Comparative Analysis of Mandatory Committees under SEBI (LODR) Regulations, 2015 and Companies Act, 2013

Introduction to Committees

Committees can be said as a group of persons who work together for a common objective and perform a specific work requiring expertise knowledge.  

With this Objective, Board Committees are formed to perform following functions-

1. To enhance Board efficiency and effectiveness 

2. To help Board focus more on Corporate Governance

3. To research on specialized areas of Industry with expertise knowledge of persons involved in it

4. To Recommend to Board about new changes in Industrial and other policies.

Different Mandatory Committees 

Under Companies Act 

  • Audit Committee
    (Section 177)
  • Nomination and Remuneration Committee
    [Section 178(1) to (4)]
  • Stakeholder Relationship Committee
    [Section 178(5) to (8)]
  • Corporate Sustainability Responsibility Committee (Section 135)
    Vigil Mechanism (Section 177 + Rule 7 of Companies (Management and Administration) Rules,2014

Under SEBI (LODR) Regulations,2015 

  • Audit Committee (Reg.18)
  • Nomination and Remuneration Committee
    (Reg.19)
  • Stakeholder Relationship Committee (Reg.20)
  • Risk Management Committee(Reg.21)
  • Vigil Mechanism(Reg.22)

Regulation 18- Audit Committee 

The Listed entity shall constitute qualified and independent audit committee subject to following :- 

Constitution 
  • Minimum 3 directors as members 
  • 2/3 rd of members shall be independent directors
  • In case of entity having outstanding SR Equity shares, it shall consist of only Independent directors 
  • Chairperson shall be independent director and must be present at Annual General Meetings of meeting to answer shareholder’s queries 
  • Company Secretary shall act as Secretary 
Qualification 
  • All members shall be financially literate and 
  • At least 1 member shall have accounting or related financial management expertise 
Frequency of meeting 
  • At least 4 meetings must be held in a year 
  • Maximum gap between 2 meetings must not exceed 120 days 
Quorum of meeting
  • 2 members or ⅓ rd whichever is higher and at least 2 Independent directors 
Invitation of other members at meeting  Audit committee shall invite-

  • Finance director or head of the finance function
  • Heads of internal audit  
  • A representative of the statutory auditor 
  • Any other such executives to be present at the meetings of the committee. 

Note-

Occasionally it may meet without the presence of any executives of the listed entity.

Powers of Committee
  • 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.
Role to be specified in Schedule II Its role and information to be reviewed by it shall be as specified in Part C of Schedule II. 
Disclosure in Board Report
  • Composition of Audit Committee must be disclosed in Board Report 
  • In case Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons thereof.

Meaning of terms used above

1) Financial Literate ( Defined in Regulation 18 of SEBI( LODR) Regulations,2015

Means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.

2) Member considered having accounting or related financial management expertise ( Defined in Regulation 18 of SEBI( LODR) Regulations,2015 

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.

3) SR Equity Shares (Defined in Regulation 2(1)(eeea) of SEBI( Issue of Capital and Disclosure Requirements) Regulations,2019 

It means the Equity shares of an issuer having Superior Voting Rights compared to all other equity shares issued by that issuer. 

Regulation 22- Vigil Mechanism

(1) The listed entity shall formulate a vigil mechanism 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.

(3)It shall also provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases.

Audit Committee as per Companies Act (Section 177)

Applicability Applies to companies-

  • Every Listed Public Company 
  • Public Companies having Paid up Share Capital of 10 crore or more
  • Public Companies having Turnover of 100 crore or more
  • Public Companies having in aggregate outstanding loans,debentures,and deposits exceeding 50 crore 
Constitution
  • Minimum 3 directors 
  • Independent directors shall form majority 
Qualification Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.
Presence of other persons at Committee meeting  The auditors of a company and the key managerial personnel shall have a right to be heard when Committee considers the auditor’s report but shall not have the right to vote. 
Functions  (i)Recommendation for appointment, remuneration and terms of appointment of auditors of the company

(ii)Review and monitor the auditor’s independence and performance, and effectiveness of audit process

(iii)Examination of the financial statement and the auditors’ report thereon

(iv)Approval or any subsequent modification of transactions of the company with related parties.

Additional Provisions related to this clause- (Explained in Proviso to this point) 

  • It may provide Omnibus Approval for Proposed transactions with some prescribed conditions.
  • It may make recommendations to the Board in case of transactions not referred in Section 188 and in case any transaction not approved by it.
  • Above clause shall not apply to any transaction not referred in Section 188 and is between a holding company and its wholly owned subsidiary company. 

