Category: Blog Posts

Compliance requirements under Companies Act, 2013

A company is a legal entity. All the matters of the company have to be decided by the members of the company. The discussions which takes place in order to decide the matters of the company as known as meeting of the company. The Companies Act, 2013 made meeting compliances to be followed. The meetings of the company for deciding on ordinary business and special business or extraordinary business takes place by following separate procedures and rules. The meetings may take place at different levels of the company to decide on matters which lie before the company. Shareholders as owners of the company have a right to convene a meeting to pass a resolution. The chairperson of the meeting precedes the meetings. A mandatory quorum is needed for the convention of a meeting. The discussions which take place in order to decide on the matters of the company are known as meetings of the company. The Companies Act contains many provisions in relation to the meetings of the company. In the case of Sharp vs. Dawes (1971), the meeting is defined as “An assembly of people for a lawful purpose” or “the coming together of at least two persons for any lawful purpose.”

Section 96 Annual General Meeting

  • Annual general meeting (AGM) is an important annual event where members get an opportunity to discuss the activities of the company. Section 96 provides that every company, other than a one person company is required to hold an annual general meeting every year.
  • Annual general meeting should be held once every year. First annual general meeting of the company should be held within 9 months from the closing of the first financial year. Hence it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation.
  • Subsequent annual general meeting of the company should be held within 6 months from the closing of the financial year. The gap between two annual general meetings should not exceed 15 months.
  • According to Section 166 of the Companies Act, the first meeting after incorporation of the company must be held within 18 months. In case, it is not possible for a company to hold an annual general meeting within the prescribed time, the Registrar may, for any special reason, extend the time within which any annual general meeting shall be held. Such extension can be for a period not exceeding 3 months. No such extension of time can be granted by the Registrar for the holding of the first annual general meeting.

Section 98 by Tribunal

  • Section 98 provides that if for any reason it is impracticable to call a meeting of a company or to hold or conduct the meeting of the company, the Tribunal may, either suo motu or on the application of any director or member of the company who would be entitled to vote at the meeting.
  • Order a meeting of the company to be called, held and conducted in such manner as the Tribunal thinks fit and give such ancillary or consequential directions as the Tribunal thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions of this Act or articles of the company.
  • Such directions may include a direction that one member of the company present in person or by proxy shall be deemed to constitute a meeting. Meeting held pursuant to such order shall be deemed to be a meeting of the company duly called, held and conducted.

Section 100 Extraordinary General Meeting

  • All general meetings other than annual general meetings are called extraordinary general meetings. All businesses items can be transacted at the extraordinary general meetings are special business.
  • Section 100(1) the board may whenever it deems fit call an extraordinary general meeting of the company.
  • Section 100 (2) by Board on Requisition.

Section 186 of the Companies Act

Company Law Board has the power to call an extraordinary general meeting but not an annual general meeting. Shareholders of the company are empowered to convene a meeting within 3 months if it is not convened within 21 days of requisition by the Company Law Board.

Section 177 of the Companies Act, 2013 deals with the Audit Committee.

  • It is desirable for the Audit Committee to meet at least 4 times a year. The meetings are preceded by the chairman.
Every company shall hold the first meeting of the Board of Directors within 30 days of the date of company incorporation. A minimum number of 4 meetings of its Board of Directors shall be held every year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board. It is observed that the Central Government may by notification direct that the provisions of this subsection shall not apply to any class or description of companies. The provisions related to a minimum number of Board meetings apply to a company licensed under section 8 company only to the extent that the Board of Directors of such Companies shall hold at least 1 meeting within every 6 calendar months.

