With an eye on improving governance the Companies Act, 2013 (2013 Act) mandates a number of Board committees for specified companies for audit, nomination and remuneration, Corporate Social Responsibility and stakeholders relationship. Clause 49 of the Listing Agreement also envisages such committees for listed entities.
Under Section 292A of the Companies Act, 1956 (‘1956 Act’) an audit committee was required for every public company whose paid up capital was INR 5 crores or more. The 2013 Act read with the rules, requires every listed company and other public companies with a paid up capital of more than Rs. 10 Crores or a turnover of INR 100 crores or outstanding loans or borrowing exceeding INR 50 crores (as per the latest audited accounts) to form an audit committee comprising at least 3 directors, the majority of whom have to be independent as well as a Nomination and Remuneration Committee, in which at least half the members have to be independent.
The 1956 Act was silent on the terms of reference, leaving it to the Board of a company to define the scope and powers. The 2013 Act prescribes certain specific items like recommendations for the appointment and remuneration of auditors, scrutiny of inter corporate loans and investments, approval of related party transactions etc., though the Board may at its discretion add more functions. The 2013 Act and rules also envisage companies to set up a vigil mechanism under the oversight of the audit committee to enable complaints against frauds or misdemeanors’ by employees or others. The audit committee is also empowered to protect whistleblowers and also to take action against frivolous complaints.
The performance of the audit committee (as well as the Board and other committees) and its efficacy have to be evaluated under Section 134 (3)(p) of the 2013 Act.
Under Section 292A (8) of the 1956 Act, the Audit Committee’s recommendations were binding on the Board of Directors. However, under the 2013 Act any recommendation of the Audit Committee that is not accepted by the Board has to be reported in the Board along with reasons for the same. Furthermore, under Section 292A (6) of the 1956 Act, the Audit Committee was mandated to have periodic discussions with auditors about the compliance of internal control systems and to review the financial statements of the company. This power has been made discretionary under Section 177(5) of the 2013 Act. There is also no mechanism specified for electing the Chairperson of the Audit Committee in the 2013 Act which was included under Section 292A(2) in the 1956 Act though the Listing Agreement provides for qualifications of the Chairperson [see end note 1]. In the context of financial literacy, the Listing Agreement mandates the presence of at least one member with accounting expertise, while the 2013 Act requires the majority of members to be financially literate.
Nomination and Remuneration Committee (NRC)
Sections 178(2), (3) and (4) of the 2013 Act specify the responsibilities of the NRC whereby it shall make recommendations on the appointment and removal of directors, evaluate their performance, recommend levels of remuneration, etc. A provision for penalty for non-compliance with such requirements has also been incorporated. Whereas the Listing Agreement specifies that the Remuneration Committee has to recommend the remuneration for executive directors only, the 2013 Act extends this to all key managerial personnel as well. In addition, the Listing Agreement mandates that all the members of the Remuneration Committee must attend all its meetings and that its Chairperson must attend the Annual General Meeting of the company.
The Institute of Company Secretaries recommended the constitution of nomination committees to identify suitable independent directors and recommend them to the board for their appointment [see end note 2]. Though the NRC is empowered to examine the sufficiency of remuneration, the link between performance and remuneration, etc., its recommendations have not been made binding upon the Board of Directors.
Stakeholders Relationship Committee
Under Section 178 of the 2013 Act, every company which has more than 1000 shareholders, deposit holders or other security holders, shall constitute a Stakeholders Relationship Committee (‘SRC’), with a non-executive director as Chairperson with the objective of grievance redressal of various stakeholders. The Chairperson of the SRC is also mandated to attend the general meetings of the company. A penalty for non-compliance has been stipulated.
Corporate Social Responsibility Committee
Section 135 of the 2013 Act envisages a Corporate Social Responsibility Committee (‘CSR Committee’) of the Board in every company whose net worth is more than Rs. 500 Crores, or turnover over Rs. 1000 Crores, or having a net profit of more than Rs. 5 Crores. The Committee must consist of at least 3 directors of whom at least one should be independent. However, unlisted public companies and private companies are exempted from the requirement of an independent director on the CSR Committee and a minimum of two members is adequate for such companies.
The functions of a CSR Committee are to formulate a CSR policy including activities as have been listed under Schedule VII of the 2013 Act, monitor the said policy periodically and prepare a transparent monitoring mechanism. The 2013 Act also mandates that the CSR Committee must ensure that at least 2% of the company’s net profits are directed towards CSR activities. The CSR Rules also provide further guidelines and enumerate various methods in which a company can conduct CSR activities such as setting up of not-for-profit organizations and collaboration with other companies to further CSR activities.
An escape route has been incorporated in the Act itself whereby companies who are unable, for sufficient cause, to spend 2% of their average net profit for the past 3 years, may explain the reasons for the same in the Board report.
The 2013 Act expands the number of committees and provides duties for each of them as compared to the 1956 Act. Further, there seems to be an attempt to bring the 2013 Act in consonance with the Listing Agreement to a certain extent. There is also significant emphasis on transparency norms and self disclosure mechanisms for these committees which have been incorporated within the new provisions. However, the roles accorded to these committees seem to be largely recommendatory with the final decision making power being vested in the Board of Directors. Only further implementation of the 2013 Act over the course of time would show the extent of impact these committees can make in the field of corporate governance.
[The author is a Principal Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad]
- Listing Agreement, Clause 49, II (A) (iii).
- See, Press Release, The ICSI Recommendations to Strengthen Corporate Governance Framework, 2009. (“ICSI Recommendations”), available at: http://www.icsi.edu/docs/webmodules/LinksOfWeeks/Recommendations%20Book-MCA.pdf (last visited on 5th September, 2013).