Consequence of Non Approval or Non- Ratification of Transaction by company (Explained in Proviso to this clause) 

  • If any transaction of amount not exceeding 1 crore Rupees entered by Director or Officer of Company, without taking Audit Committee’s Approval and not ratified within 3 months from transaction date, then- 

It shall be voidable at the option of Audit Committee.

  • In case above transaction is with any related party or is authorised by any other director, then concerned director shall indemnify company for such loss. 

(v) Scrutiny of inter-corporate loans and investments

(vi) Valuation of undertakings or assets of the company,wherever it is necessary

(vii) Evaluation of internal financial controls and risk management systems

(viii) Monitoring the end use of funds raised through public offers and related matters.

Powers
  • To investigate into any matter specified above or referred to it by the Board 
  • Power to obtain professional advice from external sources and have full access to information contained in the records of the company to perform its functions.
  • May call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors 
  • May Review financial statement before their submission to the Board 
  • May also discuss any related issues with the internal and statutory auditors and the management of the company. 
Disclosure in Board Report
  • Composition of Audit Committee must be disclosed in Board Report 
  • In case Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons thereof.

Provisions regarding Vigil Mechanism (Section 177 read with Rule 7)

Constitution  Every listed company and the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances-

  • Companies which accept deposits from the public;
  • Companies which have borrowed money from banks and public financial institutions > 50 crore rupees
Who shall oversee it 
  • In case company required to constitute Audit Committee – Audit Committee 
  • In case of other companies not required to constitute Audit Committee – Board of directors shall nominate a director to play the role of audit committee 
Functions
  • To provide adequate safeguards against victimisation of employees and directors who avail it.
  • To provide for direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit Committee in exceptional cases.
  • In case of repeated frivolous complaints being filed by a director or an employee, it may take suitable action against the concerned director or employee including reprimand.
Disclosure in Board Report and Website  Details of establishment of such mechanism shall be disclosed by the company in its Board Report and on its website,if any.

Exceptions and Non Applicability in some cases 

1. For Section 8 Company, Words Independent directors shall form majority used in Constitution Column, shall be omitted.

2. For Government Company, for words Recommendation for appointment, remuneration and terms of appointment used in Functions column above, Recommendation for remuneration, shall be substituted. 

3. This section shall not apply in case of Specified IFSC Public Company. 

Regulation 19-Nomination and Remuneration Committee

Constitution
  • At least 3 directors 
  • All shall be non-executive directors and
  • At least 50% shall be independent directors
  • In case of entity having outstanding SR Equity shares, it shall consist of 2/3rd Independent directors 
Chairperson
  • Shall be independent director
  • Chairperson of Listed Entity whether executive or non-executive can be member but can’t be Chairperson of this Committee
  • May be present at Annual General Meeting to answer Shareholder’s queries, however it shall be upto Chairperson to decide who shall answer the queries 
Role Specified as in Part D of the Schedule II.
Meetings At least once in a year.
Quorum for meetings

Higher of 1/3rd 

Or 

2 members 

And 

At least 1 independent director 

Nomination and Remuneration Committee as per Companies Act (Section 178) 

Applicability Applies to companies-

  • Every Listed Public Company
  • Public Companies having Paid up Share Capital of 10 crore or more
  • Public Companies having Turnover of 100 crore or more
  • Public Companies having in aggregate outstanding loans,debentures and deposits exceeding 50 crore rupees or more
Constitution
  • 3 or more non-executive directors out of which not less than one-half shall be independent directors 
  • Chairperson of the company (whether executive or non-executive) may be appointed as a member of the but shall not Chair such Committee.
Role
  • 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 
  • 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
  • Formulate Criteria for determining qualifications,positive attributes and independence of a director
  • Recommend to board a policy relating to remuneration for directors,Key Managerial Personnel and other employees.
Points to be kept in mind while formulating policy 

1. Level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully.

2. Relationship of remuneration to performance is clear and meets appropriate performance benchmarks.

3. 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.

Disclosure of Policy in Board Report and on Website
  • Remuneration policy shall be placed on the website of the company, if any
  • Salient features of the policy and changes therein, along with web address of the policy shall be disclosed in the Board’s report

Meaning of Senior Management (Explained in Section 178) 

Means Personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads.

