Chapter 5 Board Committees – CS Professional Governance, Risk Management, Compliances and Ethics Notes is designed strictly as per the latest syllabus and exam pattern.
Board Committees – Governance, Risk Management, Compliances and Ethics Study Material
Question 1.
Write short note on the following:
Mandatory committees under the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. (Dec 2022, 3 marks)
Answer:
Mandatory Committee:
Audit Committee
As per Regulation 18 of the SEBI (Listing Obligations & Disclosure
Requirements) Regulations, 2015,
(1) Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:
(a) The audit committee shall have minimum three directors as members.
(b) Atleast two-thirds of the members of audit committee shall be independent directors and in case of listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors.
(c) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
Explanation:
1. For the purpose of this regulation, “financially literate” shall mean the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.
2. For the purpose of this regulation, a member shall be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
(d) The chairperson of the audit committee shall be an independent director and he/she shall be present at Annual general meeting to answer shareholder queries.
(e) The Company Secretary shall act as the secretary to the audit committee.
(f) 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: Provided that occasionally the audit committee may meet without the presence of any executives of the listed entity.
(2) The listed entity shall conduct the meetings of the audit committee in the following manner:
(a) The audit committee shall meet at least four times in a year and not more than one hundred and twenty days shall elapse between two meetings.
(b) The quorum for audit committee meeting shall either be two members or one third of the members of the audit committee, whichever is greater, with at least two independent directors.
(c) The audit committee shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, if it considers necessary.
(3) The role of the audit committee and the information to be reviewed by the audit committee shall be as specified in Part C of Schedule II.
Nomination and remuneration committee:
As per Regulation 19
(1) The board of directors shall constitute the nomination and remuneration committee as follows:
(a) the committee shall comprise of at least three directors ;
(b) all directors of the committee shall be non-executive directors; and
(c) at least fifty percent of the directors shall be independent directors and in case of listed entity having outstanding SR equity shares, 2/3rd of the nomination and remuneration committee shall comprise of independent directors.
(2) The Chairperson of the nomination and remuneration committee shall be an independent director:
Provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee and shall not chair such Committee.
(2A) The quorum for a meeting of the nomination and remuneration committee shall be either two members or one third of the members of the committee, whichever is greater, including at least one independent director in attendance.
(3) The Chairperson of the nomination and remuneration committee may be present at the annual general meeting, to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who shall answer the queries.
(3A) The nomination and remuneration committee shall meet at least once in a year.
(4) The role of the nomination and remuneration committee shall be as specified as in Part D of the Schedule II.
Stakeholders Relationship Committee:
As per Regulation 20
(1) The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into various aspects of interest of shareholders, debenture holders and other security holders.
(2) The chairperson of this committee shall be a non-executive director. (2A) At least three directors, with at least one being an independent director, shall be members of the Committee and in case of listed entity having outstanding SR equity shares at least 2/3rd of the stakeholders Relationship Committee shall comprise of independent directors.
(3) The Chairperson of the Stakeholders Relationship Committee shall be present at the annual general meetings to answer queries of the security holders.
(3A) The stakeholders relationship committee shall meet at least once in a year.
(4) The role of the Stakeholders Relationship Committee shall be as specified as in Part D of the Schedule II.
Question 2.
Write notes on the following.
Compliance officer (June 2013, 3 marks) [CSEP-II]
Answer:
Compliance Officer: Regulation 6, SEBI (LODR) Regulations requires mandatory appointment of Compliance officer who will be a qualified company secretary in every listed company and his obligations are as below:
The compliance officer of the listed entity shall be responsible for:
(a) Ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
(b) co-ordination with and reporting to the Board, recognized stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives of these authorities in manner as specified from time to time.
(c) Ensuring that the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity under these regulations.
(d) monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors. Provided that the requirements of this regulation shall not be applicable in the case of units issued by mutual funds which are listed on recognised stock exchange(s) but shall be governed by the provisions of the SEBI India (Mutual Funds) Regulations, 1996.
Question 3.
Write short note on the following:
Nomination Committee. (June 2014, 3 marks)
Answer:
Nomination Committee
As per Section 178(1); The Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration.
Committee consisting of there or more non- executive directors out of which not less than one- half shall be independent directors:
Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.
Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.
As per Section 178(2) ;The Nomination and Remuneration 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 specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.
Sub-Section (3) of Section 178 said that the Nomination Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.
Further, as per Section 178 (4), the Nomination Committee shall, while formulating the policy under sub-section (3) ensure that:
(a) 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;
(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
(c) 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. Provided that such policy shall be disclosed in the Board’s report.
Question 4.
