Committees of Directors

BOARD COMMITTEES
A board committee is a small working group identified by the board, consisting of
board members, for the purpose of supporting the board’s work. Committees are
generally formed to perform some expertise work.
Members of the committee are expected to have expertise in the specified field.
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. Committees enable better management
of full board’s time and allow in-depth scrutiny and focused attention.
However, the Board of Directors are ultimately responsible for the acts of the
committee. Board is responsible for defining the committee role and structure.
Mandatory Committees of the Board are prescribed under Companies Act, 2013
(for certain class of companies) and SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 for listed companies.
Mandatory Committees under the Companies Act 2013 are:
• Audit Committee
• Nomination and Remuneration Committee
• Stakeholders Relationship Committee
• Corporate Social Responsibility Committee
AUDIT COMMITTEE
Audit Committee
Audit Committee is one of the main pillars of the corporate governance
mechanism in any company. The Committee is charged with the principal
oversight of financial reporting and disclosure and aims to enhance the
confidence in the integrity of the company’s financial reporting, the internal
control processes and procedures and the risk management systems.
The constitution of Audit Committee is mandated under the Companies Act, 2013
and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Under the Companies Act, 2013, the Audit Committee’s mandate is significantly
different from what was laid down under Section 292A of the Companies Act
1956, and its scope and constitution have also been broadened.

Constitution of Audit Committee

Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies
(Meetings of the Board and its Powers) Rules, 2014, provides that the Board of
directors of following companies are required to constitute a Audit Committee of
the Board-
(i) All listed companies
(ii) All public companies with a paid up capital of 10 crore rupees or more;
(iii) All public companies having turnover of 100 crore rupees or more;
(iv) All public companies, having in aggregate, outstanding loans or borrowings
or debentures or deposits exceeding 50 crore rupees or more.
The paid up share capital or turnover or outstanding loans or borrowings or
debentures or deposits, as the case may be, as existing on the date of last
audited financial statements shall be taken into account for the purposes of this
rule.

Composition of the Audit Committee Section [177(2)]

• Audit Committee shall consist of a minimum of three directors.
• Independent directors should form a majority. (Not applicable for Section 8
companies vide notification no. GSR 466(E), dated 5-6-2015)
• Majority of members of Audit Committee including its Chairperson shall be
persons with ability to read and understand the financial statements.
Note: “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. 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 CEO, CFO or other senior officer with financial oversight
responsibilities.

Functions/Role of the Audit Committee [Section 177(4)]

Every Audit Committee shall act in accordance with the terms of reference
specified in writing by the Board. Terms of reference as prescribed by the board
shall inter alia, include, –
(a) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
(b)
In case of Government Companies, in Clause (1) of sub-section (4) of section
177, for the words “recommendation for appointment, remuneration and terms
of appointment” the words “recommendation for remuneration” shall be
substituted - Notification No. GSR 463(E) dated 05-06-2015.

(b) review and monitor the auditor’s independence and performance, and
effectiveness of audit process;
(c) examination of the financial statements and the auditors’ report thereon;
(d) approval or any subsequent modification of transactions of the company with
related parties;
Provided that the Audit Committee may make omnibus approval for related party
transactions proposed to be entered into by the company subject to such
conditions as prescribed under rule 6A of the Companies (Meetings of Board and
its Powers) Rules, 2014;
(e) scrutiny of inter-corporate loans and investments;
(f) valuation of undertakings or assets of the company, wherever it is necessary;
(g) evaluation of internal financial controls and risk management systems;
(h) monitoring the end use of funds raised through public offers and related
matters.
Disclosure in Board’s Report
Section 177(8) of the Act provides that the board’s report shall disclose the
following –
• Composition of an Audit Committee
• Where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in the report along with the reasons
therefor.

Number of Meetings and Quorum:

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
provides for the minimum
number of meetings and quorum of the audit committee.
(i) The Audit Committee of a listed entity shall meet at least four (4) times in a
year and not more than
120 days shall elapse between two meetings. [Regulation 18(2)(a)]
(ii) The quorum for audit committee meeting shall either be
● 2 members, or
● 1/3rd of the members of the audit committee, whichever is greater;
● with at least 2 independent directors. [Regulation 18(2)(b)]
The requirement of minimum 2 independent directors in the meeting of Audit
Committee is new provision which must be complied by all the listed entities.

SECTION 178: Nomination and Remuneration Committee and

Stakeholders Relationship Committee
The Nomination and Remuneration Committee helps the Board of Directors in
the preparations relating to the election of members of the Board of Directors,
and in handling matters within its scope of responsibility that relate to the
conditions of employment and remuneration of senior management, and to
management’s and personnel’s remuneration and incentive schemes. The
responsibilities of the Nomination and Remuneration Committee are defined in
its policy document.

