Audit Committee and Corporate Governance – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.
Audit Committee and Corporate Governance – CA Final Audit Question Bank
Corporate Governance is the system by which companies are directed and governed by the management in the best interests of the stakeholders and others ensuring better management, greater transparency and timely financial reporting.
Responsibility to ensure corporate Governance rests with the Board of Directors.
In India, the legal framework of Corporate Governance is contained in Sec. 177 of the Companies Act, 2013 (relating to Audit Committee) and Chapter IV (Regulation 17 to Regulation 27) of SEBI (LODR) Regulations, 2015.
SEBI (LODR) Regulations,2015,issuedbySEBIwiththeobjectiveofstreamliningandconsolidating the provisions of various listing agreements in operation for different segments of the capital markets, such as equity shares, preference shares, debt instruments, units of mutual funds, Indian depository receipts, securitised debt instruments and any other securities that the SEBI may specify.
These Regulations are divided into 2 parts – the substantive provisions are incorporated in the main body while the procedural requirements are incorporated in the form of schedules.
It may be noted that the LODR Regulations deal with only post-listing requirements and exclude all pre-listing requirements.
Write short note on: Matters addressed in SEBI (LODR) Regulations, 2015 regarding Corporate Governance. [Nov. 15 (4 Marks)]
Enumerate the issues addressed in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 regarding Corporate Governance.
- Corporate Governance can be defined as “the formal system of accountability and control for ethical and socially responsible organisational decisions and use of resources”.
- Corporate Governance is the system by which companies are directed and governed by the management in the best interests of the stakeholders and others ensuring better management, greater transparency and timely financial reporting.
- Responsibility to ensure corporate Governance rests with the Board of Directors.
- In India, the legal framework of Corporate Governance is contained in Sec. 177 of the Companies Act, 2013 (relatingto Audit Committee) and Chapter IV (Regulation 17 to Regulation 27) of SEBI (LODR) Regulations, 2015.
- Chapter IV of SEBI (LODR) Regulations, 2015 deals with the below mentioned matters so as to ensure corporate governance framework more effective –
(a) Board of Director including its composition, independent director, non-executive director etc.;
(b) Provisions regarding composition and functioning of Audit Committee (Regulation 18).
(c) Provisions regarding setting ug and role of Nomination and Remuneration Committee.
(d) Provisions regarding setting up and-role of Stakeholder Relationship Committee.
(e) Provisions regarding setting up and role of Risk Management Committee.
(f) Vigil Mechanism.
(g) Related party Transaction;
(h) Management of subsidiary companies; Obligations w.r.t. Independent Directors.
(i) Obligations w.r.t. directors and senior management.
(j) Others as specified in Part E of Schedule II (Discretionary).
ICAI Examiner Comments
Most of the examinees did not highlight the matters addressed in Clause 49 (Now SEBI (LODR) Regulations regarding Corporate Governance, instead they wrote general answers on Corporate Governance. Also some examinees explained about audit committee.
Audit Committee (Sec. 177 of Companies Act, 2013)
Explain the Constitution and Functions of Audit Committee u/s 177 of Companies Act, 2013.
Write short note on: Requirement for Audit Committee as per Companies Act, 2013. [Nov. 17 (4 Marks)]
Constitution of Audit Committee:
Section 177(1) of Companies Act, 2013 read with Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014 requires Board of Directors of every listed Public company and below mentioned class of companies to constitute an Audit Committee —
- all public companies with a paid-up capital of ₹ 10 Cr. or more;
- all public companies having turnover of ₹ 100 Cr. or more;
- all public companies, having in aggregate, outstanding loans and debentures and deposits exceeding fifty crore rupees or more.
Explanation to Rule 6 provides that the paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account.
Functions of Audit Committee:
Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include:
- the recommendation for appointment, remuneration and terms of appointment of auditors;
- 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.
Audit Committee (Regulation of SFBl (LODR) Regulations, 2015)
Slate the main features of the qualified and independent Audit Committee set up under regulation 18 of SEBI (LODR) Regulations, 2015. [Nov. 08 (4 Marks), MTP-April 18)
Every listed company shall constitute a qualified & Independent audit committee in accordance with the terms of reference subject to a few conditions. Explain. [MTP-Aug. 18]
Features of Qualified and Independent Audit Committee:
(a) The audit committee shall have minimum 3 directors as members. Two-thirds of the members of audit committee shall be independent directors.
In case of a listed entity having outstanding Superior Rights (SR) equity shares, the audit committee shall only comprise of independent directors.