Write short note on the following:
Corporate Governance Committee. (Dec 2014, 3 marks)
Answer:
Corporate Governance Committee:
A company may constitute this committee to develop and recommend the board a set of corporate governance guidelines applicable to the company, implement policies and processes relating to corporate governance principles, to review, periodically, the corporate governance guidelines of the company. Many companies give the mandate of corporate governance to nomination committee and is given the nomenclature Nomination and Corporate Governance Committee. Typically, the committee is responsible for considering matters relating to corporate governance including the composition of board, appointment of new directors, review of strategic human resource decisions, succession planning for the chairman and other key board and executive positions, performance evaluation of the board and its committees and individual directors.
Question 5.
Write notes on the following:
(i) Corporate governance compliance certificate
(ii) Whistle blower policy. (June 2015, 4 marks each)
Answer:
(i) (a) SEBI (LODR) Regulations, 2015 deals with compliance certificate on Corporate Governance.
(b) The practicing Company Secretaries have also been recognised to issue Certificate of Compliance of Conditions of Corporate Governance. The clause provides that the company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance.as stipulated in this clause and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company.
(c) The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company.
(ii) Regulation 22 of SEBI LODR Regulations, 2015 following are the requirements for the ‘Whistle Blower Policy’ in a listed entity:
(1) The listed entity shall formulate a vigil mechanism / whistle blower policy for directors and employees to report genuine concerns.
(2) The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or employee(s) or any other person who avail the mechanism and also provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases.
Question 6.
Write a note on the following:
Whistle-blower policy. (June 2016, 4 marks)
Question 7.
Describe briefly the need and advantages of committee management. Name the committees which are to be constituted for good corporate governance. (June 2012, 5 marks)
Answer:
Need and Advantage of Committee Management
Committees are a sub-set of the board, deriving their authority from the powers delegated to them by the board. The 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.
Committees allow the board to:
- Handle a great number of issue with greater efficiency by having experts focus on specific areas.
- Develop subject-specific expertise on areas such as compliance management, risk management, financial reporting.
- Enhance the objectivity and independence of the boards judgement. Greater specialization and intricacies of modern board work is one of the reasons for increased used of board committees.
The reasons include:
(a) Responsibilities are shared.
(b) More members become involved.
(c) Specialized skills of members can be used to best advantage.
(d) Inexperienced members gain confidence while serving on the committee.
(e) Matters may be examined in more details by a committee.
The committees which are to be constituted for good corporate governance are:
- Audit cominittee (mandatory under Regulation 18 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, and Section 177 of Companies Act, 2013)
- Shareholders Grievance Committee [mandatory under Regulation 13 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015].
- Remuneration Committee.
- Nomination Committee.
- Corporate Governance Committee.
- Corporate Compliance Committee.
Question 8.
State any six important Regulations of SEBI: (LODR) Regulations 2015. (June 2012, 6 marks) [CSEP-II]
Answer:
Following are six important Regulations of SEBI (Listing obligations and Disclosure Requirements) Regulations, 2015;
| 1. Regulation 6 | Compliance officer and his obligations |
| 2. Regulation 17 | Board of Directors, its composition, meeting etc. |
| 3. Regulation 18 | Audit committee |
| 4. Regulation 19 | Nomination and remuneration committee |
| 5. Regulation 20 | Stakeholders relationship committee |
| 6. Regulation 21 | Risk Management Committee |
| 7. Regulation 22 | Vigil mechanism |
| 8. Regulation 23 | Related party transactions |
Question 9.
“With the globalisation and the complex regulatory requirements, the need to delegate oversight of certain areas to a specialist Board committee has become imperative.” In the light of this statement, discuss the need and advantages of such committees. (June 2013, 5 marks)
Question 10.
What do you mean by SME Exchange? Discuss the role of Company Secretary in the model SEBI (LODR) Regulations, 2015 laid down by SEBI for SMEs for the purpose of listing. (Dec 2013, 5 marks) [CSEP-II]
Answer:
1. Meaning of SME Exchange: It means a trading platform of a recognized stock exchange having nationwide trading terminals permitted by SEBI to list the specified securities issued in accordance with SEBI(lCDR) Regulation. It also includes a stock exchange granted recognition for this purpose but does not include the ‘Main Board’.
Here ‘Main Board’ means a recognized stock exchange having nationwide trading terminals, other than SME exchange.
2. Example: BSE and NSE h3ve started their SME listing platforms in India.
3. Role of Company Secretary; The roles of CS are as:
(a) All listed SMEs on SME platform are required to appoint the Company Secretary of the Issuer as Compliance Officer who will be responsible for monitoring the share transfer process and report to the Issuer board in each meeting. .
(b) The ‘Compliance Officer’ will directly liaise with the authorities such as SEBI, Stock Exchange, ROC etc., and investors with respect to implementation of various clause, rules, regulations and other directives of such authorities and investors service and complaints related matter.
(c) Further “Registrar and Transfer Agent” of a listed SMEs are required to produce a certificate from a practicing company secretary that all the transfers have been completed within the stipulated time and certification regarding compliance of conditions of Corporate Governance.
Question 11.
Discuss in brief the following:
Every listed company shall constitute a committee of the Board to be known as audit committee. [Old Syllabus] (June 2014, 2 marks)
Question 12.
