With the globalization and the blurring of the borders, the demands on the board have increased tremendously. The regulatory requirements are complex and the onus on the Board is immense. In this scenario the need to delegate oversight of certain areas to a specialist board committee has become imperative. However, it is to be remembered that even though the board delegates some of the responsibilities to a committee, the ultimate responsibility lies with the board.
Committees are a sub-set of the board, deriving their authority from the powers delegated to them by the board. Under section 177 of Companies Act, 2013, Board of Directors may delegate certain matters to the committees set up for the purpose. These committees are usually formed as a means of improving board effectiveness and efficiency in areas where more focused, specialized and technically oriented discussions are required. These committees prepare the groundwork for decision-making and report at the subsequent board meeting.
NEED OF COMMITTEES
In the present day, the regulatory requirement is such that the composition of the board comprising executive directors and non-executive independent directors is relatively large in number. In such a situation it becomes at times practically difficult to convene board meetings which suit the convenience and other commitments of each director. By having smaller committees this aspect also gets addressed effectively.
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.
VARIOUS COMMITTEES OF THE BOARD
The following are some of the important committees to be constituted by the Board:
MANDATORY COMMITTEES
A key element in the corporate governance process of any organization is its audit committee. The purpose of constitution of this committee is to make it responsible for the oversight of the quality and integrity of the company’s accounting and reporting practices; controls and financial statements; legal and regulatory compliance; the auditors’s qualifications and independence; and the performance of company’s internal function. The committee functions as liaison between the board of directors and the auditors- external & internal.
Regulatory Framework:
The Regulatory Framework with regard to Audit Committee is covered under:
– Clause 18 of the LODR regulation
– Section 177 of Companies Act, 2013
Section 177 of the Companies Act, 2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014 deals with the Audit Committee.
Applicability:
The Board of directors of every listed company and the following classes of companies, as prescribed under Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014 shall constitute an Audit Committee.
• all public companies with a paid up capital of Rs.10 Crores or more;
• all public companies having turnover of Rs.100 Crores or more;
• all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores or more.
The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule.
Composition:
• The Board must have minimum three member out of which at least two/third must be independent directors.
• All the members must be financially literate & one member must be an expert in accounting or related financial management.
• The chairman of the Audit Committee must be an independent director, who must be present at the Annual General Meeting to answer shareholder’s query.
• The Company Secretary shall act as the secretary to the committee.
Meeting:
• The Audit Committee should meet at least four times in a year and not more than four months shall elapse between two meetings.
• The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present.
Functions:
• 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 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:
• To 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.
• To discuss any related issues with the internal and statutory auditors and the management of the company.
• To investigate any activity within its terms of reference.
• To investigate into any matter in relation to the items or referred to it by the Board.
• To obtain professional advice from external sources.
• To seek information from any employee.
• To have full access to information contained in the records of the company.
• The auditors of a company and the KMP 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.
• To secure attendance of outsiders with relevant expertise, if it considers necessary.
Review of information:
The Audit Committee shall mandatorily review the following information:
• Management discussion and analysis of financial condition and results of operations;
• Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;
• Management letters / letters of internal control weaknesses issued by the statutory auditors;
• Internal audit reports relating to internal control weaknesses;
• The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee.
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