GST challenges faced by MSMEs in the adoption of internet

MSME refers to Micro, Small, and Medium Enterprises, which were introduced by the Government of India by the Micro, Small, and Medium Enterprises Development Act, 2006. MSME is initiated and managed under the Ministry of MSME and is an entity engaged in the production, manufacture, processing, and preservation of goods and commodities. MSME, despite being a big contributor to India’s growth story, is still lagging behind. The E-commerce wave has taken over MSME (Micro, Small, and Medium Enterprises) sector with a huge turn. However, in this transformation, the Goods and Services Tax (GST) poses several roadblocks for MSMEs. Due to Covid 19 wave, most MSME businesses turned these online. Because the physical movement was restricted, MSMEs that were integrated with e-commerce platforms had an edge over those that did not have an online presence. MSMEs were able to keep their businesses afloat thanks to online sales channels. Self-sufficiency: E-commerce can play a key role in fulfilling the visions of ‘voice for local’ and ‘Atma Nirbhar Bharat.’ Businesses are able to reach a wider audience: It allows products from the hinterlands to reach the national market, giving craftsmen and small sellers in Tier 2/3 towns the opportunity to sell online to clients outside their immediate area. The survey found that in 2020-21, online sales accounted for 27% of total sales compared to barely 12% in 2018-19. With all the growth in the business, there are challenges to face. MSMEs have challenges when it comes to integrating e-commerce platforms.
  • Because firms that are integrated on e-commerce platforms are required to register for the goods and services tax (GST), they are unable to take advantage of GST benefits because e-commerce marketplaces do not benefit from the GST threshold exemption (Rs 4 million).
  • In e-commerce, it is not quite practical for online sellers to have a physical place of business. It makes it more difficult for MSMEs to register in e-commerce marketplaces.
  • MSMEs operating through online platforms are burdened with cumbersome and time-consuming periodical compliance needs like registration and the monthly filing of returns, which further dissuades them from registering under the GST Network.
  • MSME offline sellers under ₹1.5 crores annual turnover with intra-state sales cannot continue with simplified GST compliance processes under the composite GST scheme if they wish to sell online.

Compliance for an MSME sector

  • E-commerce business/ MSME GST registration is mandatory. Every e-commerce operator irrespective of their turnover is required to be compulsorily registered under the CGST Act.
  • MSME Form 1 is the form for furnishing half-yearly returns with the registrar concerning the outstanding payments to the Micro and Small Enterprises.
  • Section 22 – MSME Act Disclosure in Financial Statement
  • Section 23 – Interest Disallowed under Income-tax Act, 1961(MAT and Normal Tax )
  • Section 24(ix) of the CGST Act, 2017, states that “any person who supplies goods through an e-commerce operator, is required to compulsorily register under GST, irrespective of the turnover of such persons.

Closing Thought:

Prejudice leads to ignorance, ignorance of the law is no excuse. Everyone should do proper research and consult a lawyer if possible. Because negligence of compliances will lead to huge loss to the business.

Environment Compliances in India

Every industry is no stranger to complying with environmental compliances. Indian legislation has specific laws to address specific environmental issues, from air pollution, and waste management to coastal area pollution. The Indian constitution is one of the few in the world that contains provisions relating to environmental conservation and a specialized court/tribunal.

The efforts of the environmental regulatory authority to protect and preserve India’s environment are clearly bearing positive results.

The Supreme Court of India in 1978 provided substantial life to this Article 21 in the case of Maneka Gandhi vs. Union of India (1978) and Subhash Kumar vs. the State of Bihar (1991), the Supreme Court of India declared that Article 21 “includes the right of enjoyment of pollution-free water and air for full enjoyment of life”. India’s first PIL on environmental issues before the Supreme Court was the case, Rural Litigation and Entitlement Kendra vs. the State of UP (1988). There is a proactive role of the National Green Tribunal (NGT) and Supreme Court in protecting India’s natural environment.

NGT has ordered the environmental regulatory authorities, that is, the Central Pollution Control Board (CPCB) and the State Pollution Control Boards (SPCB) to strictly enforce and take into account the Comprehensive Environmental Pollution Index. With the rapid growth in the economy, there are significant environmental issues arising like pollution control, waste management, natural resource conservation, climate change, etc. The SEBI introduced the Business Responsibility and Sustainability Report (BRSR), and mandates reporting on environmental, social and governance (ESG) parameters from the next financial year.

