Need for constitution of committees - Dr S. Chandrasekaran - - Article published in Business Advisor, dated July 10, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume VIII Part 1 July 10, 2014 9 Business Advisor
Need for constitution of committees
Dr S. Chandrasekaran
The shareholders are the owners of the company. They
entrust the management of the affairs of a company to
select individuals who may be the promoters,
professionals, nominees, independent and so on.
The individuals who control, and manage the affairs of
a company are directors and collectively named as the
Board of directors (Board).
The Board, subject to the provisions of all applicable
laws, shall act in good faith in order to promote the objects of the company
for the benefit of its members as a whole and in the best interest of the
company, its employees and other stakeholders.
The Board being the trustee of shareholders shall not achieve or attempt to
have any undue gain or advantage for itself. It has several duties and
responsibilities towards its shareholders, regulators, and all other
stakeholders. It has to comply with all applicable laws to the company in
letter and spirit and to protect the interest of community and environment
as a whole.
The role and responsibility of the Board is enormous and matters such as
protection of funds, compilation of financial results, related party
transactions are very important. The internal control and risk management
system has to be on top line of agenda for a Board.
It has prime responsibility towards the shareholders and the constitution of
the Board is very important to serve the shareholders and all stakeholders
besides the community. Even a slightest unintentional non-compliance is
viewed seriously and attracts severe penal consequences.
The role and responsibility of the Board is enormous and
matters such as protection of funds, compilation of financial
results, related party transactions are very important.

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Need of committees
The Board in order to achieve the desired results has to concentrate more
with select team members on particular issues. The structure of Board is a
key issue for good governance.
The Board, having control and responsibility for all affairs of the company
as a whole, feels comfortable by delegating some of its powers to the
selective directors by forming committees. A committee can be delegated
with a specific matter or general issues and would be required to do the
assigned task or give their recommendation or comments on certain matters
to the Board.
Normally, the role and responsibility of a committee is to make
recommendations to the Board and it is up to the Board to accept, modify or
reject the recommendations. However in recent times, regulators have given
more importance for constitution of committees and expect that if the Board
is not accepting some of the recommendations of a committee, it has to give
reasons for non-acceptance of such recommendations.
Advantages of committees
The committee being small in number with expertise and knowledge in
particular issues, would be able to devote more time and take a concrete
decision and recommend the same to the Board. There exist several reasons
for setting up of the committees and a few of them are:
 Better governance;
 Sharing of responsibilities;
 More involvement of members;
 Specialised skills of members can be used for best advantage;
 Detailed examination of matters by committees.
Besides above, experts can also be invited to share their experience and
knowledge for arriving at certain important decisions.
A committee can be delegated with a specific matter or
general issues and would be required to do the assigned task
or give their recommendation or comments on certain
matters to the Board.

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The Companies Act, 2013
The Companies Act, 2013 (The Act) has identified seven committees, out of
which four committees are mandatory for prescribed classes of companies.
The Board has to constitute such mandatory committees. They are:
1. Audit committee;
2. Nomination and remuneration committee;
3. Corporate social responsibility committee;
4. Stakeholders‘ relationship committee.
Apart from the above, the Act also stipulates the following event-based
committees. Such committees would be constituted by other agencies as
and when need arises to a particular company.
1. Advisory committee;
2. Committee of creditors;
3. Winding up committee.
Securities & Exchange Board of India:
Securities & Exchange Board of India (SEBI) is the regulator for the
securities market in India. The key objective of SEBI is to encourage healthy
and organised growth of the securities market in India and to provide
investor protection. Securities are listed in stock exchanges and SEBI
regulates stock exchanges for overall protection of all stakeholders. SEBI
gives its directions to stock exchanges to amend the listing agreement from
time to time and the recent such direction is of 17th April, 2014. The
amendments in the Clause 49 of the listing agreement will be effective from
1st October, 2014.
The proposed amended corporate governance clause in listing agreement
The Companies Act, 2013, has identified seven committees,
out of which four committees are mandatory for prescribed
classes of companies.

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has recognised three committees which are:
1. Audit committee;
2. Nomination and remuneration committee;
3. Stakeholders‘ relationship committee.
Besides, constitution of risk management committee shall be applicable to
top 100 listed companies by market capitalisation as at the end of the
immediate previous financial year.
Comparative analysis
Both the Act and Listing agreement have stipulated three common
committees, namely:
1. Audit committee;
2. Nomination and remuneration committee;
3. Stakeholders‘ relationship committee.
The comparative analysis of the above said committees is as under:
Audit committee
Nature As per Companies Act,
2013
As per Listing Agreement
Applicability Mandatory for every listed
company and all public
companies having -
 paid up capital of ten
crore rupees or more;
 turnover of one
hundred crore rupees
or more;
 in aggregate,
outstanding loans or
borrowing or
debenture or deposits
exceeding fifty crore
rupees.
Mandatory for all listed
companies.
Composition A minimum of three
directors with independent
directors forming a majority
 Minimum three
directors as
members.
 Two-thirds of the

