Company Law CS Executive Notes

Company Law CS Executive Notes – Chapter 15

Company Law CS Executive Notes

Committes of BOD

Topics covered in this article

 

Company Law CS Executive Notes

Mandatory Committees under the Companies Act 2013 are:

  • Audit Committee
  • Nomination and Remuneration Committee
  • Stakeholders Relationship Committee
  • Corporate Social Responsibility Committee

Audit Committee

Audit Committee is a sub-committee of BOD and aims to enhance the confidence in

  • the integrity of the company’s financial reporting,
  • the internal control processes and procedures and
  • the risk management systems of company.

Which company is required to constitute Audit Committee?

According to Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014, the Board of directors of following companies are required to constitute Audit Committee of the Board-

1.Every listed Public companies;

2.  All public companies with a paid up capital of 10 crore rupees or more;

3. All public companies having turnover of 100 crore rupees or more;

4.All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Here the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

The following classes of unlisted public company shall not be covered for above purpose:-

  • a joint venture;
  • a wholly owned subsidiary; and
  • a dormant company as defined under section 455 of the Act.

Composition of the Audit Committee Section [177(2)]

There shall be minimum of 3 directors, with majority being independent. The majority including the Chairperson should be persons with ability to read and understand the financial statement. The requirement of Independent directors forming a majority is not applicable to Section 8 companies (vide exemption notification dt. 5-6-2015). For the listed entities, according to Regulation 18 of SEBI (LODR) Regulations, 2015 Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:
  • The audit committee shall have minimum 3 directors as members.
  • At-least (w.e.f 1.1.2022) two-thirds of the members of audit committee shall be independent directors, and in case of a listed entity having outstanding SR equity shares, the audit Committee shall only comprise of Independent Directors
  • All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
The word “financially literate” shall mean the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. The chairperson of the audit committee shall be an independent director and he/she shall be present at Annual general meeting to answer shareholder queries. The Company Secretary shall act as the secretary to the audit committee. The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee. Provided that occasionally the audit committee may meet without the presence of any executives of the listed entity.

Number of Meetings and Quorum

In case of unlisted public companies, there is no specific requirement under Companies Act, 2013 w.r.t min. number of meetings or quorum of meetings.

For listed companies, Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides for the minimum number of meetings and quorum of the audit committee.

  1. The Audit Committee of a listed entity shall meet at least four (4) times in a year and not more than 120 days shall elapse between two meetings.
  2. The quorum for audit committee meeting shall either be
    • 2 members, or
    • 1/3rd of the members of the audit committee,

whichever is greater; with at least 2 independent directors.     

Functions/Role of the Audit Committee [Section 177(4)]

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board.
Terms of reference as prescribed by the board shall inter alia, include, –

  1. the recommendation for appointment, remuneration and terms of appointment of auditors of the company; (In case of Government Companies, in Section 177(4)(1), for the words “recommendation for appointment, remuneration and terms of appointment” the words “recommendation for remuneration” shall be substituted – Exemption Notification dated 05-06-2015)
  2. review and monitor the auditor’s independence and performance, and effectiveness of audit process;
  3. examination of the financial statements and the auditors’ report thereon;
  4. approval or any subsequent modification of transactions of the company with related parties;
  5. scrutiny of inter-corporate loans and investments;
  6. valuation of undertakings or assets of the company, wherever it is necessary;
  7. evaluation of internal financial controls and risk management systems;monitoring the end use of funds raised through public offers and related matters

The Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as prescribed under rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014.

Further in case of transaction, other than transactions referred to in section 188 (Related Party Transactions), and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board.

In case any transaction involving any amount not exceeding 1 crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within 3 months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it:

The provisions of this clause shall not apply to a transaction, other than a transaction referred to in Section 188, between a holding company and its wholly owned subsidiary company.

Mandatorily review by Audit Committee under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

  1. Management discussion and analysis of financial condition and results of operations;
  2. Statement of significant related party transactions (as defined by the audit committee), submitted by management;
  3. Management letters / letters of internal control weaknesses issued by the statutory auditors;
  4. Internal audit reports relating to internal control weaknesses; and
  5. The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.
  6. Statement of deviations:
    a. quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted to stock exchange(s) in terms of Regulation 32(1).
    b. annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice in terms of Regulation 32(7).

Further, there are some additional functions of Audit Committee under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Powers of the Audit Committee [Section 177(5) and (6)]

The Audit Committee may call for the comments of the auditors about

  • internal control systems,
  • the scope of audit, including the observations of the auditors and
  • review of financial statement before their submission to the Board

and may also discuss any related issues with the internal and statutory auditors and the management of the company.

Right of Auditor to be heard in the meetings of the Audit Committee [Subsection 7]
The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote.

Disclosure in Board’s Report [Subsection 7]

The BOD’s report shall disclose the composition of an Audit Committee. Where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in the report along with the reasons therefore.

Vigil Mechanism [Section 177(9)/(10) read with Rule 7 of the Companies (Meetings of Board and its powers Rules, 2014)]

The vigil mechanism shall provide for direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit Committee, as the case may be, in exceptional cases.

It shall provide for adequate safeguards against victimisation of employees and directors who avail of the vigil mechanism.

Which Company is required to establish vigil mechanism?

Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances-

  • the Companies which accept deposits from the public;
  • the Companies which have borrowed money from banks and public financial institutions in excess of Rs. 50 crore.