The main environmental laws in India are

  • Water (Prevention and Control of Pollution) Act 1974 (Water Act),
  • Air (Prevention and Control of Pollution) Act 1981 (Air Act).
  • E-Waste (Management) Rules 2016, as amended in 2018 (E-Waste Rules);
  • Batteries (Management & Handling) Rules 2001 (and the proposed draft Battery Waste Management Rules 2020);
  • Bio-Medical Waste Management Rules 2016;
  • Plastic Waste Management Rules 2016 (and a proposed draft 2021 amendment);
  • Solid Waste Management Rules 2016;
  • Construction and Demolition Waste Management Rules 2016;
  • Hazardous and Other Waste (Management and Transboundary Movement) Rules 2016, as amended in 2019 (HW Rules);
  • Manufacture, Storage and Import of Hazardous Chemicals Rules 1989 (MSIHC Rules);
  • Coastal Regulation Zone Notification 2019 (and related 2021 procedure for violation of the CRZ Notification); and
  • Environment Impact Assessment Notification 2006.
  • Wild Life (Protection) Act 1972.
  • Forest (Conservation) Act 1980.
  • Public Liability Insurance Act 1991.
  • Biological Diversity Act 2002.
  • National Green Tribunal Act 2010.

Every industry is discussing environmental issues more than ever. The Factory Manager, EHS Manager, etc are responsible for the implementation of their regulations. Companies/Industries shall obtain an Environment Clearance (EC), Consent to Establish (CTE) at the planning stage, followed by Consent to Operate (CTO) before the commencement of any activities/operations and renew it under the water act and air act can typically be obtained by submitting a combined consent application to the relevant SPCB.

Depending on the type of activities undertaken by a company, multiple permits may need to be obtained. Companies/Industries shall obtain site operations from applications for environmental permits as well as from statutory records and returns. Companies/Industries shall maintain the records of waste characterisation and inventory, labels on containers of hazardous chemicals and hazardous wastes, documented information regarding the waste vendors and the final fate of disposed of wastes.

Non-Compliance of these regulators will face action and bear the burnt of penalties imposed by the Environmental Protection Act, National Green Tribunal and Courts Companies/Industries shall have proper management with adequate knowledge of the applicable regulations and have an understanding of the actions required to demonstrate compliance.

Significance of Compliances in Labour Law

Labour law compliances are the mandatory rules which companies should have to follow. It is a set of rules and regulations for the employees. The working environment and the economy have developed over time. There are many acts governing the labour law. Labour law compliances are enforced under state as well as central government. These are the compliances that companies should have to follow,

The Minimum Wages Act, 1948

The minimum wage of the employees is protected by this act. It is enforced because the labourers should get basic pay based on the work of the employee. Every time the parliament of India reviews the minimum wage because the inflation rate in India also simultaneously increases. So companies have to mandatorily comply with the provisions when it is required.

The Payment of Wages Act, 1936

The act ensures that the employees get their wages correctly and appropriately.

The Payment of Bonus Act, 1965

Employees need to get the bonuses in festival time for managing the expenses of themselves and their families. The payment should be entered in the register and it requires compliance when it is needed.

The Equal Remuneration Act, 1976

This act provides the provision for equal remuneration of the employees based on their work without any discrimination between men and women.

The Industrial Disputes Act, 1947

This act monitors industrial disputes and compensation on the basis of the damage accrued because of the disputes. The main objective of this act is to provide peace and harmony between the workmen to workmen and workmen to management in the industries.

The Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996

This act was enacted for the regulation of the employees working in the construction field. This act gives the protection of the workers in the construction field. The compensation for the damage accrued in the workplace etc.

The Motor Transport Workers Act, 1961

This act protects the labourers in the transportation field. It directs the industries to get the proper insurance of the employees, the compensation of the employees. This act gives the provision of getting all the formalities and licences for the workers in the transportation field.

The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979.

The act gives the provision for the protection of the inter-state migrant workers and the company has to arrange the accommodations for the employees.