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members of audit
committee shall be
independent
directors.
 The chairman shall
be an independent
director
Qualification
required of
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 one member shall
have accounting or related
financial management
expertise.
Terms of
reference
Includes the reference
specified in writing by the
Board which shall inter alia,
include -
 the recommendation
for appointment,
remuneration and
terms of appointment
of auditors of the
company;
 review and monitor
the auditor‘s
independence and
performance, and
effectiveness of audit
process;
 examination of the
financial statement
and the auditors‘
report thereon;
 approval or any
subsequent
modification of
transactions of the
company with related
parties;
 scrutiny of inter-
corporate loans and
investments;
 valuation of
The audit committee is
expected to play the
following role besides the
role prescribed under the
Act:-
i. To review the functioning
of the whistle blower
mechanism
ii. Approval of appointment
of CFO after assessing the
qualifications, experience
and background etc. of the
candidate
iii. To look into the reasons
for substantial defaults in
the payment to the
depositors, debenture
holders, shareholders and
creditors
iv. To review the
management discussion
and analysis of financial
condition and results of
operations
v. Reviewing with the

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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.
management, performance
of statutory and internal
auditors, adequacy of the
internal control systems.
vi. To review the
management letters/
letters of internal control
weaknesses issued by the
Statutory Auditors.
Meetings Not prescribed Audit committee shall meet
at least four times in a year
and not more than four
months shall elapse
between two meetings.
Quorum Not prescribed Either two members or one
third of the members of the
committee whichever is
greater, but there should
be a minimum of two
independent members
present.
Presence of
chairman of
audit committee
in annual
general meeting
Not prescribed Chairman of Audit
Committee shall be present
at the Annual General
Meeting to answer
shareholder queries.
Nomination and remuneration committee
Nature As per Companies Act,
2013
As per Listing Agreement
Applicability Mandatory for every listed
company and all public
companies having -
 paid up capital of ten
crore rupees or more;
 turnover of one
Mandatory for all listed
companies.

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hundred crore rupees
or more;
 in aggregate,
outstanding loans or
borrowings or
debentures or
deposits exceeding
fifty crore rupees.
Composition  The Committee shall
consist of three or
more non-executive
directors out of which
not less than one-half
shall be independent.
 Chairman of the
company may be
appointed as a
member but shall not
chair such
committee.
 As per listing
agreement also the
Committee shall have
the same composition
as prescribed in the Act
however chairman of
the committee shall be
an independent
director.
Terms of
reference
Terms of reference include -
 Identifying the
persons who are
qualified to become
directors and who
may be appointed in
senior management.
 To identify and
recommend to the
board for
appointment and
removal
 Formulation of the
criteria for
determining
qualifications,
positive attributes
and independence of
a director
 To recommend to the
board a policy, relating to
the remuneration for
directors, key managerial
personnel and other
employees.
Listing Agreement besides the
terms included in The Act
also include the following-
 Formulation of criteria
for evaluation of
independent directors
and the Board;
 Devising a policy on
Board diversity.

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Presence of
chairman of
committee in
general
meetings
The chairperson or in his
absence, any other member
of the committee authorised
by him in this behalf shall
attend the general meetings
of the company
The chairman of the
committee could be present at
the annual general meeting to
answer the shareholders‘
queries. However, it would be
upto the chairman to decide
who should answer the
queries.
Stakeholders’ relationship committee
Nature As per Companies Act, 2013 As per Listing Agreement
Applicability Mandatory for every company
which consists of more than
one thousand shareholders,
debenture holders, deposits
holders and any other
security holders at any time
during a financial year.
Mandatory for every listed
company.
Terms of
reference
Committee shall consider and
resolve the grievances of
security holders of the
company.
Committee shall consider
and resolve the grievances of
the security holders of the
company including
complaints related to transfer
of shares, non-receipt of
balance sheet, non-receipt of
declared dividends.
Other committees as per Companies Act, 2013
Corporate social responsibility (CSR) committee
The CSR committee finds its place in the Act for the first time as one of the
mandatory committees for particular class of companies which may be
listed and unlisted companies including private limited companies.
One way, it may be termed as old wine in new bottle since several industrial
houses are already engaged in such activities in different ways and
methods.

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The Act has spelt out the formation of such a committee in the following
manner:
Applicability - Companies having net worth of Rs 500 crore or more or
turnover of Rs 1000 crore or more or net profit of Rs 5 crore or more during
any financial year.
Composition - Three or more directors out of which at least one shall be an
independent director. Unlisted public company or private company which is
not required to appoint an independent director shall have its CSR
committee without such independent director. Further, a private company
having only two directors on its Board shall constitute its CSR committee
with two such directors.
The Act has provided one year time from commencement of applicable
provisions of the Act to the existing companies to comply with the
requirement of independent director. However, the companies are required
to constitute CSR committee with at least one independent director
immediately. Therefore, in view of above, companies that are required
to constitute the CSR committee can constitute such committee
without an independent director and continue to function as such and
have to appoint independent director on the Board as well as on the
committee before the expiry of said one year for complying with the
requirements of the applicable provisions of the Act.
Further, certain companies are required to have nomination and
remuneration committee as discussed above. Nomination and remuneration
committee has the responsibility to identity persons and determine his
independence for appointment as an independent director.
However, the committee itself is formed by having members in which half of
them shall constitute independent directors. Therefore, for the first time for
induction of independent directors, the Board will identify and induct
independent directors.
The Act has provided one year time from commencement of
applicable provisions of the Act to the existing companies to
comply with the requirement of independent director.