(b) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. –
(c) The Chairperson of the Audit Committee shall be an independent director.
(d) The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.
(e) The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives, to be present at the meetings of the committee.
(f) The Company Secretary shall act as the secretary to the committee.
The audit committee has been granted several roles under SEBI (LODR) regulations, 2015. Oversight of the company’s financial reporting process; recommendation for appointment of auditors; approval of payment to statutory auditors etc. are some of the roles that an audit committee perform. State the role of Audit Committee as provided under SEBI (LODR) Regulations.
Role of Audit Committee under SEBI (LODR) Regulations, 2015:
1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible;
2. Recommendation for appointment, remuneration and terms of appointment of auditors;
3. Approval of payment to statutory auditors for any other services rendered by them;
4. Reviewing with management the annual financial statements before submission to the Board, focusing primarily on:
(a) Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of Sec. 134(3)(c) of the Companies Act, 2013.
(b) Changes, if any, in accounting policies and practices and reasons for the same.
(c) Major accounting entries involving estimates based on the exercise of judgment by management.
(d) Significant adjustments made in the financial statements arising out of audit findings.
(e) Compliance with listing and other legal requirements relating to financial statements.
(f) Disclosure of any related party transactions.
(g) Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval;
6. Reviewing, with the management, the-statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter;
7. Review and monitor the auditor’s independence and performance, and effectiveness of audit process;
8. Approval or any subsequent modification of transactions of the company with related parties;
9. Scrutiny of inter-corporate loans and investments; ,
10. Valuation of undertakings or assets of the company, wherever it is necessary;
11. Evaluation of internal financial controls and risk management systems;
12. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems;
13. Reviewing the adequacy of internal audit function;
14. Discussion with internal auditors of any significant findings and follow up there on;
15. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board;
16. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern;
17. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors;
18. To review the functioning of the Whistle Blower mechanism;
19. Approval of appointment of CFO after assessing the qualifications, experience and background, etc. of the candidate;
20. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee
21. Reviewing the utilization of loans and/or advances from/investment by the holding company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower including existing loans/advances/investments existing as on 01.04.2019.
State the mandatory Review areas of the audit committee. [May 12 (4 Marks), RTP-May 20]
List few documents that require mandatory review by Audit Committee. [Nov. 18-New Syllabus (5 Marks)]
Mandatory Review Area of Audit Committee:
- Management discussion and analysis of financial condition and results of operations.
- Statement of significant related party transactions submitted by management.
- Management letters/letters of internal control weaknesses issued by the statutory auditors.
- Internal audit reports relating to internal control weaknesses; and
- The appointment, removal and terms of remuneration of the Chief Internal Auditor.
- Statement of deviations:
(a) Quarterly statement of deviation (s) including report of monitoring agency, if applicable submitted to stock exchange.
(b) Annual statement of funds utilised for purposes other than those stated in offer document/ prospectus.
D Ltd., a company incorporated in India has six members in its Audit Committee. Due to recessionary conditions in India the revenue of the company is going down and there is slow down in other activities of the company. Therefore, it is expected that there would not be significant work for members of the Audit Committee.
Considering the overall recession in the company and the economy, the members of the Committee decided unanimously to meet only once at the year end. They reviewed monthly information system of the company and found no errors.
As an auditor of D Limited would you consider the decision taken by the Audit Committee to hold the meeting once in a year, is complying with Listing Obligation and Disclosure Requirements (LODR)? Also state the quorum requirements for such meetings. [Nov. 13 (4 Marks), RTP-Nov. 18., Nov. 19 – New Syllabus (5 Marks)]
Validity of Audit committee decisions w.r.t. meetings and review area:
Regulation 18 of SEBI (LODR) Regulations, 2015, among other things, requires the followings:
- The audit committee should meet at least 4 times in a year and not more than 120 days shall elapse between two meetings.
- Audit committee should mandatorily review certain areas like management discussion and analysis, statement of significant related party transactions, letters of internal control weaknesses, internal audit reports etc.
In the present case, members of audit committee decided to meet only once in a year and review only the monthly information system which does not meet the requirement of regulation 18 of SEBI (LODR) Regulations, 2015 as stated above.
Conclusion: Decision taken by audit committee to conduct meeting once in a year and review of only monthly information system is not in line with the requirements of Regulation 18 of SEBI (LODR) Regulations, 2015.
Quorum requirements of meetings of audit committee: The quorum shall be either 2 members or 1 /3 of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present.