The Child Labour (Prohibition and Regulation) Act, 1986

The act prohibits child labour within the age of 14. This act prohibits child labourers in certain fields and organisations.

Conclusion

If there is non-compliance, an organisation will be subject to fines, penalties, lawsuits, loss of credibility, and maybe even closure of the business. So it is mandatory for the organisations to follow the procedures of compliances prescribed in the various acts of labour law.

Regulations and Compliances for Organic Industry

Organic is when the product is not produced with any chemicals and it should be produced with natural elements and natural ingredients. It also refers to food grown without chemicals or pesticides. The farming without using any chemical fertilisers is organic farming. The products which are produced naturally without any chemical ingredients are called organic products. The food which is produced in organic farming is called organic foods. The clothes which are produced with organic fibre and organic cotton are called organic clothes. Organic products reduce toxicity in the human body and also in the environment. The food grown organically are rich in nutrients, such as Vitamin C, iron, magnesium, and phosphorus and there are less pesticides in organically grown fruits, vegetables, and grains. Organic milk has more heart-healthy omega-3 fatty acids compared to milk from cows raised on conventionally managed dairy farms. Due to lack of confidence and genuineness about products paved the way for the regulations of organic products. The regulations should be strict because the business operators mark their products organic while it contains non organic ingredients. So the product should get the licence and the label should be on the products. The Food Safety and Standards Authority of India(FSSAI) has the provisions to regulate manufacture, distribute, sell or import “organic foods” as per the provisions laid under Section 22 of the Food Safety Standards Act, 2006. These regulations are imposed for the protection of farmers and aims to increase their income and it provides two types of certificate, the Participatory Guarantee System (PGS) implemented by the Ministry of Agriculture and Farmers Welfare and National Programme for Organic Production (NPOP) implemented by Ministry of Commerce and Industry. If the Business Operators are not complying with the FSS Act, Rules and Regulations are liable for offences and penalties provided under Section 48 and 49 of the FSS Act. The manufacturers with an annual turnover of less than ₹12 Lakhs per annum and/or a production capacity of non-milk and non-meat products at less than 100 kgs or 100 litres per day, all food businesses need a licence from the FSSAI. To surpass the aforementioned criteria, not only are you required to apply for the FSSAI licence, but you’re also additionally required to comply with the Food Safety and Standards (Organic Foods) Regulations, 2017. If the farmers want to export their goods PGS-India is a local Quality Assurance initiative which certifies farmers in a local group through a peer-appraisal process. The organics food processing and handling should be packed with certain criteria to ensure biodegradable, recyclable, reusable systems and eco-friendly. It should not contaminate the food, Should resist manipulation. The proper labelling should be there for the identification of the products and it should describe the procedure of organic farming, it should mention the year of the manufactured product, it must mention the name and address, the list of processing procedures, it must declare all components of additives and processing aid, must depict the name and logo of the accredited Certification Body, accreditation number and India Organic Logo. These are the regulations followed by the organic business operators in India.

Commercial Disputes under the Commercial Courts Act, 2015

The Commercial Courts Act 2015 came into force with the sole objective to address disputes that are of commercial nature above a certain specific value, in a time-effective manner. The Act specifies a distinct procedural framework and the establishment of commercial courts in India.

What is a Commercial Dispute?