Except for certain large listed companies, the importance of constitution of the
Nomination and Remuneration Committee has not been realised fully in India.

The Board of directors of following companies shall constitute Nomination and

Remuneration Committee of the Board:
(a) Every listed Companies; or
(b) The following class of companies –
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings
or debentures or deposits exceeding fifty crore rupees or more.

After exemption notification dated 05.06.2015 the provisions of Section

178 of the Act are not
applicable to the Section 8 Companies.
The committee shall consist of three or more non-executive directors out of
which not less than one-half shall be independent directors.
The chairperson of the company may be appointed as member, but shall not
chair such committee.
As per section 178(2) of the Act, The Committee shall identify the person
qualified to become directors and may be appointed in senior management and
recommend their appointment and removal and also carry out evaluation of
every director.
As per section 178(3) of the Act, The Committee shall formulate the criteria, for
determining qualifications, positive attributes and independence of a director
and recommend to the Board the policy relating to remuneration for directors,
KMPs and other employees.

After exemption notification dated 05.06.2015, in case of the

Government Company provisions of Section 178(2),(3)and(4) shall apply
for the appointment of Senior management and other employees only.

The Stakeholders Relationship Committee

Section 178(5) of the Companies Act, 2013 provides for constitution of the
Stakeholders Relationship Committee. The Board of a company that has more
than one thousand shareholders, debenture-holders, deposit-holders and any
other security holders at any time during a financial year is required to 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.
The Stakeholders Relationship Committee shall consider and resolve the
grievances of security holders of the company.
The chairperson of each of the committees constituted under this section or, in
his absence, any other
member of the committee authorised by him in this behalf shall attend the
general meetings of the company.
Corporate Social Responsibility Committee
India has one of the richest traditions of CSR. Much has been done in recent
years to make Indian entrepreneurs aware of social responsibility as an
important segment of their business activity but CSR in India has yet to receive
widespread recognition. If this goal has to be realised then the CSR approach of
corporates has to be in line with their attitudes towards mainstream business-
companies setting clear objectives, undertaking potential investments,
measuring and reporting performance publicly.
One of the key changes in the Companies Act, 2013 is the introduction of a
Corporate Social Responsibility section making India the first country to mandate
CSR through a statutory provision. While CSR is not mandatory for companies,
the rules are in line with the ‘Comply or Explain’ principle with penalties
applicable only if an explanation is not offered. The provisions of the Section 135
of the Act may be summarized as under:
1. The Section applies to the following classes of companies during any financial
year:
(i) Companies having Net Worth of rupees five hundred crore or more;
(ii) Companies having turnover of rupees one thousand crore or more;
(iii) Companies having Net Profit of rupees five crore or more

2. The companies specified above shall constitute a Corporate Social

Responsibility Committee (CSR
Committee) of the Board.
A Company which ceases to be a company covered under the above three
threshold requirement to constitute CSR Committee for three consecutive
financial years shall not be required to constitute CSR Committee till such time it
meets the threshold as specified above. [Rule 3(2)]

3. The CSR Committee shall consist of three or more Directors, out of which at
least one Director shall be an Independent Director.

4. After taking into account the recommendations of the CSR Committee, the
Board shall approve the
CSR Policy for the company.

5. The contents of the Policy shall be disclosed in the Board’s report.

6. It shall also be placed on the Company ’s website, if any, in a manner to be
prescribed by the Central Government.
7. The Board shall ensure that the activities as are included in the CSR Policy
(from the activities as specified in Schedule VII) are undertaken by the Company.
The following additional features of the Section are relevant:
1. While spending the amount earmarked for CSR activities, the company shall
give preference to the local area and areas around it where it operates;
2. If the Company fails to spend the amount, the Board shall specify the reasons
for not spending the amount in the Board’s Report.
3. The eligible companies are required to spend in every financial year, at least
two per cent of the Average Net Profits of the Company made during the three
immediately preceding financial years in pursuance of its CSR Policy. For this
purpose, “Average Net Profit” shall be calculated in accordance with the
provisions of Section 198 of the Companies Act, 2013.

Other Board Committees

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 oversea a specific objective or project. The nomenclature,
composition and role of such Committees will vary, depending upon the specific
objectives of the company.
A few examples of such Committees prevalent in the corporate sector in India
and abroad are given below:
1. Corporate Governance Committee
2. Science, Technology & Sustainability Committee
3. Regulatory, Compliance & Government Affairs Committee