Mr. ‘U’, a respectable Chartered Accountant of international repute was requested by one of the major corporate in India to join its Board and also as a Chairman of Audit Committee. He expressed his apprehensions that he is not having the requisite experience. Mr. ‘U’ seeks your view on the responsibility of Audit Committees vis-a-vis the review of Financial Statements. [May 14 (4 Marks)]
Responsibility of Audit Committee vis-a-vis the review of Financial statement:
As per Regulation 18 of SEBI [LODR] Regulations, 2015, audit committee is required to review with management the annual financial statements before submission to the Board, focusing primarily on:
- Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of Sec. 134(3)(c) of the Companies Act, 2013.
- Changes, if any, in accounting policies and practices and reasons for the same.
- Major accounting entries involving estimates based on the exercise of judgment by management.
- Significant adjustments made in the financial statements arising out of audit findings.
- Compliance with listing and other legal requirements relating to financial statements.
- Disclosure of any related party transactions.
- Qualifications in the draft audit report.
Write short notes on: Power of Audit Committee as stipulated under SEBI (Listing Obligations and Disclosure Requirements) Regulations.
Power of Audit Committee:
As per SEBI (LODR) Regulations, 2015, the audit committee may exercise following powers, in addition to others:
- To investigate any activity within its terms of reference.
- To seek information from any employee.
- To obtain outside legal or other professional advice.
- To secure attendance of outsiders with relevant expertise.
Comment on the following in the light of certificate of compliance of conditions of Corporate Governance to be issued for a listed company where the Board consists of 10 directors including a non-executive director as its chairman and further:
- There were 5 audit committee meetings held during the year as follows: 01/04/2020, 01/06/2020,01/09/2020, 03/01/2021, 25/03/2021.
- There are 4 independent directors. One of them resigned on 25/05/2020. A new independent director was appointed on 01/09/2020.
- The Chairman of Audit Committee did not attend the Annual General meeting held on 14/09/2020.
- The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1 internal audit report commented on certain serious irregularities as regards electronic online auction of scrap. The agenda of Audit Committee did not deliberate or take note of the issue. [Nov. 18-Old Syllabus (4 Marks), RTP-Nov. 19]
Compliance of conditions as to Corporate Governance:
Regulation 18 of SEBI (LODR) Regulations, 2018, among other things provides the followings:
(a) The Audit Committee shall have minimum 3 directors as members. Two-thirds of the members of Audit Committee shall be independent directors.
(b) The Chairperson of the Audit Committee shall be an independent director. The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.
(c) The Audit Committee should meet at least 4 times in a year and not more than 120 days shall elapse between two meetings.
(d) Audit Committee must mandatorily review certain aspects including therein is the Internal audit reports relating to internal control weaknesses.
Regulation 17(1) of the SEBI (LODR) Regulations, 2015 provides the following:
(a) The Board of Directors of the company shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than 50% of the Board of Directors comprising non-executive directors.
(b) Where the Chairperson of the Board is a non-executive director, at least 1/3rd of the Board should comprise independent directors and in case the company does not have a regular non-executive Chairman, at least half of the Board should comprise independent directors.
Further Sec. 149(4) of the Companies Act, 2013 read with Rule 4 of Companies (Appointment and Qualifications of Directors) Rules, 2014 provides that any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy, whichever is later.
Accordingly, while issuing certificate of Corporate Governance, auditor is required to make the following modifications:
- Gap between meetings held on 01.09.2020 and 03.01.2021 is more than 120 days; .
- Casual vacancy in the office is independent director was filled up after the period prescribed u/s 149 (4) read with Rule 4 of Companies (Appointment and Qualifications of Directors) Rules, 2014;
- Chairman was mandatorily required to attend AGM, which he did not;
- Internal audit report was not reviewed by the Audit Committee.
Section 177 of the Companies Act, 2013 provides that every listed company and other class of companies as prescribed shall constitute a committee of the Board known as “audit Committee”. Briefly discuss the additional requirements as per Sec. 177 which are silent in Regulation 18 of SEBI (LODR) Regulations, 2015.
Additional requirement of Sec. 177 which are silent in Regulation 18:
(a) Every Audit Committee shall act in accordance with terms of reference to be specified in writing by the Board.
(b) The Board’s report u/s 134(3) 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 therefor.
(c) 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.
Briefly explain the role of auditor in audit committee and certification of compliance of conditions of Corporate Governance.
Role of Auditor in Audit Committee and certification of compliance of conditions of corporate governance:
Regulation 18 of SEBI (LODR) Regulations, 2015 requires a representative of the statutory auditor, when required, shall be invited to the meetings of the Audit Committee.
