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

This ceiling of ₹2,00,000 for companies and ₹50,000 for individual officers is what has been applied in the present case.

Background of the company and individuals

Company profile

The adjudication proceedings relate to:

  • Company Name: SUSHRUTA MEDICAL AID AND RESEARCH HOSPITAL LIMITED
  • CIN: U85110KA1982PLC004845
  • Registered Office:
    202, RASHTRIYA VIDYALAYA ROAD,
    BANGALORE, KARNATAKA, INDIA, 560004

The company is registered under the provisions of the Companies Act, 1956/2013. It does not qualify as a “small company” under Section 2(85) of the Companies Act, 2013. Therefore, the beneficial reduced penalty regime under Section 446B is not available in this case.

Individuals involved

Two individuals were initially under scrutiny:

  1. KRISHNA PRASAD SURAPANENI – treated as officer in default in relation to the impugned appointment.
  2. SOODA HEMACHANDRA SHETTY – an erstwhile whole-time director, who had resigned prior to the period of default.

Ultimately, only Sushruta Medical Aid and Research Hospital Limited and Krishna Prasad Surapaneni were saddled with penalty, while no penalty was imposed on Sooda Hemachandra Shetty due to his prior resignation and lack of involvement during the offending period.

Nature of violation – appointment of non-resident Managing Director

Suo motu disclosure by the company

The process was triggered by a suo motu adjudication application filed by the company on 13.12.2024. In this application, the company admitted non-compliance with:

  • Section 196(4) of the Companies Act, 2013 read with
  • Part I of Schedule V(e).

The company disclosed that:

  • Mr. Krishna Prasad Surapaneni, a non-resident director, was appointed as Managing Director with effect from 03.02.2023 for a term of 5 years.
  • This appointment was made without complying with the necessary approval requirement pertaining to appointment of a non-resident as Managing Director.
  • The company only later realised that the appointment was in breach of the provisions of Section 196(4) read with Part I of Schedule V(e).

Duration of default

Upon review, the ROC concluded that the violation existed for the period:

  • From: 03.02.2023
  • To: 20.03.2024