Briefly explain the following terms and their relevance to good corporate governance practices:
Stakeholders relationship committee [Old Syllabus] (June 2014, 2 marks)
Answer:
Stakeholders Relationship Committee: According to Section 178 of the Companies Act, 2013, a company having a combined membership of more than 1,000 shareholders, debenture holders, deposit holder and other security holder at any time during a financial year shall constitute the Stakeholders Relationship Committee.
Question 13.
What is mandatory review of information by the audit committee? Discuss the information required to be reviewed by the audit committee. (June 2014, 4 marks)
Answer:
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; and
- the appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.
- statement of deviations:
(a) quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted to stock exchange(s) in terms of Regulation 32(1).
(b) annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice in terms of Regulation 32(7).
Question 14.
Briefly comment on the following:
A company can have as many non-mandatory committees as it would require for efficient oversight of the company. – (Dec 2014, 2 marks)
Answer:
A company may have as many non-mandatory committees as it would require for efficient oversight of the company. We will discuss about the committees which are generally constituted by corporate.
In addition to the Committees of the Board mandated by the Companies Act, 2013 viz, Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee and the CSR Committee, Board of Directors may also constitute other Committees to oversee a specific objective or project. The nomenclature, composition and role of such Committees will vary, depending upon the specific objectives of the company.
The non-mandatory committees depending upon the need like:
- Strategies Committee
- Capital Expenditure (Capex) Committee
- HR Committee
- Project Appraisal Committee
- Science, Technology & Sustainability Committee
- Regulatory,- Compliance & Government Affairs Committee.
Question 15.
Discuss the role of qualified and independent audit committee in good governance. (June 2015, 5 marks)
Answer:
Role of Audit Committee:
The role of the Audit Committee shall include the following:
- 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;
- Recommendation for appointment, remuneration and terms of appointment of auditors of the company;
- Approval of payment to statutory auditors for any other services rendered by the statutory auditors;
- Reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to:
(a) Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of Clause(c) of sub-section 3 of Section 134 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 - Reviewing, with the management, the quarterly financial statements before submission to the board for approval;
- 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;
- Review and monitor the auditor’s independence and performance, and effectiveness of audit process;
- 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;
- Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems;
- Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit;
- Discussion with internal auditors of any significant findings and follow up there on;
- 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;
- 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;
- 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;
- To review the functioning of the Whistle Blower mechanism;
- Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person heading the finance function or discharging that function) after assessing the qualifications, experience and background, etc. of the candidate;
- Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.
- Reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding rupees 100 crore’br 10% of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as on the date of coming into force of this provision.
- Consider and comment on rationale, cost-benefits and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.
Question 16.
Why do companies set-up remuneration committee and what is its role in companies? (June 2015, 5 marks)
Answer:
The company through its Board of Directors shall constitute the remuneration committee which shall comprise at least three directors, all of whom shall be non-executive directors and at least half shall be independent. Chairman of the committee shall be an independent director. Provided that the chairperson of the company (whether executive or non-executive) may be appointe d as a member of the Remuneration Committee but shall not chair such Committee.
The role of the committee shall, inter-alia, include the following:
1. formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees;
- A. For every appointment of an independent director, the Nomination and RemunerationCommittee shall evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description. For the purpose of identifying suitable candidates, the Committee may:
a. use the services of an external agencies, if required;
b. consider candidates from a wide range of backgrounds, having due regard to diversity; and
c. consider the time commitments of the candidates. - formulation of criteria for evaluation of performance of independent directors and the board of directors;
- devising a policy on diversity of board of directors;
- identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and ‘ removal.
- whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.
- recommend to the board, all remuneration, in whatever form, payable to senior management.
The Chairman of the remuneration committee could be present at the Annual General Meeting, to answer the shareholders’ queries. However, it would be up to the Chairman to decide who should answer the queries.
Question 17.
Elucidate the following:
Board committees (Dec 2016, 5 marks)
Answer:
Board committees are pillars of corporate governance. In this background, the board constitutes various committees, statutory as well as non-statutory, as a means of improving board effectiveness and efficiency where more focused, specialized and technically oriented discussions are required. Committees prepare the ground work for decision making and report at the subsequent board meetings. Further, committees enable better management of the board’s time and allow in-depth scrutiny and focused attention.
It is a widely held view that committees:
- Review information in greater detail before it is placed before the board.
- Manage issues with greater efficiency by having experts focusing on specific matters.
- Provide an objective and independent insight into board’s functioning and judgment.
Question 18.
Discuss the duties of the nomination and remuneration committee. (Dec 2016, 5 marks)
Answer:
Role of Nomination and Remuneration Committee: [Regulation 19(4)] Role of Committee shall, inter-alia, include the following:
- formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees;
1 A. For every appointment of an independent director, the Nomination and Remuneration Committee shall evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description. For the purpose of identifying suitable candidates, the Committee may:
a. use the services of an external agencies, if required;
b. consider candidates from a wide range of backgrounds, having due regard to diversity; and
c. consider the time commitments of the candidates. - formulation of criteria for evaluation of performance of independent directors and the board of directors;
- devising a policy on diversity of board of directors;
- identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal.
- whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.
- recommend to the board, all remuneration, in whatever form, payable to senior management.
Question 19.
“The committees are a sub-set of the Board, deriving their authority from the powers delegated to them by the Board.” In the light of above statement, discuss the need and advantage of committee management. (Dec 2016, 5 marks)
Answer:
Question 20.
Discuss the rationale behind composition of Board Committees. (Dec 2017, 5 marks)
Answer:
Board committees are pillars of corporate governance. The board constitutes various committees, statutory as well as non-statutory, as a means of improving board effectiveness and efficiency where more focused, specialized and technically oriented discussions are required. Committees prepare the ground work for decision making and report at the subsequent board meetings. Further, committees enable better management of the board’s time and allow in-depth scrutiny and focused attention.
Committees allow the board to handle larger number of issues with greater efficiency by having experts focusing on specific matters. Committees review information in greater detail and provide the board with an objective and independent insight into board’s functioning and judgment.
Greater specialization and intricacies of modern board work is one of the reasons for increased use of board committees. Some advantages of committees include:
- Responsibilities are shared;
- More members become involved;
- Specialized skills of members can be used to best advantage;
- Inexperienced members gain confidence while serving on the committee; and
- Matters may be examined in more detail by a committee.
Question 21.
Answer the following in brief:
Discuss the composition of Corporate Social Responsibility Committee with reference to the statutory provisions applicable. (June 2018, 2 marks)
Answer:
Composition of CSR:
Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding 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.
Question 22.
Discuss the functions of Nomination and Remuneration Committee. (June 2018, 5 marks)
Answer:
Functions of Nomination and Remuneration Committee:
- formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees;
1 A. For every appointment of an independent director, the Nomination and Remuneration Committee shall evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description. For the purpose of identifying suitable candidates, the Committee may:
a. use the services of an external agencies, if required;
b. consider candidates from a wide range of backgrounds, having due regard to diversity; and
c. consider the time commitments of the candidates. - formulation of criteria for evaluation of performance of independent directors and the board of directors;
- devising a policy on diversity of board of directors;
- identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal.
- whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.
- recommend to the board, all remuneration, in whatever form, payable to senior management.
Question 23.
Your Company is planning to get listed in the stock exchange of India. As a Company Secretary, provide constitution of Audit Committee under the Section 177(2) of the Companies Act, 2013 and the changes as per Regulation 18 of 3EBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, for the consideration of Chairman of your company. (Dec 2018, 5 marks)
Answer:
Section 177(1) of the Companies Act, 2013 read with rule 6 of the Companies (Meetings of the Board and is Powers) Rules, 2014 provides that the Board of directors of following companies are required to constitute a Audit Committee of the Board.
- All listed companies;
- All public companies with a paid up capital of 10 crore rupees or more;
- All public companies, having turnover of 100 crore rupees or more;
- All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.
Section 177(2) of the Companies Act, 2013 provides that the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. The majority of members of Audit Committee including its Chairperson Shall be persons with ability to read and understand, the financial statement.
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.
Regulation 18(1) of SEBI Listing Regulations, 2015 provides that every listed entity shall constitute a qualified and independent audit committee in accordance with its terms of reference, subject to the following:
(a) The audit committee shall have minimum three directors as members.
(b) At least two-thirds of the members of audit committee shall be independent directors and in case of a listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors.
(c) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
(d) The chairperson of the audit committee shall be an independent director and he/she shall be present at Annual general meeting to answer shareholder queries.
(e) The Company Secretary shall act as the secretary to the audit committee.
(f) 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. However, occasionally the audit committee may meet without the presence of any executives of the listed entity.
Question 24.
“The committees are formed as means of improving Board’s effectiveness and efficiency in the areas where more focused, specialized and technical discussions are required”.
Evaluate the statement by bringing out the needs and significance of committees. (Dec 2018, 5 marks)
Answer:
Committees are usually formed as a means of improving board effectiveness and efficiency, in areas where more focused, specialized and technical discussions are required. These committees prepare the groundwork for ‘ decision-making and report at the subsequent board meeting.
Board committees are pillars of corporate governance. Board committees with formally established terms of reference, criteria for appointment, life span, role and function constitute an important element of the governance process and should be established with clearly agreed reporting procedures and a written scope of authority. A Board can. either delegate some of its . powers to the committee, enabling it to act directly, or can require the recommendations of the committee to be approved by the Board. Committees thus enable better management of the board’s time and allow in-depth scrutiny and focused attention.