Sec. 177 of Companies Act, 2013 requires that auditors of a company and the key managerial personnel has a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but they shall not have the right to vote.
In relation to audit committee and certification of compliance of conditions of corporate governance, auditor is required:
(a) To ensure that he communicates frequently with the Audit Committee on key accounting or auditing issues that, in his judgment, give rise to a greater risk of material misstatement of the financial statements.
(b) To ensure that he addresses any questions or concerns voiced by the Audit Committee.
(c) To assist and advise the Audit Committee on improving corporate governance, oversight of financial reporting process, implementation of accounting policies and practices, compliance with accounting standards, strengthening of the internal control systems in regard to financial reporting and reporting processes.
(d) To assist the management and the Audit Committee to enable them to discharge their functions effectively and in certification of the requirements of corporate governance.
Note: Auditor role is not to drive corporate governance directly. It is the management’s responsibility to do so and in the process, auditor may play a significant role in assisting management to ensure better standards of corporate governance.
Matters covered by SEBI (LODR) Regulations, 2015
Elaborate under SEBI (LODR) Regulations, 2015, who is an independent director.
Independent Director under SEBI (LODR) Regulations, 2015:
As per Regulation 16(1) ofSEBI (LODR) Regulations, 2015, independent director shall mean a non-executive director, other than a nominee director of the company:
a. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
b. who is or was not a promoter of the company or its holding, subsidiary or associate company; and not related to promoters or directors in the company, its holding, subsidiary or associate company or member of the promoter group of the listed entity;
c. apart from receiving director’s remuneration, has or had no material pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
d. none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or ? 50 Lacs or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
e. who, neither himself nor any of his relatives
1. holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
2. is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of;
- a firm of auditors or CS in practice or cost auditors of the company or its holding, subsidiary or associate company; or
- any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;
3. holds together with his relatives 2% or more of the total voting power of the company; or
4. is a Chief Executive or director, by whatever name called, of any non-profit organisation that . receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company;
5. is a material supplier, service provider or customer or a lessor or lessee of the company.
f. who is not less than 21 years of age.
g. who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.
P Limited is a listed Company in which no code of conduct is laid down for its board members and senior members. As an auditor of P Limited:
(a) Briefly explain the compliance requirements with respect to Code of Conduct as per Listing Order Disclosure Requirement (LODR) Regulations.
(b) What will be your role in compliance of above-mentioned Code of Conduct as per LODR Regulations?
Requirements of Code of Conduct in SEBI (LODR) Regulations, 2015:
(a) Compliance Requirements w.r.t. Code of Conduct:
- Regulation 17(5): The board of directors shall lay down a code of conduct for all members of board of directors and senior management of the listed entity. The code of conduct shall suitably incorporate the duties of independent directors as laid down in the Companies Act, 2013.
- Regulation 26(3): All members of the Board and senior management shall affirm compliance with the code of conduct on an annual basis.
- Regulation 46(2): Listed entity shall disseminate code of conduct on its website.
- Part D of Schedule V: Annual Report of the company shall contain a declaration signed by the CEO stating that the members of board and senior management have affirmed compliance with the code of conduct.
(b) Role of auditor in compliance of code of conduct requirements:
- As certain whether the Board has laid down a Code of Conduct for all Board members and senior personnel of the company.
- Obtain a copy of the code of conduct.
- Verify whether all Board members and senior management have affirmed compliance with the code on an annual basis.
- Verify whether the code has been posted on company’s website.
Write short note on: CEO/CFO Certification to the Board.
CEO/CFO Certification to the Board:
Regulation 17(8) of SEBI (LODR) Regulations, 2015 requires that the CEO and CFO shall provide the compliance certificate to the Board that:
(a) They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief:
- These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading.
- These statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations,
(b) There are no transactions entered that are fraudulent, illegal and violative of the company’s code of conduct.
(c) They accept responsibility for establishing and maintaining internal controls w.r.t. financial reporting.
(d) They have indicated to the auditors and the audit committee:
- Significant changes in internal control during the year.
- Significant changes in accounting policies during the year.
- Instances of significant fraud.
Write short note on: Content of Management Discussion and Analysis. [Nov. 13 (4 Marks)]
Management Discussion and Analysis:
Schedule V of SEBI (LODR) regulations, 2015 requires that a Management Discussion and Analysis should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position:
- Industry structure and developments.
- Opportunities and Threats.
