In the world of corporate governance, committees play a vital role in ensuring that companies operate within a regulatory framework that promotes transparency and efficiency. Under the Companies Act, 2013 , and SEBI (LODR) Regulations, 2015, various committees can be formed to fulfill specific tasks and responsibilities within an organization. The constitution of these committees can be either temporary or permanent, depending on the business needs. This article explores the different committees that may be formed and the mandatory ones as stipulated by law.
Need For Committees
Committees can be established on a short-term or temporary basis, or they can be formed as a permanent body for ongoing work. With increasing business complexities and time commitment of Board members, constituting committees has become inevitable for organization of any significant size.
There are various committees which may be formed by an organization which are as followed;
- Selection Committee/Nomination Committee: To select Board members, to select a CEO, to select key managerial and senior management personnel succession planning and remuneration advisory.
- Board development or Governance Committee: To look after/ administer/support Board members and committee members and other executive positions.
- Investment Committee: For advising to the board for investments of surplus finds of the Company.
- Risk Management Committee: To report to the board about potential risks factor and to suggest action point for risk mitigation.
- 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.
- Committee of Inquiry: To inquire into particular questions (disciplinary, technical, etc.)
- Finance or Budget Committees: To be responsible for financial reporting, organizing audits, etc.
- Marketing and Public Relations Committees: To identify new markets; build relationship with media and public, etc.
MANDATORY COMMITTEES OF THE BOARD:
1. Companies Act,2013 (For certain class of companies)
♦ Audit committee.
♦ Nomination and Remuneration Committee.
♦ Stakeholder Relationship Committee.
♦ Corporate Social Responsibility.
2. SEBI (LODR) Regulations,2015 (For listed companies)
♦ Audit committee.
♦ Nomination and Remuneration Committee.
♦ Stakeholder Relationship Committee.
AUDIT COMMITTEE
The constitution of Audit Committee is mandated under the Companies Act 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Constitution under Companies Act, 2013
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 every;
1. listed public company and
2. A company covered under 4 of the Companies (Appointment and Qualifications of Directors) Rule, 2014 are required to constitute an Audit Committee of the Board.
The rule 4 of the Companies (Appointment and Qualifications of Directors), Rules, 2014 provides the following class or classes of companies-
(i) All public companies with a paid up capital of 10 crore rupees or more;
(ii) All public companies having turnover of 100 crore rupees or more;
(iii) 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) of the Companies Act, 2013
Audit Committee shall consist of a minimum of three directors with independent directors forming a majority
Regulation 18(1) of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015
Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:
a) Audit Committee shall have minimum three directors as members.
b) Two-third 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 1 (one) member shall have accounting or related financial management expertise.
d) The chairperson of the audit committee shall be an independent director and he shall be present at AGM to answer shareholder queries
e) The Company Secretary shall act as the secretary to the audit committee.
NOMINATION AND REMUNERATION COMMITTEE
Constitution of Nomination and Remuneration Committee under the Companies Act 2013:
Section 178(1) of the Act read with rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 and Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, provides that the board of directors of following classes of companies is required to constitute a Nomination and Remuneration Committee of the Board-
(i) Every listed public 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.
Note : Section 178 shall not apply to Section 8 companies and specified IFSC public companies.
Constitution of Nomination and Remuneration under SEBI (LODR) Regulations, 2015:
Regulation 19(1) of the SEBI Listing Regulations, 2015 provides that the Board of all listed entity shall constitute the Nomination and Remuneration Committee.
a) The board of directors shall constitute the nomination and remuneration committee as follows: the Committee shall comprise of at least three (3) directors;
b) all directors of the committee shall be nonexecutive directors; and
c) at least 50% of the directors shall be independent directors and in case of a listed entity having outstanding SR equity shares, two thirds 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.
STAKEHOLDERS RELATIONSHIP COMMITTEE
Composition of the Stakeholders Committee Section 178(5) of the Companies Act 2013
The Board of Directors of a 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 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.
Regulation – 20 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
1. The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into various aspects of interest of shareholder the chairperson of this committee shall be a non-executive director.
2. At least three directors, with at least one being an independent director, shall be members of the Committee and in case of a listed entity having outstanding SR equity shares, at least two thirds 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.
4. 3(A) the stakeholders’ relationship committee shall meet at least once in a year.
CORPORATE SOCIAL RESPONSIBILITY COMMITTEE
Under Companies Act, 2013 Section 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014,
mandates that every company which fulfils any of the following criteria during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of Board consisting of three or more directors, out of which at least one director shall be an independent director-
- Companies having net worth of rupees 500 crore or more, or
- Companies having turnover of rupees 1000 crore or more or
- Companies having a net profit of rupees 5 crore or more.
Composition of the CSR Committee
- The CSR Committee shall consist of three or more directors.
- At least one director shall be an independent director. Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee with two or more directors.
- Rule 5(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, which deals with the matter relating to the CSR Committee, provides that-
(i) a company covered under sub-section (1) of section 135 which is not required to appoint an independent director pursuant to section 149(4), shall have its CSR Committee without such director.
(ii) a private company having only two directors on its Board shall constitute its CSR Committee with two such directors.
(iii) with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of subsection (1) of section 380 of the Act, (i.e. the person resident in India authorized to accept on behalf of the company, service of process and any notices or other documents) and another person shall be nominated by the foreign company.
Conclusion: The formation of committees within an organization is not merely a regulatory compliance but an essential aspect of corporate governance that ensures transparent and responsible management. By having specific committees to handle various facets of the company’s operations, organizations are better positioned to monitor their compliance with laws, manage risks, and align with their strategic objectives. While the Companies Act, 2013, and SEBI Regulations, 2015, have outlined clear guidelines for mandatory committees, companies must carefully consider their unique requirements and challenges to form other specialized committees that serve their interests best.
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