Corporate Governance - Audit committee (AC) - Vigil Mechanism

[hardeep sandhu]

Audit committee (AC)

• Relevant Provisions under Companies Act, 1956 – Section 292A, which requires establishment of audit committee by public company if it’s paid up capital is 5 crore or more.

• Corresponding Provisions under Companies Act, 2013 – Section 177, it provides that every listed company and such class or classes of companies as may be specified shall constitute audit committee (AC). Rules 6 of Companies (Meetings & Powers of Board) Rules, 2014 specify the classes of companies being all the public companies which fulfill any of the following given conditions:

• Paid up capital ≥ 10 crore; or
• Turnover ≥ 100 crore; or
• O/s loans or borrowings or debentures or deposits > 50 crore

These limits as existing on the last date of audited financial statement shall be taken.

Composition of audit committee

It shall have minimum 3 directors with independent directors in majority. [Section 177(2)]

Transition time period

• Already existing AC in a company shall be reconstituted as per section 177(2) within one year form the commencement of this act. As the provisions of this section are effective from April 1, 2014 therefore one year time period should be reckoned from this date.
• Also, in case a company which is not covered under section 292A of Companies Act, 1956 but fulfill the criteria as specified under Rule 6 of the above mentioned rules shall observe the compliance of section 177 within 1 year from the commencement of the said rules or appointment of Independent director whichever is earlier.

Functions of Audit Committee (AC)

As may be specified by the board in writing and including following:

1. Recommendation for appointment, remuneration and terms of appointment of auditors of the company;
2. Review and monitor the auditor’s independence and performance, and effectiveness of audit process;
3. Examination of the financial statement  and the auditors’ report thereon;
4. Approval or any subsequent modification of transactions of the company with related parties;
5. Scrutiny of inter-corporate loans and investments;
6. Valuation of undertakings or assets of the company, wherever it is necessary;
7. Evaluation of internal financial controls and risk management systems;
8. Monitoring the end use of funds raised through public offers and related matters.

Powers of Audit Committee (AC)

1. To call for the comments of the auditor regarding:

• Internal control;
• Scope of audit;
• Observation of audit;
• Review of Financial Statement,

before their submission to board

2. Discuss any related issues with internal and statutory auditor and management of company
3. Power to investigate for matters covered under functions of AC
4. Can obtain professional advice from external sources
5. Full access to information contained in the records of the company.

Disclosure in Board Report U/s 134:

• Composition of AC and
• Reasons for not accepting the recommendation of AC.

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Vigil Mechanism

The meaning of the term vigil is purposeful surveillance to guard or observe. Companies Act, 2013 has introduced new provisions relating to setting up by specified companies a mechanism known as ‘Vigil Mechanism’ for directors and employees to report genuine concerns [Section 177(9)]. Following provisions need to be complied with:

-         Every listed company and unlisted public company required to constitute audit committee, shall establish vigil mechanism,

-         There should be adequate safeguards against the victimization of person who use such mechanism,

-         There should be provision for direct access to chairperson of audit committee in appropriate or exceptional cases,

-         Disclosure of Vigil Mechanism establishment on company’s website and in Board report.

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Nomination & Remuneration Committee (NRC) and Stakeholders Relationship committee (SRC)

Companies Act, 2013, by section 178 has introduced new provisions whereby BOD shall form Nomination & Remuneration Committee (NRC) and Stakeholders Relationship Committee (SRC).

• It can be regarded as an imperative step from viewpoint of stakeholders, whose money is invested in the company as the conditions stipulated in this section will:

• Ensure company’s performance;
• Give a sense of safety to the stakeholders regarding their funds utilization;
• Avoid siphoning of funds by the directors or senior management.

1. Nomination & Remuneration Committee

• Now every listed company and such class or classes of companies as may be specified shall set up NRC.
• Specified companies - all the public companies which fulfill any of the following given conditions:
  • Paid up capital ≥ 10 crore; or
  • Turnover ≥ 100 crore; or
  • O/s loans or borrowings or debentures or deposits > 50 crore

Composition of NRC

It shall have 3 or more non executive directors of which atleast one half shall be independent director.

Functions of NRC

Nomination & Remuneration committee shall perform the following functions:

1. Identify the persons who are qualified to become directors and who may be appointed in senior management;
2. Recommend to the Board for appointment and removal of identified persons;
3. Carry out evaluation of every director’s performance;
4. Formulate the criteria for determining qualifications, positive attributes and independence of a director;
5. Recommend a policy to the board, relating to the remuneration for the directors, key managerial personnel and other employees.

Considerations while formulating Policy

1. 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;
2. Clear relationship between remuneration and performance;
3. Remuneration to directors, key management personnel and senior management should involve fixed and incentive pay;
4. Such policy shall also be disclosed in board’s report.

-       Senior Management- members of core management team (excluding board), all members of management one level below executive directors and including functional heads.

2.  Stakeholders Relationship Committee (SRC)

Board shall constitute Stakeholders Relationship Committee (SRC), if the company has more than 1000

• Shareholders and/or
• Debenture holders and/or
• Deposit holders and/or
• Any other security holder

Composition of SRC

• Chairperson: - who shall be non executive director
• Other members: - as may be decided by the board

Purpose of SRC

The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.

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Penal Provision

If the company fails to comply with the requirement of section 177 or section 178 then following penal provision are applicable:

-         Company shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to 5 lakhs.

-         Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.