Who is responsible to oversee the vigil mechanism?

  • In case of companies which are required to constitute an audit committee
    Audit Committee shall oversee the vigil mechanism and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.
  • In case of other companies
    The Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

The details of establishment of the Vigil Mechanism is required to be disclosed by the company on its website, if any, and in the Board’s report.

Nomination and Remuneration Committee [Section 178]

Which company is required to constitute Nomination and Remuneration Committee? (Same as in case of Audit Committee)
According to Section 178(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014, the Board of directors of following companies are required to constitute Nomination and Remuneration Committee of the Board-
1. Every listed Public companies;
2. All public companies with a paid up capital of 10 crore rupees or more;
3.All public companies having turnover of 100 crore rupees or more;
4.All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Here the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

The following classes of unlisted public company shall not be covered for above purpose:-

  • a joint venture;
  • a wholly owned subsidiary; and
  • a dormant company as defined under section 455 of the Act.

Composition of Nomination and Remuneration Committee
Nomination and Remuneration Committee shall consists of three or more non-executive directors out of which not less than one-half shall be independent directors.

The Chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee

Functions of Nomination and Remuneration Committee [Subsection 2]
The Nomination and Remuneration Committee shall

  • identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down,
  • recommend to the Board their appointment and removal,
  • specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and
  • review its implementation and compliance.

According to Subsection (3), the Nomination and Remuneration Committee shall

  • formulate the criteria for determining qualifications, positive attributes and independence of a director and
  • recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.


According to Subsection (4), the Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3) ensure that—

  • the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;
  • relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
  • remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:

Disclosure of policy framed by Nomination and Remuneration Committee
Such policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.

Quorum and Meeting

  • The quorum for a meeting of the nomination and remuneration Committee shall be either two members or one third of the members of the Committee, whichever is greater, including at least one Independent Director in attendance.
  • The nomination and remuneration Committee shall meet at least once in a year.

Presence in General Meeting
The chairperson of the committee or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Provisions w.r.t Nomination and Remuneration Committee under SEBI (LODR) Regulations, 2015 [Regulation 19]
The board of directors shall constitute the nomination and remuneration committee as follows:

  1. the committee shall comprise of at least three directors ;
  2. all directors of the committee shall be non-executive directors; and
  3. at least 50% of the directors shall be independent directors.
  4. in case of a listed entity having outstanding SR equity shares, two thirds of the nomination and remuneration Committee shall comprise of Independent Directors.

The Chairperson of the nomination and remuneration committee shall be an independent director:

Provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the nomination and remuneration committee and shall not chair such committee.

The chairperson of the nomination and remuneration committee may be present at the AGM, to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who shall answer the queries.

Stakeholders Relationship Committee [Section 178(5)]

The Board of Directors of a company which consists of more than 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.

Function of Stakeholders Relationship Committee [Section 178(6)]
The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.

Presence in General Meeting
The chairperson of the committee or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.Regulation 20 of SEBI (LODR) Regulations, 2015,

  • The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into various aspects of interest of shareholders, debenture holders and other security holders.
  • The stakeholders relationship committee consists of at least 3 directors, with at least one being an independent director, shall be members of the Committee
  • In case a listed entity having outstanding SR equity shares, at least two thirds of the Stakeholders Relationship Committee shall comprise of independent directors.
  • The chairperson of this committee shall be a non-executive director.
  • The Chairperson of the Stakeholders Relationship Committee shall be present at the annual general meetings to answer queries of the security holders.
  • The stakeholders relationship committee shall meet at least once in a year.

Penalties in case of Contravention [Subsection 8 of Section 178]
In case of any contravention of the provisions of section 177 and this section, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees [Substituted by the Companies (Amendment) Act, 2020]

Provided that inability to resolve or consider any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.

Risk Management Committee

There is no statutory requirement under Companies Act, 2013 to constitute Risk Management Committee. According to Section 134(3)(n), company shall disclose in its BOD’s Report a statement indicating development and implementation of a risk management policy for the company.

But according to Regulation 21 of SEBI (LODR) Regulations, 2015,

  1. The board of directors shall constitute a Risk Management Committee
  2. The Risk Management Committee shall have minimum three members with majority of them  being  members  of  the  board  of  directors,  including  at  least  one  independent director  and  in  case  of  a  listed  entity  having  outstanding  SR  equity  shares,  at  least  two thirds of the Risk Management Committee shall comprise independent directors.  [Substituted by the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021 w.e.f.5.5.2021]
  3. The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.
  4. The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.
  5. The Committee shall meet at least twice in a year.
  6. The provisions of this regulation shall be applicable to:

    1. the top 1000 listed entities, determined on the basis of market capitalization as at the end of the immediate preceding financial year; and,
    2. a ‘high value debt listed entity’ (entities which have listed its non-convertible debt securities with an outstanding value of ₹500 crore and above).

Additional fine payable by listed entity for Non-compliance with provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

  • Non-compliance with the constitution of Audit Committee – Rs 2,000 per day
  • Non-compliance with the constitution of Nomination and Remuneration Committee – Rs 2,000 per day
  • Non-compliance with the constitution of Stakeholder Relationship Committee – Rs 2,000 per day
  • Non-compliance with the constitution of Risk Management Committee – Rs.2000 per day

Leave a Comment