AUDIT COMMITTEE (Section 292A Vs Clause 249)

04 January 2010

AUDIT COMMITTEE

(Section 292A of Companies Act Vs Clause 49 of Listing Agreement)

The Companies (Amendment) Act (2000), among other things, provides for the formation and functioning of audit committees (section 292A). Similar requirements for audit committees are prescribed under clause 49 of the Listing Agreement issued by Sebi. In India, perhaps the 1992 stock market scam and liberalisation of the economy contributed more to the introduction of these requirements than did Enron. Be that as it may, these scams and corporate failures have shaken investors’ confidence and the whole world is watching intently the steps being undertaken by the various statutory authorities in this respect. Below is a comparison between the regulations governing the audit committee. It points to a few prominent differences between the regulations in both.

Base of Diff.	Section 292A	Clause 49

Applicability	Section 292A applies to all pubic companies with a paid-up capital of Rs 5 crore or more.	Clause 49 of the Listing Agreement covers most of the listed companies

Constitution and independence of the audit committee	Section 292A requires that the audit committee shall consist of not less than three directors and such number of other directors as the board may determine. Two-thirds of the total number of the audit committee shall be directors other than the managing or whole-time directors.	Clause 49 requires a minimum of three members, all being non-executive directors, with the majority of them being independent directors*, with at least one director having financial and accounting knowledge.

Role and powers of the audit committees	Section 292A gives the audit committee the authority to investigate into any matter in relation to the items specified in this section or referred to it by the board. The audit committee has full access to information contained in the records of the company and may take external professional advice, if it deems necessary.	Clause 49 gives specific powers to the audit committee to investigate any activity within its terms of reference, seek information from any employee, and obtain outside legal or professional advice. The role of audit committee has also been clearly defined under the clause 49.

* Independence of audit committee members: Clause 49 defines ’independent directors’ as directors who, apart from receiving directors’ remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the board’s view may affect their independent judgment.

It may be noted that clause 49 has listed the powers of the audit committee while section 292A has left it to the discretion of the board.

The question is: how many audit committee members would be willing to commit to this extra time and be held accountable? In India the problem is compounded with inadequate remuneration to non-executive directors. Few companies offer commission on profits to independent directors. So which audit committee member would be willing to spend an extra 7-8 days for a mere Rs 5,000 sitting fee? The skills gap and inadequate remuneration is going to be a challenge for audit committees in India. The Department of Company Affairs appears to have taken up the remuneration issue quite seriously and is about to announce changes.

It may be noted from the above analysis that the local regulations are generally stringent and comparable with international standards. However, considering the kind of Enron-like corporate failures that the world has faced in the recent past, these regulations need re-examination. Improvement in areas like remuneration of audit committee members, their training, and the extent to which they can be held liable in case of default, would enable them to discharge their responsibilities more effectively and efficiently. Following the footsteps of the US, the Naresh Chandra Committee was constituted to examine the entire gamut of issues pertaining to the auditor-company relationship and related issues. The committee has considered the above-mentioned issues and has submitted its recommendations. The writing is on the wall: the fundamentals of corporate governance in India will see radical change in the near future.