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The Board will then constitute the nomination and remuneration committee
with the required number of independent directors.
Role of CSR committee
The committee shall -
 formulate and recommend to the Board a CSR policy which shall
indicate the activities to be undertaken by the company as specified in
Schedule VII;
 recommend the amount of expenditure to be incurred on the activities
referred above monitor the CSR policy of the company from time to
time.
MCA has clarified that:-
1. CSR activities should be undertaken by the companies in project/
programme mode. One-off events such as marathons/ awards/ charitable
contribution/ advertisement/sponsorships of TV programmes etc. would not
be qualified as part of CSR expenditure.
2. Expenses incurred by companies for the fulfillment of any Act/
Statute of regulations (such as Labour Laws, Land Acquisition Act etc.)
would not count as CSR expenditure under the Companies Act.
3. Salaries paid by the companies to regular CSR staff as well as to
volunteers of the companies (in proportion to company‘s time/hours spent
specifically on CSR) can be factored into CSR project cost as part of the CSR
expenditure.
4. Expenditure incurred by foreign holding company for CSR activities in
India will qualify as CSR spend of the Indian subsidiary if, the CSR
expenditures are routed through Indian subsidiaries and if the Indian
subsidiary is required to do so as per section 135 of the Act.
5. Contribution to corpus of a trust/ society/ section 8 company etc. will
qualify as CSR expenditure as long as (a) the trust/ society/ section 8
company etc. is created exclusively for undertaking CSR activities or (b)
One-off events such as marathons/ awards/ charitable
contribution/ advertisement/sponsorships of TV programmes
etc. would not be qualified as part of CSR expenditure.

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where the corpus is created exclusively for a purpose directly relatable to a
subject covered in Schedule VII of the Act.
Other event based committees
As discussed above, the Act requires for constitution of event based
committees by the agencies as and when need arises to a particular
company. A brief on all such committees is discussed hereunder:
Committee of creditors
 The interim administrator appointed by the Tribunal for
determination of the measures that may be adopted with respect to
revival and rehabilitation of sick company, shall appoint a committee
of creditors with such number of members as he may determine, but
not exceeding seven and as far as possible a representative each of
every class of creditors should be represented in that committee.
 Interim administrator shall decide the holding of the meeting of the
committee of directors including appointment of its chairman.
 The interim administrator may direct any promoter, director or any
key managerial personnel to attend any meeting of the committee of
creditors and to furnish such information as may be considered
necessary by the interim administrator.
Winding up committee
 The committee is constituted on the application of Company
Liquidator to the Tribunal
 The committee is constituted to assist and monitor the progress of
liquidation proceedings by the Company Liquidator in certain areas
such as sale of assets, taking over of assets, payment of dividend, etc.,
and any other function as directed by the Tribunal.
 Winding up committee shall comprise of the following persons,
namely:—
(i) Official Liquidator attached to the Tribunal;
(ii) Nominee of secured creditors; and
The interim administrator may direct any promoter, director
or any key managerial personnel to attend any meeting of the
committee of creditors.

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(iii) A professional nominated by the Tribunal.
Advisory committee
 Tribunal may order for the constitution of an advisory committee
while passing an order of winding up of a company to advise the
Company Liquidator and to report to the Tribunal on such matters as
the Tribunal may direct
 The Company Liquidator shall be the chairman of the meetings of the
committee so formed.
 Committee to have a maximum of twelve members, being creditors
and contributories of the company or such other persons in such
proportion as the Tribunal may, keeping in view the circumstances of
the company under liquidation, direct.
 The Company Liquidator shall convene a meeting of creditors and
contributories, as ascertained from the books and documents, of the
company within thirty days from the date of order of winding up for
enabling the Tribunal to determine the persons who may be members
of the advisory committee.
 Committee shall have the right to inspect the books of accounts and
other documents, assets and properties of the company under
liquidation at a reasonable time.
Risk management committee prescribed by SEBI is featured below:
 The Board shall frame, implement and monitor the risk management
plan of the company and may delegate monitoring and reviewing of
the same and other functions as it may deem fit to risk management
committee.
 Board to define the roles and responsibilities of the committee.
Conclusion
The importance and need for constitution of committees is well recognised
by the Act as well as by the SEBI. The regulators also suggested the having
of directors with financial background on audit committee, independent
directors for all the committees to form independent judgment. The
committees have to meet at required intervals to achieve the desired results
and the very purpose of constitution of such committees. Committee is also
authorised to invite outside experts for consultation and advice besides,
involvement of management team in their proceedings. SEBI has also
inserted a condition that a director can utmost be a member of ten
committees and to act as chairman of five committees in all companies in
which he is a director. The corporate governance clause of listing agreement
requires once in a year the meeting of independent directors and since it is
not termed as committee, it does not find place in this article.
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)