Thus Committees have the following important roles :
- to strengthen the governance arrangements of the company and support the Board in the achievement of the strategic objectives of the company;
- to strengthen the role of the Board in strategic decision making and supports the role of non-executive directors in challenging executive management actions;
- to maximise the value of the input from non-executive directors, given their limited time commitment;
- to support the Board in fulfilling its role, given the nature and magnitude of the agenda.
Significance of Board Committees:
- To improve Board effectiveness and efficiency.
- Minor details needs to be evaluated/analysed to arrive at a logical conclusion This requires body having expertise in subject matter, a Board Committee shall in such cases assist the Board and given well considered recommendations to the Board.
- Insulate Board from potential undue influence of controlling shareholders and managers.
- Committees prepare groundwork for decision making and submit their recommendations to the Board for decision making.
- Enables better management of Board’s time and allows in-depth scrutiny of proposals.
- Establishing committees is one way of managing the work of the Board and strengthening the Board’s governance role.
Question 25.
What are the applicable legal/regulatory provisions regarding Stakeholders Relationship Committee? You, as practicing Company Secretary, advise the board mentioning the provisions relating to the Composition and Functions of the Committee. (Dec 2018, 5 marks)
Answer:
Provisions regarding Stakeholders Relationship Committee
Section 178(5) of the Companies Act 2013 provides that the Board of Directors of following companies shall constitute a Stakeholders Relationship
Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board;
- Company which consists of more than one thousand shareholders, debenture holders, deposit holders and any other security holders at any time during a financial year.
- The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.
Regulation 20 of DEBI (LODR) Regulations, 2015 provides that every listed entity shall constitute a Stakeholders Relationship Committee to specifically look into the mechanism of redressal of grievances of shareholders, debenture holders and other security holders.
Composition of the Committee
Section 178(5) of the Companies Act 2013 and Regulation 20 of SEBI (LODR) Regulations, 2015 provides that-
- Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director.
- Other members of the committee shall be decided by the Board.
The chairperson of the committees or, in his absence, any other member of the committee authorised by him in this behalf is required under the section to attend the general meetings of the company.
Functions of the Committee
The main function of the committee is to consider and resolve the grievances of security holders of the company.
The role of the Stakeholders. Relationship Committee shall be to consider and resolve the grievances of the . security holders of the listed entity including complaints related to transfer of shares, non-receipt of annual report and non-receipt of declared dividends.
Question 26.
Which categories of companies are required to have Audit Committee of Board (ACB) as per the Companies Act, 2013 and as per the SEBI (LODR) Regulations, 2015. (June 2019, 3 marks)
Answer:
Section 177(1) of the Companies Act, 2013 Provides that the Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 states that “the Board of directors of every listed public company and a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’. The class of companies covered under Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 are:
- All listed public companies
- All public companies with a paid up capital of 10 crore rupees or more
- All public companies having turnover of 100 crore rupees or more
- All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.
Regulation 18(1) of SEBI Listing Regulations, 2015 provides that every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference.
Question 27.
Prepare a detailed note on ICSI Recommendations to strengthen Corporate Governance framework. (Dec 2019, 3 marks)
Answer:
ICSI Recommendations to strengthen Corporate Governance framework suggests for constitution of Corporate Compliance Committee on mandatory basis in respect of ail public limited companies having a paid-up capital of ₹ 5 crore or more.
The charter of the committee may include:
- To oversee the Company’s compliance efforts with respect to relevant Company policies, the Company’s Code of Conduct, and other relevant laws and regulations and monitor the Company’s efforts to implement legal obligations arising from agreements and other similar documents.
- To review the Company’s overall compliance programme to ensure that it is well communicated, supports lawful and ethical business conduct by employees, and reduces risk to the Company for non compliance with laws and regulations related to the Company’s business.
- To review complaints received from internal and external sources, regarding matters other than the financial matters which are within the purview of the Audit Committee.
- To periodically present to the Board for adoption appropriate changes to the policies, arid oversee implementation of and compliance with these policies.
- To review regularly the company’s compliance risk assessment plan.
- To investigate or cause to be investigated any significant instances of non-compliance, or potential compliance violations that are reported to the committee.
- To coordinate with other committees regarding matters brought to the committees attention that relate to issues of compliance with applicable laws and regulations.
- Regularly report to the Board on the Committee’s activities, recommendations and conclusions.
- To discuss any significant compliance issues with the Chief Executive officer.
- To periodically report to the Board and CEO on the adequacy and effectiveness of the company’s compliance programme.
- To retain at the company’s expense, independent advisors to assist the committee with carrying out its responsibilities from time to time.
- To perform such other duties and responsibilities as may be assigned to the committee by the board.
Question 28.
