Need for constitution of committees - Dr S. Chandrasekaran - - Article published in Business Advisor, dated July 10, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/
Text of Need for constitution of committees - Dr S. Chandrasekaran
Volume VIII Part 1 July 10, 2014 9 Business Advisor Need for constitution of committees Dr S. Chandrasekaran The shareholders are the owners of the company. They entrust the management of the affairs of a company to select individuals who may be the promoters, professionals, nominees, independent and so on. The individuals who control, and manage the affairs of a company are directors and collectively named as the Board of directors (Board). The Board, subject to the provisions of all applicable laws, shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the best interest of the company, its employees and other stakeholders. The Board being the trustee of shareholders shall not achieve or attempt to have any undue gain or advantage for itself. It has several duties and responsibilities towards its shareholders, regulators, and all other stakeholders. It has to comply with all applicable laws to the company in letter and spirit and to protect the interest of community and environment as a whole. The role and responsibility of the Board is enormous and matters such as protection of funds, compilation of financial results, related party transactions are very important. The internal control and risk management system has to be on top line of agenda for a Board. It has prime responsibility towards the shareholders and the constitution of the Board is very important to serve the shareholders and all stakeholders besides the community. Even a slightest unintentional non-compliance is viewed seriously and attracts severe penal consequences. The role and responsibility of the Board is enormous and matters such as protection of funds, compilation of financial results, related party transactions are very important.
Volume VIII Part 1 July 10, 2014 10 Business Advisor Need of committees The Board in order to achieve the desired results has to concentrate more with select team members on particular issues. The structure of Board is a key issue for good governance. The Board, having control and responsibility for all affairs of the company as a whole, feels comfortable by delegating some of its powers to the selective directors by forming committees. A committee can be delegated with a specific matter or general issues and would be required to do the assigned task or give their recommendation or comments on certain matters to the Board. Normally, the role and responsibility of a committee is to make recommendations to the Board and it is up to the Board to accept, modify or reject the recommendations. However in recent times, regulators have given more importance for constitution of committees and expect that if the Board is not accepting some of the recommendations of a committee, it has to give reasons for non-acceptance of such recommendations. Advantages of committees The committee being small in number with expertise and knowledge in particular issues, would be able to devote more time and take a concrete decision and recommend the same to the Board. There exist several reasons for setting up of the committees and a few of them are: Better governance; Sharing of responsibilities; More involvement of members; Specialised skills of members can be used for best advantage; Detailed examination of matters by committees. Besides above, experts can also be invited to share their experience and knowledge for arriving at certain important decisions. A committee can be delegated with a specific matter or general issues and would be required to do the assigned task or give their recommendation or comments on certain matters to the Board.
Volume VIII Part 1 July 10, 2014 11 Business Advisor The Companies Act, 2013 The Companies Act, 2013 (The Act) has identified seven committees, out of which four committees are mandatory for prescribed classes of companies. The Board has to constitute such mandatory committees. They are: 1. Audit committee; 2. Nomination and remuneration committee; 3. Corporate social responsibility committee; 4. Stakeholders relationship committee. Apart from the above, the Act also stipulates the following event-based committees. Such committees would be constituted by other agencies as and when need arises to a particular company. 1. Advisory committee; 2. Committee of creditors; 3. Winding up committee. Securities & Exchange Board of India: Securities & Exchange Board of India (SEBI) is the regulator for the securities market in India. The key objective of SEBI is to encourage healthy and organised growth of the securities market in India and to provide investor protection. Securities are listed in stock exchanges and SEBI regulates stock exchanges for overall protection of all stakeholders. SEBI gives its directions to stock exchanges to amend the listing agreement from time to time and the recent such direction is of 17th April, 2014. The amendments in the Clause 49 of the listing agreement will be effective from 1st October, 2014. The proposed amended corporate governance clause in listing agreement The Companies Act, 2013, has identified seven committees, out of which four committees are mandatory for prescribed classes of companies.
Volume VIII Part 1 July 10, 2014 12 Business Advisor has recognised three committees which are: 1. Audit committee; 2. Nomination and remuneration committee; 3. Stakeholders relationship committee. Besides, constitution of risk management committee shall be applicable to top 100 listed companies by market capitalisation as at the end of the immediate previous financial year. Comparative analysis Both the Act and Listing agreement have stipulated three common committees, namely: 1. Audit committee; 2. Nomination and remuneration committee; 3. Stakeholders relationship committee. The comparative analysis of the above said committees is as under: Audit committee Nature As per Companies Act, 2013 As per Listing Agreement Applicability Mandatory for every listed company and all public companies having - paid up capital of ten crore rupees or more; turnover of one hundred crore rupees or more; in aggregate, outstanding loans or borrowing or debenture or deposits exceeding fifty crore rupees. Mandatory for all listed companies. Composition A minimum of three directors with independent directors forming a majority Minimum three directors as members. Two-thirds of the
Volume VIII Part 1 July 10, 2014 13 Business Advisor members of audit committee shall be independent directors. The chairman shall be an independent director Qualification required of Majority of members of audit committee including its chairperson shall be persons with ability to read and understand the financial statement. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. Terms of reference Includes the reference specified in writing by the Board which shall inter alia, include - the recommendation for appointment, remuneration and terms of appointment of auditors of the company; review and monitor the auditors independence and performance, and effectiveness of audit process; examination of the financial statement and the auditors report thereon; approval or any subsequent modification of transactions of the company with related parties; scrutiny of inter- corporate loans and investments; valuation of The audit committee is expected to play the following role besides the role prescribed under the Act:- i. To review the functioning of the whistle blower mechanism ii. Approval of appointment of CFO after assessing the qualifications, experience and background etc. of the candidate iii. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders and creditors iv. To review the management discussion and analysis of financial condition and results of operations v. Reviewing with the
Volume VIII Part 1 July 10, 2014 14 Business Advisor undertakings or assets of the company, wherever it is necessary; evaluation of internal financial controls and risk management systems; monitoring the end use of funds raised through public offers and related matters. management, performance of statutory and internal auditors, adequacy of the internal control systems. vi. To review the management letters/ letters of internal control weaknesses issued by the Statutory Auditors. Meetings Not prescribed Audit committee shall meet at least four times in a year and not more than four months shall elapse between two meetings. Quorum Not prescribed Either two members or one third of the members of the committee whichever is greater, but there should be a minimum of two independent members present. Presence of chairman of audit committee in annual general meeting Not prescribed Chairman of Audit Committee shall be present at the Annual General Meeting to answer shareholder queries. Nomination and remuneration committee Nature As per Companies Act, 2013 As per Listing Agreement Applicability Mandatory for every listed company and all public companies having - paid up capital of ten crore rupees or more; turnover of one Mandatory for all listed companies.
Volume VIII Part 1 July 10, 2014 15 Business Advisor hundred crore rupees or more; in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees. Composition The Committee shall consist of three or more non-executive directors out of which not less than one-half shall be independe