- Segment-wise or product-wise performance.
- Risks and concerns.
- Internal control systems and their adequacy.
- Discussion on financial performance with respect to operational performance.
- Material developments in Human Resources/Industrial Relations front, including number of people employed.
- Details of significant changes (i.e. change of 2 5% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, including:
- Debtors Turnover
- Inventory Turnover
- Interest Coverage Ratio
- Current Ratio
- Debt Equity Ratio
- Operating Profit Margin (%)
- Net Profit Margin (%)
- or sector-specific equivalent ratios, as applicable.
- Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof.
The auditor of Mould Limited made an adverse statement in his certificate as the Audit Committee of the company did not meet four times a year. Discuss few circumstances which require an adverse or qualified statement in the auditor’s certificate in respect of compliance of the requirements of Corporate Governance. [Nov. 16 (4 Marks)]
Discuss any eight (8) adverse or qualified statement or disclosure, which you would like to make in respect of non-compliance with requirements Corporate Governance of a company. [May 18 – Old Syllabus (4 Marks)]
Some situations may require an adverse or qualified statement or a disclosure without necessarily making it a subject matter of qualification in»the Auditors’ Certificate, in respect of compliance of requirements of corporate governance. Give four examples of such situations. [MTP-Oct. 18]
A listed entity has to obtain a compliance certificate from either the statutory auditors or practicing company secretaries regarding compliance of conditions of corporate governance and annex it to the Directors’ Report. Discuss some situations which may require an adverse or qualified statement in respect of the above certificate. [Nov. 19 – Old Syllabus [5 Marks)]
Circumstances requiring adverse or qualified statement in Auditor’s certificate in respect of compliance of requirements of corporate governance:
- The number of non-executive directors is less than 50% of the strength of Board of directors.
- A qualified and independent audit committee is not set up.
- The chairman of the audit committee is not an independent director.
- The audit committee does not meet four times a year.
- The necessary powers in terms of SEBI (LODR) Regulations, 2015 have not been vested by the Board in the audit committee.
- The time gap between two Board meetings is more than four months.
- A director is a member of more than ten committees across all companies in which he is a director.
- The information of quarterly results is neither put on the company’s website nor sent in a form so as to enable the Stock Exchange on which the entity’s securities are listed to enable such Stock Exchange to put it on its own website.
- The power of share transfer is not delegated to an officer or a committee or to the registrar and share transfer agents.
M/s All-in-one limited is a large – sized listed Indian company with focus on design and delivery of custom made information Technology applications for various business entities in India and abroad. The management wants to know whether they are required to constitute Risk Management committee as per SEBI (LODR) Regulations, 2015 and if so, required, what should be its composition? Advise. [May 18 – New Syllabus (4 Marks)]
Requirement and Composition of Risk Management Committee:
As per Regulation 21 of SEBI (LODR) Regulations, 2015 requires the board of directors of companies to constitute a Risk Management Committee.
Composition of Risk Management Committee:
(a) The majority of members of Risk Management Committee shall consist of members of the board of directors.
(b) The majority of members of Risk Management Committee shall consist of members of the board of directors and in case of a listed entity having outstanding SR equity shares, at least 2/3rd of the Risk Management Committee shall comprise of independent directors.
(c) The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee. ………..
(d) The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.
(e) The risk management committee*shall meet atleast once in a year.
(f) The provisions of this regulation shall be applicable to top 100 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.
The Directors and senior management of a listed company of which you are the statutory auditor, want to know their obligations under the SEBI Regulations in regard to Board or Non-Executivc Directors, (mention any Five). [May 19 – Old Syllabus (5 Marks)]
Obligations of Directors and Senior Management under SEBI (LODR) Regulations, 2015:
(1) Regulation 17(2): The Board shall meet at least 4 times a year, with a maximum time gap of 120 days between any two meetings.
(2) Regulation 17(3): The Board shall periodically review compliance reports pertaining to all laws applicable to the listed entity, prepared by the listed entity as well as steps taken by the listed entity to rectify instances of non-compliances.
(3) Regulation 17(3): The Board shall satisfy itself that plans are in place for orderly succession for appointment to the Board and senior management.
(4) Regulation 17A: A person shall not be a director in more than 8 listed entities with effect from April 1, 2019 and in not more than 7 listed entities with effect from April 1, 2020:
Provided that a person shall not serve as an independent director in more than 7 listed entities.
(5) Regulation 25: An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge and with his consent or where he had not acted diligently with respect to the provisions contained in these regulations.