During the Meeting of Audit Committee of PQR Ltd. (BSE Listed Company), the member of the Audit Committee so desired to detailed information on material management control at depot. He also required the financial control system on material movement. The Project Head opined that Audit Committee has no such power. In light of the provisions of the Companies Act, 2013 and SEBI (LODR). Regulations 2015, explain whether such information can be called by Audit Committee. What penal provisions are applicable in case of Audit Committee is not constituted as per section 177 of the Act? (Aug 2021, 5 marks)
Answer:
Powers of the Audit Committee
| Section 177 (5),(6) and (7) of the Companies Act, 2013 | Regulation 18(2)(c) of the SEBI Listing Regulations, 2015 |
| 1. The Audit Committee has the power 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 and may also discuss any related issues with the internal and statutory auditors and the management of the company. [Section 177(5)]. | The Audit committee shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice and secure attendance of out siders with relevant expertise, if it considers necessary. |
| 2. Audit Committee shall have authority to investigate into any matter in relation to the items specified in terms of reference or referred to it by the Board and for this purpose the Committee has power to obtain professional advice from external sources. The Committee for this purpose shall have full access to information contained in the records of the company. [Section 177(6)] | |
| 3. 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. [Section 177(7)] |
As per section 178(8) of the Companies Act, 2013, in case of any contravention of the provisions of section 177 of the Companies Act, 2013, the Company shall be liable to a penalty of ₹ 5 Lakhs and every officer of the Company who is in default shall be liable to a penalty of ₹ 1 Lakh.
Question 29.
ICSI Recommendations to strengthen Corporate Governance framework suggests for constitution of Corporate Compliance Committee on mandatory basis. If such recommendations are accepted by competent authority, what will be the applicability? Highlight any 3 major functions, that may be included in charter of the Committee. (Aug 2021, 3 marks)
Answer:
ICSI Recommendations to strengthen Corporate Governance framework suggests for constitution of Corporate Compliance Committee on mandatory basis in respect of all public limited companies having a paid-up capital of ₹ 5 crore or more.
The charter of the committee may include:
- To oversee the Company’s compliance efforts with respect to relevant Company policies, the Company’s Code of Conduct, and other relevant laws and regulations and monitor the Company’s efforts to implement legal obligations arising from agreements and other similar documents;
- To review the Company’s overall compliance programme to ensure that it is well communicated, supports lawful and ethical business conduct by employees, and reduces risk to the Company for non-compliance with laws and regulations related to the Company’s business;
- To review complaints received from internal and external sources, regarding matters other than the financial matters which are within the purview of the Audit Committee;
- To periodically present to the Board for adoption appropriate changes to the policies, and oversee implementation of and compliance with these policies;
- To review regularly the company’s compliance risk assessment plan;
- To investigate or cause to be investigated any significant instances of non-compliance, or potential compliance violations that are reported to the committee;
- To coordinate with other committees regarding matters brought to the committees attention that relate to issues of compliance with applicable laws and regulations;
- Regularly report to the Board on the Committee’s activities, recommendations and conclusions;
- To discuss any significant compliance issues with the Chief Executive officer;
- To periodically report to the Board and CEO on the adequacy and effectiveness of the company’s compliance programme;
- To retain at the company’s expense, independent advisors to assist the committee with carrying out its responsibilities from time to time;
- To perform such other duties and responsibilities as may be assigned to the committee by the board.
Question 30.
Infowin Ltd. has been pioneer in corporate governance practices. The Board is comprised of appropriate mix of independent and executive directors to separate Board functions of governance and management. The Board comprises of fifteen members with seven executive directors and eight independent directors. Responsibilities of the Chairman, f CEO (Chief Executive Officer) and COO (Chief Operating Officer) have been clearly defined and they have to make periodic presentations before the t Board on their responsibilities, targets and performance. The Board is ‘ responsible for selection of new directors and it delegates the selection of the new Board members to the Nomination and Remuneration Committee. The Nomination and Remuneration Committee recommends to the Board the induction of any new Board member. The Board also regularly works with the Chairman, CEO and the COO to determine the plans of internal succession of these posts in case of any emergency. The Board meets to review the quarterly results, discusses issues related to the company’s financial performance and the shareholders’ interests. The independent directors are always kept up to date with the information regarding the company by the Board through separate meetings arranged at regular intervals. The Board currently has five committees namely, Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, Corporate Social Responsibility Committee and Investment Committee. The COO and CEO deal with interaction of the Board with the clients, employees, institutional investors, the government and press. The risk management is dealt with by the Board with the help of the Audit Committee.
In light of the above, you are required to answer the following questions:
(i) How do independent directors on the Board help Infowin Ltd. to. formulate best business policies?
(ii) What are the different committees formed as part of corporate governance of Infowin Ltd. and what role do these committees play? (June 2016, 5 marks each)
Answer:
(i) Independent directors are known to bring an objective view in board deliberations. They also ensure that there is no dominance of one individual or special interest group or the stifling of healthy debate. They act as the guardians of the interest of all shareholders and stakeholders, especially in the areas of potential conflict of interest. Independent directors bring a valuable outside perspective to the deliberations. They contribute significantly to the decision-making process of the Board. They can bring on objective view to the evaluation of the performance of Board and Management. In addition, they can play an important role in areas where the interest of management, the company and shareholders may converge such as executive remuneration, succession planning, changes in corporate control, audit function etc.
