Download - 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.


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.


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.


has recognised three committees which are:

1. Audit 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;



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


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 auditor‘s 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


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.


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 independent.

Chairman of the company may be appointed as a

member but shall not chair such committee.

As per listing agreement also the

Committee shall have the same composition

as prescribed in the Act however chairman of

the committee shall be an independent director.

Terms of

reference

Terms of reference include -

Identifying the

persons who are qualified to become directors and who

may be appointed in senior management.

To identify and recommend to the board for

appointment and removal

Formulation of the criteria for determining

qualifications, positive attributes and independence of

a director

To recommend to the

board a policy, relating to

the remuneration for

directors, key managerial

personnel and other

employees.

Listing Agreement besides the

terms included in The Act

also include the following-

Formulation of criteria

for evaluation of independent directors and the Board;

Devising a policy on Board diversity.


Presence of

chairman of

committee in

general

meetings

The chairperson or in his

absence, any other member

of the committee authorised

by him in this behalf shall

attend the general meetings

of the company

The chairman of the

committee could be present at

the annual general meeting to

answer the shareholders‘

queries. However, it would be

upto the chairman to decide

who should answer the

queries.

Stakeholders’ relationship committee

Nature As per Companies Act, 2013 As per Listing Agreement

Applicability Mandatory for every company

which consists of more than

one thousand shareholders,

debenture holders, deposits

holders and any other

security holders at any time

during a financial year.

Mandatory for every listed

company.

Terms of

reference

Committee shall consider and

resolve the grievances of

security holders of the

company.

Committee shall consider

and resolve the grievances of

the security holders of the

company including

complaints related to transfer

of shares, non-receipt of

balance sheet, non-receipt of

declared dividends.

Other committees as per Companies Act, 2013

Corporate social responsibility (CSR) committee

The CSR committee finds its place in the Act for the first time as one of the

mandatory committees for particular class of companies which may be

listed and unlisted companies including private limited companies.

One way, it may be termed as old wine in new bottle since several industrial

houses are already engaged in such activities in different ways and

methods.


The Act has spelt out the formation of such a committee in the following

manner:

Applicability - Companies having net worth of Rs 500 crore or more or

turnover of Rs 1000 crore or more or net profit of Rs 5 crore or more during

any financial year.

Composition - Three or more directors out of which at least one shall be an

independent director. Unlisted public company or private company which is

not required to appoint an independent director shall have its CSR

committee without such independent director. Further, a private company

having only two directors on its Board shall constitute its CSR committee

with two such directors.

The Act has provided one year time from commencement of applicable

provisions of the Act to the existing companies to comply with the

requirement of independent director. However, the companies are required

to constitute CSR committee with at least one independent director

immediately. Therefore, in view of above, companies that are required

to constitute the CSR committee can constitute such committee

without an independent director and continue to function as such and

have to appoint independent director on the Board as well as on the

committee before the expiry of said one year for complying with the

requirements of the applicable provisions of the Act.

Further, certain companies are required to have nomination and

remuneration committee as discussed above. Nomination and remuneration

committee has the responsibility to identity persons and determine his

independence for appointment as an independent director.

However, the committee itself is formed by having members in which half of

them shall constitute independent directors. Therefore, for the first time for

induction of independent directors, the Board will identify and induct

independent directors.

The Act has provided one year time from commencement of

applicable provisions of the Act to the existing companies to

comply with the requirement of independent director.


The Board will then constitute the nomination and remuneration committee

with the required number of independent directors.

Role of CSR committee

The committee shall -

formulate and recommend to the Board a CSR policy which shall indicate the activities to be undertaken by the company as specified in

Schedule VII;

recommend the amount of expenditure to be incurred on the activities referred above monitor the CSR policy of the company from time to

time. MCA has clarified that:-

1. CSR activities should be undertaken by the companies in project/

programme mode. One-off events such as marathons/ awards/ charitable

contribution/ advertisement/sponsorships of TV programmes etc. would not

be qualified as part of CSR expenditure.