Exceptions/ Modifications/ Adaptations

1. Provisions of this Committee shall not apply in case of Government Company except with regard to appointment of senior management and other employees. 

2. This section shall not apply in case of Section 8 company and Specified IFSC Public Company. 

Regulation 20-Stakeholders Relationship Committee 

Constitution
  • At least 3 directors and at least 1 independent director as members  
  • In case of entity having outstanding SR Equity shares, it shall consist of 2/3rd Independent directors 
  • Chairperson shall be non-executive director 
Functions To Look into various aspects of interest of shareholders, debenture holders and other security holders. 
Meetings At least once in a year. 
Chairperson
  • Non-Executive director
  • Shall be present in Annual general meetings to answer security holders’ queries. 
Role Specified as in Part D of the Schedule II.

Stakeholders Relationship Committee as per Companies Act-Section 178

Applicability Applies to company consist of more than 1000

  •  Shareholders,
  •  Debenture-holders,
  •  Deposit-holders and
  •  Any other security holders at any time during a financial year
Constitution
  • Chairperson who shall be a non-executive director and
  • Such other members as may be decided by the Board.
  • 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.
Role Consider and resolve the grievances of security holders of the company.

Penalty for Non-Constitution of Audit Committee, Nomination and Remuneration Committee and Stakeholder Relationship Committee under Companies Act (Section 178)

Company Fine

Minimum- 1 Lakh Rupees

Maximum- 5 Lakh Rupees

Every Officer of Company Fine

Minimum- 25,000 Rupees

Maximum- 1 Lakh Rupees 

               Or

Imprisonment

Maximum – 1 year 

               Or Both 

Relaxation from Penalty Inability to resolve or consider any grievance by Stakeholders Relationship Committee in good faith not to be constituted as contravention. 

Exceptions/ Modifications/ Adaptations

1. This section shall not apply in case of Section 8 company and Specified IFSC Public Company. 

Regulation 21-Risk Management Committee 

Applicability Applies to Top 500 Listed Entities determined on basis of Market Capitalisation at the end of Previous Financial Year 
Constitution
  • Shall be constituted by Board of Directors
  • Majority members shall be members of Board of Directors 
  • In case of entity having outstanding SR Equity shares, it shall consist of 2/3rd Independent directors 
  • Chairperson shall be a  member of Board of Directors
  • Senior Executives may be members of the Committee 
Role
  • Board of directors shall define the role and responsibility of the Risk Management Committee 
  • May delegate monitoring and reviewing of the risk management plan to the committee and 
  • Such other functions as it may deem fit ( specifically include Cyber security). 
Meetings At least once in a year. 

Under Companies act

There are no corresponding provisions related to Risk Management Committee under Companies act,2013.

Corporate Social Responsibility Committee Provisions under Companies Act(Section 135)

Applicability Applies to Company having –

  • Net worth of 500 crore rupees or more or
  • Turnover of 1000 crore rupees or more or
  • Net Profit of 5 crore Rupees or more

During immediately preceding financial year

Constitution
  • 3 or more directors out of which at least 1 shall be independent director
  • In case company not required to appoint independent director u/s 149(4) ,it shall consist of 2 or more directors
  • In case of private company having 2 directors, it shall consist of 2 directors
  • In case of foreign company,it shall consist of at least 2 persons of which-
  • 1 Person shall be Indian Resident authorised to accept documents and notices on behalf of foreign company
  • Other Person shall be nominated by foreign company 
Role

1. Formulate and recommend to the Board, a CSR Policy indicating the activities to be undertaken by the company in areas or subject, specified in  Schedule VII

2. Recommend the amount of expenditure to be incurred on the activities referred to in (1) and

3. Monitor the Corporate Social Responsibility Policy of the company from time to time

Role of Board The Board of every company shall —

  • After taking Committee’s recommendations approve CSR Policy
  • Ensure that activities included in CSR policy are undertaken by company 
Disclosure in Board Report and Website
  • Board shall disclose CSR Committee Composition in Board Report 
  • Board shall disclose contents of such Policy in its report and also place it on the company’s website, if any in prescribed manner 

 Under SEBI (LODR) Regulations,2015 

There are no corresponding provisions related to CSR Committee under SEBI (LODR) Regulations,2015

Author Bio

Qualification: CS
Company: Komal and Associates
Location: EAST DELHI, New Delhi, IN
Member Since: 15 Apr 2020 | Total Posts: 1

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