COMMITTEES TO BE CONSTITUTED BY A COMPANY UNDER COMPANIES ACT, 2013

[Mr. M. GOVINDARAJAN]

The new Companies Act, 2013 (‘Act’ for short) provides for constitution of some committees. According to this Act the following committees are to be formed by a company-

• Audit Committee under Section 177;
• Nomination and Remuneration Committee under Section 178(1);
• Stakeholders Relationship Committee under Section178(5);
• Corporate and Social Responsibility Committee under Section 135; and
• Committee under Section 315.

AUDIT COMMITTEE

Section 178 of the Act provides for the formation of Audit Committee. This is not the new concept.   This has been available in the erstwhile Companies Act, 1956.   Section 178 (1) of the Act provides that the Board of Directors of every listed company and such other class or classes of company, as may be prescribed, shall constitute an Audit Committee. Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with this Act. The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.

Number of members

Section 178(2) provides that the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.

Functions         

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall include-

• The recommendation for appointment, remuneration and terms of appointment of auditors of the company;
• Review and monitor of the auditor’s independence and performance and effectiveness of audit process;
• Examination of the financial statement and the auditors’ report thereon;
• Approval of any subsequent modification of transaction of the company with related parties;
• Scrutiny of inter-corporate loans and investments;
• Valuation of 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.

Powers

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 internal and statutory auditors and the management of the company. The Audit Committee shall have authority to investigate into any matter in relation to the functions or referred to it by the Board and for this purpose shall have powers to obtain professional advice from external sources and have full access to information contained in the records of the company.

Rights of Auditors

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

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

Contravention

In case of any contravention of the provisions of section 177 and this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

NOMINATION AND REMUNERATION COMMITTEE

Section 178 of the Act provides for the constitution of nomination and remuneration committee. According to this section the Board of Directors of-

• Every listed company; and
• Such other class or classes of companies

as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of 3 or more non executive directors out of which of which not less than one half shall be independent directors.   The Chair person of the company, whether executive or non executive, may be appointed as a member of the said committee but shall not chair such Committee.

Functions

• The 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 and shall carry out evaluation of every director’s performance.
• The Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to remuneration for the directors, key managerial personnel and other employees;
• The Committee shall, while formulating the policy shall 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.

Such policy shall be disclosed in the Board’s report. The term ‘senior management’ means personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads. The Chairperson of this committee or in his absence, any other member of the committee authorized by him in this behalf shall attend the general meetings of the company.

STAKEHOLDERS RELEATIONSHIP COMMITTEE

Section 178 (5) of the Act provides that 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.   The said committee shall consist of a chairperson who shall be a non executive director and such other members as may be decided by the Board.

The Committee shall consider and resolve the grievances of security holders of the company. The Chairperson of this committee or in his absence, any other member of the committee authorized by him in this behalf shall attend the general meetings of the company.                  

Non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.

CORPORATE AND SOCIAL RESPONSIBILITY COMMITTEE

Section 135 of the Act provides for the constitution of Corporate and Social Responsibility Committee.   According to this Act, every company having net worth of Rs.500 crores or more, or turnover of Rs.1000 crore or more or a net profit of Rs.5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. The Board’s report shall disclose the composition of the Corporate Social Responsibility Committee.

Functions

The Corporate Social Responsibility Committee shall-

• Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII, as detailed below:
  • Activities relating to-
    • Eradicating extreme hunger and poverty;
    • Promotion of education;
    • Promoting gender equality and empowering women;
    • Reducing child mortality and improving maternal health;
    • Combating human immuno deficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
    • Ensuring environmental sustainability;
    • Employment enhancing vocational skills;
    • Social business projects;
    • Contributions to Prime Minister’s National Relief Fund or any other fund set up by the Central Government of the State Government for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
    • Such other matters as may be prescribed.

• Recommend the amount of expenditure to be incurred on the activities for above; and
• Monitor the Corporate Social Responsibility Policy of the company from time to time.

Obligations of the Board

The Board of every company shall after taking into account the recommendations of the Committee approve the Corporate Social Responsibility Policy for the company and disclose contents of such policy in its report and also place it on the company’s website, if any, in such manner, as may be prescribed and ensure that the activities as are included in the Policy of the company are undertaken by the company.

The Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its policy.   The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.   If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount.

COMMITTEE UNDER Section 315

Section 315 provides for the appointment of committee.   According to this section where there are no creditors of a company, such company in its general meeting and, where a meeting of creditors is held under section 306, such creditors, as the case may be, may appoint such committees as considered appropriate to supervise the voluntary liquidation and assist the Company Liquidator in discharging his or its functions.