Companies Act Section 190

Companies Act, Section 190: Contract of Employment with Managing or Whole-Time Director

Section 190 of the Companies Act, 2013 lays down specific requirements for record-keeping and transparency in relation to employment contracts involving a managing director or a whole-time director of a company. It is designed to ensure that such employment terms are properly documented and are accessible to members of the company. However, the section exempts private companies from its applicability.

1. Requirement to Maintain Records of Employment Contracts at the Registered Office

Under sub-section (1) of Section 190:

Every company (other than a private company) is under an obligation to retain evidence of the contract of service entered into with a managing or whole-time director at its registered office. This requirement ensures that the company’s formal relationship with its key managerial personnel is transparent and traceable.

This documentation may take either of the following two forms:

(a) If the Contract is in Writing:

The company must maintain a physical or digital copy of the written contract of employment at its registered office.
(b) If the Contract is Not in Writing:

In cases where no formal written agreement exists, the company must prepare and retain a written memorandum that clearly sets out all the terms and conditions of the appointment.
This memorandum must reflect details such as the duties, tenure, remuneration, termination clauses, and any other relevant terms associated with the director’s employment.
The intent is to ensure legal clarity and corporate accountability in all cases, whether the contract was formally drafted or orally agreed upon.

2. Right of Inspection by Members of the Company

According to sub-section (2):

The copies of the written contract or the memorandum (as applicable) that are maintained under sub-section (1) must be open for inspection by any member (i.e., shareholder) of the company.
No fee is required for this inspection.
This provision provides transparency to shareholders, allowing them to verify the nature of the company’s relationship with its key directors, particularly in terms of remuneration, responsibilities, and duration of service.

Such access plays an important role in fostering trust and accountability, especially where directors might also be shareholders or have decision-making powers within the company.

3. Penalty for Non-Compliance

Sub-section (3) of Section 190 deals with the consequences of default in fulfilling the obligations laid down in sub-sections (1) and (2):

Company-Level Penalty:

If the company fails to maintain the required contract or memorandum or does not make it available for inspection by members, the company itself shall be subject to a penalty of ?25,000.
Officer-Level Penalty:

Each officer of the company who is responsible for the default shall be liable to a separate penalty of ?5,000 for each such instance of non-compliance.
This dual-layered penalty framework reinforces the individual accountability of officers and ensures that corporate governance obligations are not ignored.

4. Exemption for Private Companies

Sub-section (4) provides that:

The provisions of this section shall not apply to a private company.

This means that private companies are exempt from the requirement to:

Maintain written contracts or memoranda for managing or whole-time directors at the registered office,
Make such documents open to inspection by members, and
Face penalties for non-compliance with this section.
The exemption recognises that private companies, being closely held entities, are subject to less stringent disclosure norms compared to public companies, where wider public interest and investor protection demand greater transparency.