(ii) Audit Committee – Regulation 18: Minimum Numbers of Members -The audit committee shall have minimum three directors as members. Atleast 2/3rd shall be independent directors and in case of listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors.
Chairperson: Shall be independent director
No. of Meetings: Members shall meet at least 4 times in a calendar year & not more than 120 days shall elapse between 2 meetings.
Role: To review the management & auditor’s performance, financial statements etc.
Nomination and Remuneration Committee – Regulation 19:
Minimum Numbers of Members: At least three directors, all shall be non-executive director & at least 2/3rd of the directors shall be independent directors.
Chairperson: Shall be independent director
Role: To give recommendation to the Board regarding appointment/reappointment of the Board of Directors & Independent Directors and to evaluate the performance of them.
Quorum: The quorum for a meeting of the nomination and remuneration committee shall be either two members or one third of the members of the committee, whichever is greater, including at least one independent director in attendance.
Meeting: The risk management committee shall meet at least once in a year.
Risk Management Committee – Regulation 21:
Applicability: The provisions of this regulation shall be applicable to top 1000 listed entities earlier the same was to be applicable to top 500 listed entities. Composition: The Risk Management Committee shall have minimum three members with majority of. them being members of the board of directors, including at least one independent director and in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk Management Committee shall comprise independent directors. Number of meetings: At least twice in a year, and not more than one hundred and eighty days shall elapse between any two consecutive meetings. Quorum: Two members or one third of the members of the committee, whichever is higher, including at least one member of the board of directors in attendance.
Roles and responsibilities: the role and responsibilities of the Risk Management Committee shall mandatorily include the performance of functions specified in Part D of Schedule II
Question 31.
You are the Company Secretary of ABC Ltd., the turnover of your company as per last audited financial statement has crossed ₹ 100 crore. As per requirement of Section 177(i) of the Companies Act, 2013 your company is required to constitute an Audit Committee. Board of Directors of the company has asked you to draft the composition of audit committee. Keeping in view the provisions of Companies Act, 2013 and Listing Obligations and Disclosure Requirement (LODR), 2015 prepare a note for the composition of audit committee. (Dec 2017, 5 marks)
Answer:
Note on Composition of Audit Committee
| Section 177(2) of the Companies Act, 2013 | Regulation 18(1) of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 |
| Audit Committee shall consist of a minimum of three directors. | Audit Committee shall consist of a Minimum three directors as members. |
| Independent directors should form a majority. (Not applicable for Section 8 companies vide notification no. GSR 466(E), dated 5-6-2015) | At least two-thirds (2/3rd) of the members shall be independent directors and in case of listed entity having outstanding SR equity share, the audit committee shall only comprise of independent directors. |
| Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement. | All members of audit committee shall be financially literate and at least 1 (one) member shall have accounting or related financial management expertise. |
| The Chairperson of the audit committee shall be an independent director and he shall be present at AGM to answer shareholder queries. | |
| The Company Secretary shall act as the secretary to the audit committee. | |
| 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. However, occasionally the audit committee may meet without the presence of any executives of the listed entity. |
Draft Resolution for the appointment of Audit Committee “RESOLVED THAT pursuant to the provisions of Section 177 of the Companies Act, 2013, Regulation 18(1) of the SEBI (LODR) Regulations, 2015 and Article No. __________________ of the Articles of Association of the Company, the Board hereby constitute the Audit Committee consisting of the following directors of the company:
| Name | Designation | Position in the committee |
| 1. Mr. X | Director (Independent Director) | Chairman |
| 2. Mr. Y | Director (Independent Director) | Member |
| 3. Ms. Z | Managing Director | Member |
RESOLVED FURTHER THAT the Audit Committee shall have the terms of reference in accordance with the provisions of Section 177 of the Companies Act, 2013 and Regulation 18(1) of the SEBI (LODR) Regulations, 2015.
RESOLVED FURTHER THAT the quorum of Audit Committee shall either be two members or one third of the members of the audit committee, whichever is greater, with at least two independent directors.”
Question 32.
The Audit Committee of Polar Ltd., a company listed with BSE, consists of three directors, Ashish, Nitin and Rekha. Ashish is the chairman of the Audit Committee and is also the CEO of Polar Ltd., Nitin and Rekha are independent directors and all three directors are financially literate. Rekha is a Chartered Accountant with more than 15 year’s experience in finance and accounting.
Discuss the above constitution of the Audit Committee in the light of the legal requirements in this regard. (Dec 2020, 5 marks)
Answer:
As per Regulation 18 of SEBI (LODR) Regulations, 2015, Every listed entity shall constitute a qualified and independent audit committee and shall have minimum three directors as members. At least two-thirds of the members of audit committee shall be independent directors and in case of a listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. The chairperson of the audit committee shall be an independent director and he shall be present at Annual general meeting to answer shareholder queries.
Question 33.