(6) Regulation 26(1): A director shall not be a member in more than 10 committees or act as chairperson of more than 5 committees across all listed entities in which he is a director.
(7) Regulation 26(2): Every director shall inform the listed entity about the committee positions he or she occupies in other listed entities and notify changes as and when they take place.
(8) Regulation 26(4): Non-executive directors shall disclose their shareholding in the listed entity in which they are proposed to be appointed as directors, in the notice to the general meeting called for appointment of such director.
(9) Regulation 26(5): Senior management shall make disclosures to the board relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the listed entity at large.
You have been appointed as an auditor of M/s Real Ltd. in which total number of directors in the board is 9. As an auditor, state the points to be considered in verification of composition of Board under Regulation 17 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. [May 19 – New Syllabus (6 Marks)]
Verification regarding composition of Board of Directors:
(i) Ascertain whether, the Board comprises an optimum combination of executive and non-executive directors, with at least one woman director and not less than 50% of members of Board,comprising non-executive directors.
The minutes ofthe Board meetings may be verified to ascertain whether a director is an executive director or a non-executive director.
(ii) Verify that no listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.
(iii) Verify that where the Chairperson of the Board is a non-executive director and at least 1/3rd of the Board comprise of independent directors.
In case the listed entity does not have a regular non-executive Chairperson, at least 1/2 of the Board should comprise of independent directors.
(iv) Verify that the board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.
(v) In case of listed company having outstanding SR equity shares, the auditor shall check that at least half of the board of directors comprises of independent directors.
(vi) Ensure that the Chairperson of the board of the top 500 listed entities is – (a) a non-executive director; (ft) not related to the Managing Director or the CEO as per the definition of the term “relative” defined under the Companies Act, 2013.
(vii) Auditor may also examine the annual disclosure submitted by the directors to the Board.
(viii) Auditor should also verify that independent non-executive director, apart from receiving remuneration, should not have any material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.
M/s FCA & Associates, Chartered Accountants is one of the leading auditing firms in Guwahati. The firm received an assignment to examine the compliance conditions [as stated in SEBI (LODR) Regulations] of corporate governance by ABC Ltd., a listed entity with no outstanding SR equity shares. The firm had made the following observations:
Observation No. 1: Mr. Fine, one of the Director of the Company, also the Chairman of the Stakeholder Relationship Committee, was acting
Observation No. 2: The Nomination & Remuneration Committee consisted of 6 members, which regularly met biannually.
Observation No. 3: The Risk Management Committee consisted of 9 directors, out of which, the number of independent directors is the majority, but it was less than two thirds of the total strength.
Which among the above three observations made by the auditor of ABC Ltd. should be reported by M/s.FCA& Associates? [RTP-Nov. 20]
Reporting on Corporate Governance Requirements:
Observation No. 1:
As per Regulation 26 of SEBI (LODR) Regulations, a Director cannot be a Chairman in more than 5 committees across all listed entities. However, for the purpose of reckoning the limit under this Regulation, chairmanship of committees in a private company shall be excluded.
In this case, since Mr. Fine is the Chairman of audit committee in ABC Ltd. and Chairman in 4 other listed companies, there is no violation of the limit specified under the Regulation 26. Accordingly, this observation need not be reported by the auditor.
Observation No. 2:
As per Regulation 19, Part D of Schedule II of SEBI (LODR) Regulations, every listed company should have a Nomination & Remuneration Committee, which shall meet at least once in a year.
In the given case the committee met biannually (i.e. once in 2 years). Accordingly, this observation needs to be reported by the auditor.
Observation No. 3:
As per Regulation 21 of SEBI (LODR) Regulations, in case of a listed entity having outstanding SR equity shares, atleast two thirds of Risk Management Committee shall comprise of independent directors.
In the given case, ABC Ltd. does not have outstanding SR equity shares. Accordingly, this observation need not be reported by the auditor.
Conclusion: Only observation 2 will be reported.
Mr. S has been appointed as a director of CAC Ltd. You are required to state the information to be provided to the shareholders of the company in accordance with Regulation 36 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Information to be provided to Shareholders under Regulation 36 of SEBI (LODR) Regulations:
The listed entity shall send annual report to the holders of securities, not less than 21 days before the AGM.
In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information:
(a) a brief resume of the director;
(b) nature of his expertise in specific functional areas;
(c) disclosure of relationships between directors inter se;
(d) names of listed entities in which the person also holds the directorship and the membership of Committees of the board; and
(e) shareholding of non-executive directors.