2. Expenses incurred by companies for the fulfillment of any Act/

Statute of regulations (such as Labour Laws, Land Acquisition Act etc.)

would not count as CSR expenditure under the Companies Act.

3. Salaries paid by the companies to regular CSR staff as well as to

volunteers of the companies (in proportion to company‘s time/hours spent

specifically on CSR) can be factored into CSR project cost as part of the CSR

expenditure.

4. Expenditure incurred by foreign holding company for CSR activities in

India will qualify as CSR spend of the Indian subsidiary if, the CSR

expenditures are routed through Indian subsidiaries and if the Indian

subsidiary is required to do so as per section 135 of the Act.

5. Contribution to corpus of a trust/ society/ section 8 company etc. will

qualify as CSR expenditure as long as (a) the trust/ society/ section 8

company etc. is created exclusively for undertaking CSR activities or (b)

One-off events such as marathons/ awards/ charitable

contribution/ advertisement/sponsorships of TV programmes

etc. would not be qualified as part of CSR expenditure.


where the corpus is created exclusively for a purpose directly relatable to a

subject covered in Schedule VII of the Act.

Other event based committees

As discussed above, the Act requires for constitution of event based

committees by the agencies as and when need arises to a particular

company. A brief on all such committees is discussed hereunder:

Committee of creditors

The interim administrator appointed by the Tribunal for determination of the measures that may be adopted with respect to

revival and rehabilitation of sick company, shall appoint a committee of creditors with such number of members as he may determine, but not exceeding seven and as far as possible a representative each of

every class of creditors should be represented in that committee.

Interim administrator shall decide the holding of the meeting of the committee of directors including appointment of its chairman.

The interim administrator may direct any promoter, director or any key managerial personnel to attend any meeting of the committee of

creditors and to furnish such information as may be considered necessary by the interim administrator.

Winding up committee

The committee is constituted on the application of Company

Liquidator to the Tribunal

The committee is constituted to assist and monitor the progress of liquidation proceedings by the Company Liquidator in certain areas

such as sale of assets, taking over of assets, payment of dividend, etc., and any other function as directed by the Tribunal.

Winding up committee shall comprise of the following persons,

namely:— (i) Official Liquidator attached to the Tribunal;

(ii) Nominee of secured creditors; and

The interim administrator may direct any promoter, director

or any key managerial personnel to attend any meeting of the

committee of creditors.


(iii) A professional nominated by the Tribunal.

Advisory committee

Tribunal may order for the constitution of an advisory committee while passing an order of winding up of a company to advise the

Company Liquidator and to report to the Tribunal on such matters as the Tribunal may direct

The Company Liquidator shall be the chairman of the meetings of the

committee so formed.

Committee to have a maximum of twelve members, being creditors and contributories of the company or such other persons in such

proportion as the Tribunal may, keeping in view the circumstances of the company under liquidation, direct.

The Company Liquidator shall convene a meeting of creditors and contributories, as ascertained from the books and documents, of the company within thirty days from the date of order of winding up for

enabling the Tribunal to determine the persons who may be members of the advisory committee.

Committee shall have the right to inspect the books of accounts and

other documents, assets and properties of the company under liquidation at a reasonable time.

Risk management committee prescribed by SEBI is featured below:

The Board shall frame, implement and monitor the risk management

plan of the company and may delegate monitoring and reviewing of the same and other functions as it may deem fit to risk management

committee.

Board to define the roles and responsibilities of the committee. Conclusion

The importance and need for constitution of committees is well recognised

by the Act as well as by the SEBI. The regulators also suggested the having

of directors with financial background on audit committee, independent

directors for all the committees to form independent judgment. The

committees have to meet at required intervals to achieve the desired results

and the very purpose of constitution of such committees. Committee is also

authorised to invite outside experts for consultation and advice besides,

involvement of management team in their proceedings. SEBI has also

inserted a condition that a director can utmost be a member of ten

committees and to act as chairman of five committees in all companies in

which he is a director. The corporate governance clause of listing agreement

requires once in a year the meeting of independent directors and since it is

not termed as committee, it does not find place in this article.

(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)

Download - Need for constitution of committees - Dr S. Chandrasekaran

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