Arham Logistics Limited, a listed company, has duly constituted an Audit Committee. One of the matters considered by the Audit Committee, was quarterly internal audit report. Board was informed by Chairman of the Audit Committee that there was no adverse remark reported in the internal audit report. An independent Director requested a copy of internal audit report, which was denied by CFO stating that it is only the prerogative of Audit Committee to consider internal audit report and hence copy of the same need not be placed in the Board meeting or circulated. Based on the above facts, answer the following questions:
(a) Whether this stand taken by CFO will amount to undermining the authority of the Board of Directors?
(b) What is the role of Chairman of the Audit Committee?
(c) What is the role of Chairman of the Board of Directors?
(d) Not providing the copy will hot make other directors liable for any unusual observation in internal audit report.
(e) Is the principle of transparency flouted? (June 2022, 4 marks each)
Question 34.
Surabhi Pharmaceutical Ltd. is a listed company. The Board of the Company comprises of following:
Mr. AG, Chairman (Executive)
Mr. RS, Managing Director Mr. AR, Whole-Time Director
Mr. DS, a Cost Accountant by profession, Nominee Director of XYZ Bank and Member of the Audit Committee
Mr. UB, Practicing Advocate (Independent Director)
Mr. SP, retired Chairman of a Bank and Member of Audit Committee (Independent Director)
Ms. KV, a practising Chartered Accountant and Chairman of Audit Committee (Independent Director)
Due to certain personal issues, Ms. KV resigned from the directorship with effect from 01.04.2021. What immediate steps the Company should take to comply with the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to composition of the Board and Audit Committee? (June 2022, 5 Marks)
Board Committees Notes:
Selection Committee/Nomination Committee:
To select Board members, to select a CEO, to select key managerial and senior management personnel
Safety, Health & Environment Committee:
To take care of the safety measures, prevention and effective disposal of the hazardous materials during the course of manufacturing and taking of care of sustainability development.
Marketing and Public Relations Committees:
To identify new markets; build relationship with media and public, etc.
Mandatory Committees under the Companies Act, 2013:
- Audit Committee
- Nomination and Remuneration Committee
- Stakeholders Relationship Committee
- Corporate Social Responsibility Committee
Mandatory Committees under the SEBI (LODR) Regulations, 2015:
- Audit Committee
- Nomination and Remuneration Committee
- Stakeholders Relationship Committee
- Risk Management Committee
Audit Committee-Regulation 18:
- Minimum Numbers of Members – The audit committee shall have minimum three director as members. Atleast 2/3rd of the members of audit committee shall be independent directors and in case of listed eqtity having outstanding SR equity share the audit committee shall only companies of independent directors.
- Chairperson: Shall be independent director
- No. of Meetings – Members shall meet at least 4 times in a calendar year and not more than 120 days shall elapse between 2 meetings.
- Role – To review the management and auditor’s performance, financial statements etc.
Nomination and Remuneration Committee – Regulation 19:
- Minimum Numbers of Members: At least three directors, all shall be non-executive director & at least 2/3rd of the directors shall be independent directors.
- Chairperson: Shall be independent director
- Role: To give recommendation to the Board regarding appointment/ reappointment of the Board of Directors and Independent Directors and to evaluate the performance of them.
- Quorum: The quorum for a meeting of the nomination and remuneration committee shall be either two members or one third of the members of the committee, whichever is greater, including at least one independent director in attendance.
- Meeting: The nomination and remuneration committee shall meet at least once in a year.
Stakeholders Relationship Committee – Regulation 20:
- Minimum Numbers of Members: No minimum criteria. The Chairperson of the Stakeholders Relationship Committee shall be present at the annual general meetings to answer queries of the security holders.
- Chairperson: Shall be Non-executive Director
- Role: To consider and resolve grievances of security holders.
- Directors: At least three directors, with at least one being an independent director, shall be members of the Committee and in case of listed entity having outstanding SR equity shares, at least 2/3 of the Stakeholders Relationship Committee shall comprise of independent directors.
- Presence: The Chairperson of the Stakeholders Relationship Committee shall be present at the annual general meetings to answer queries of the security holders.
- Meeting: The stakeholders relationship committee shall meet at least once in a year.
Risk Management Committee – Regulation 21:
- Minimum Numbers of Members: Shall have minimum three members with majority of them being members of the board of directors, including at least one independent director and in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk Management Committee shall comprise independent directors.
- Chairperson: Shall be the member of Board Role: To monitor & review risk management plan.
- Meeting: The risk management committee shall meet at least twice in a year.
Fraud Monitoring Committee:
Pursuant to the directions of the RBI, the Bank has constituted a Fraud Monitoring Committee, exclusively dedicated to the monitoring and following up of cases of fraud involving amounts of ? 1,00,00,000/- (Rupees One Crore Only) and above. The objectives of this Committee are the effective detection of frauds and immediate reporting of the frauds and actions taken against the perpetrators of frauds to the concerned regulatory and enforcement agencies.