INTRODUCTION:
A board committee consists of board members for supporting the board’s work. Committees are formed to perform specific expertise work. Members of the committee have expertise in specific field. Committees improve the efficiency and effectiveness of Board in areas where more focused, specialized and technical discussions are required. Committee function in accordance with the terms of reference established by the board.
The Companies Act, 2013 (“Act”) and Securities Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015 (“SEBI (LODR) Regulations”)has mandated certain committees to be formed for certain companies. The composition, duties and function detailed in this article.
TYPES OF COMMITTEES:
The following are the types of committees’ mandatory under Act and SEBI (LODR) Regulations:
I. AUDIT COMMITTEE:
- Applicability:
Pursuant to provision of Section 177 of the Act the following classes of companies shall mandatorily constitute audit committee.
a. Listed public company
b. Public companies having paid up share capital of 10 crores or more.
c. Public companies having turnover of 100 crore or more.
d. Public companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50 crores. - Constitution:
Companies Act, 2013 SEBI (LODR) Regulations
• Minimum of 3 Directors.
• Majority of Directors to be independent.
• Majority of members of the committee including its chairperson shall be persons with ability to read and understand, the financial statements. • Minimum of 3 Directors.
• 2/3rd of the members shall be independent directors.
• All members shall be financially literate and at atleast one member shall have accounting or related financial management expertise.
• The Chairperson shall be an independent director. - Manner of Conduct of Audit Committee Meetings as prescribed under SEBI (LODR) Regulations:
a. The audit committee shall meet at least four times in a year and not more than one hundred and twenty days shall elapse between two meetings.
b. Quorum for audit committee meeting shall either be two members or one third of the members of the audit committee, whichever is greater, with atleast two independent directors. - Roles and Responsibility:
a. oversight of financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
b. recommendation for appointment, remuneration and terms of appointment of auditors of the listed entity.
c. approval of payment to statutory auditors for any other services rendered by the statutory auditors.
d. reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval.
e. reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process.
f. approval or any subsequent modification of transactions of the listed entity with related parties.
g. evaluation of internal financial controls and risk management systems.
h. reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.
i. to review the functioning of the whistle blower mechanism.
j. consider and comment on rationale, cost-benefits and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.
k. audit committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.
l. compliance with stock exchange and legal requirements concerning financial statements. - Review of Audit Committee:
a. management discussion and analysis of financial condition and results of operations.
b. statement of significant related party transactions submitted by management.
c. management letters/letters of internal control weaknesses issued by the statutory auditors.
d. internal audit reports relating to internal control weaknesses; and
e. the appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.
f. quarterly statement of deviations including report of monitoring agency and annual statement of fund utilized for purpose other than those stated in the offer document.
II. NOMINATION AND REMUNERATION COMMITTEE:
- Applicability:
Pursuant to provision of Section 177 of the Act the following classes of companies shall mandatorily constitute audit committee.
a. Listed public company
b. Public companies having paid up share capital of 10 crores or more.
c. Public companies having turnover of 100 crore or more.
d. Public companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50 crores. - Constitution:
Companies Act, 2013 SEBI (LODR) Regulations
• Three or more non-executive Directors out of which not less than one-half shall be independent directors • Minimum of 3 Directors.
• all directors of the committee shall be non-executive directors.
• atleast fifty percent of the directors shall be independent directors.
• The Chairperson shall be an independent director. - Manner of Conduct of Committee Meetings as prescribed under SEBI (LODR) Regulations:
a. 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 atleast one independent director in attendance.
b. The nomination and remuneration committee shall meet at least once in a year. - Roles and Responsibilities:
a. formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the board of directors a remuneration policy;
b. formulation of criteria for evaluation of performance of independent directors and the board of directors;
c. devising a policy on diversity of board of directors;
d. identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal.
e. Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.
f. recommend to the board, all remuneration, in whatever form, payable to senior management.
III. STAKEHOLDERS RELATIONSHIP COMMITTEE:
- Applicability:
Pursuant to provision of Section 177 of the Act the Company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee. - Constitution:
Companies Act, 2013 SEBI (LODR) Regulations
• Chairperson shall be a non-executive director and such other members as may be decided by the Board. • Minimum of 3 Directors atleast one of them shall be independent director.
• all directors of the committee shall be non-executive directors.
• The chairperson of this committee shall be a non-executive director. - Manner of Conduct of Committee Meetings as prescribed under SEBI (LODR) Regulations:
a. The stakeholders relationship committee shall meet at least once in a year.
b. The committee members shall meet in such circumstances as necessary. - Roles and Responsibilities:
a. consider and resolve the grievances of security holders of the company.
b. resolving the grievances of the security holders of the listed entity including complaints related to transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue of new/duplicate certificates, general meetings etc.
c. review of measures taken for effective exercise of voting rights by shareholders.
d. review of adherence to the service standards adopted by the listed entity in respect of various services being rendered by the Registrar & Share Transfer Agent.
e. review of the various measures and initiatives taken by the listed entity for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the shareholders of the company.
IV. RISK MANAGEMENT COMMITTEE:
- Applicability:
Top 1000 listed entities, determined on the basis of market capitalization, as at the end of the immediate previous financial year shall constitute Risk Management committee. - Constitution and Manner of Conduct of Committee Meetings as prescribed under SEBI (LODR) Regulations:
a. Committee shall have minimum three members with majority of them being members of the board of directors including atleast one independent director.
b. 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.
c. The risk management committee shall meet at least twice in a year.
d. The quorum for a meeting of the Risk Management Committee shall be either two members or one third of the members of the committee, whichever is higher, including at least one member of the board of directors in attendance.
e. The gap between two meetings shall not be more than one hundred and eighty days. - Roles and Responsibilities:
a. formulate a detailed risk management policy including framework for identification of internal and external risks, measures for mitigation of risks, systems and processes for internal controls and business continuity plan.
b. ensure that appropriate methodology, processes and systems are in place to monitor and evaluate risks associated with the business of the Company.
c. monitor and oversee implementation of the risk management policy, including evaluating the adequacy of risk management system.
d. appointment, removal and terms of remuneration of the Chief Risk Officer shall be subject to review by the Risk Management Committee.
V. CORPORATE SOCIAL RESPONSIBILITY (CSR) COMMITTEE:
- Applicability:
Every company having
a. Networth of 500 crores or more
b. Turnover of 1000 crores or more
c. Net profits of 5 crores or more.
shall spend in every financial year atleast 2% of the average net profits made during the three immediately preceding financial years in such activities specified in Schedule VII of the Act.
- Constitution and Manner of Conduct of Committee Meetings:
a. Minimum of three or more directors, out of which one director shall be independent director.
b. The members shall meet as and when required. - Roles and Responsibilities:
a. formulate and recommend to the Board, a corporate social responsibility policy which shall indicate the activities to be undertaken by the company.
b. recommend the amount of expenditure to be incurred on the activities.
c. monitor the corporate social responsibility policy of the company from time to time.
Note: CSR committee is not required to be constituted where the amount to be spend by the company does not exceed rupees fifty lakhs. The functions of such committee may be discharged by the Board of Directors.
CONCLUSION:
The Board if desire can constitute various other committees, apart from the above mentioned committees mandatory under law, to assist in functioning of the Board and to handle a greater number of issues with greater efficiency by having experts focus on specific areas. Greater specialization and intricacies of modern board work is one of the reasons for increased use of board committees.
Author: Nisha Jhawar, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at nisha@rna-cs.co.in.