A dispute is a disagreement between the parties. A commercial dispute means a dispute between parties that involves commerce or business. It can arise out of infringement of contract or in any specific transaction, etc Section 2 (1) (c) of the Commercial Courts Act 2015 defines the term “Commercial Dispute” as a dispute arising out of––
  1. Ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents.
  2. Export or import of merchandise or services.
  3. Issues relating to admiralty and maritime law.
  4. Transactions relating to aircraft, aircraft engines, aircraft equipment and helicopters, including sales, leasing and financing of the same.
  5. Carriage of goods.
  6. Construction and infrastructure contracts, including tenders.
  7. Agreements relating to immovable property used exclusively in trade or commerce.
  8. Franchising agreements.
  9. Distribution and licensing agreements.
  10. Management and consultancy agreements.
  11. Joint venture agreements.
  12. Shareholder’s agreements.
  13. Subscription and investment agreements pertaining to the services industry including outsourcing services and financial services.
  14. Mercantile agency and mercantile usage.
  15. Partnership agreements.
  16. Technology development agreements.
  17. Intellectual property rights relating to registered and unregistered trademarks, copyright, patent, design, domain names, geographical indications and semiconductor integrated circuits.
  18. Agreements for sale of goods or provision of services.
  19. Exploitation of oil and gas reserves or other natural resources including electromagnetic spectrum.
  20. Insurance and re-insurance.
  21. Contracts of agency relating to any of the above.
  22. Such other commercial disputes as may be notified by the Central Government.
Explanation –– A commercial dispute shall not cease to be a commercial dispute merely because –
  • (a) it also involves action for recovery of immovable property or for realisation of monies out of immovable property given as security or involves any other relief pertaining to immovable property.
  • (b) one of the contracting parties is the State or any of its agencies or instrumentalities, or a private body carrying out public functions.
The Calcutta High Court in the case of Ladymoon Towers Pvt. Ltd. vs Mahendra Investment Advisors Pvt. Ltd. (2021), analysed the definition of “Commercial Disputes” under the Act and held that the definition section of the 2015 Act only contemplates a “commercial dispute” and not any other form of dispute where the basis of disagreement between the parties has a non-commercial cause. The gradation of disputes in Section 2(1) (c) taking into account all possible forms of agreements from which a “commercial dispute” may arise, makes it clear that the framers of the statute gave emphasis on the commercial flavour of the transaction as opposed to agreements entered into between parties without a commercial purpose. The qualification of the person being a Merchant, Banker, Trader or Financier imparts an unimpeachable commercial flavour to the transaction and the resulting dispute.

The Process of Initial Public Offering (IPO)

Initial public offering (IPO) is the process of raising capital through issuing of shares. It helps the company to raise funds from the Investors through equity shares. It is the conversion of a private company into a public company. Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an IPO. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering.

Appointing an Investment bankers or Underwriters

The process of initial public offering needs the help of financial experts like investment bankers and underwriters. The underwriters assure the company about the capital being raised and act as intermediaries between the company and its investors. The experts will also study the crucial financial parameters of the company and sign an underwriting agreement. The underwriter offers to take on some of the risks of the offering in exchange for a premium. In essence, the underwriter buys the securities from the issuer and then turns around to sell the securities on the market. This means that the issuer gets cash upfront. So the risk is reduced for the issuer. There are sometimes multiple investment banks involved in the underwriting of security. The details of the process may vary from deal to deal, but the fundamental job of the underwriter(s) is to take some of the issuer’s risk in exchange for a premium.

Registration of IPO

This IPO step involves the preparation of a registration statement along with the draft prospectus, also known as Red Herring Prospectus (RHP). Submission of RHP is mandatory, as per the Companies Act. This document comprises all the compulsory disclosures as per the SEBI and Companies Act.

Approval by SEBI and Stock Exchange

Company needs to get the approval of SEBI by fulfilling appropriate provisions of the act. SEBI then verifies the disclosure of facts by the company. If the application is approved, the company can announce a date for its IPO. Then the company needs to file the application to Stock exchanges for approval.

Advertisement by company

Before an IPO opens to the public, the company has to create a buzz in the market by roadshows. Over a period of two weeks, the executives and staff of the company will advertise the impending IPO across the country. This is basically a marketing and advertising tactic to attract potential investors. The key highlights of the company are shared with various people, including business analysts and fund managers.

Fixation of the Price range

There are two methods of fixing the price of IPO, either through Fixed Price IPO or by Book Binding Offering. In the case of Fixed Price Offering, the price of the company’s stocks is announced in advance. In the event of Book Binding Offering, a price range of 20% is announced, following which investors can place their bids within the price bracket. The booking is the process typically open from three to five working days and investors can avail the opportunity of revising their bids within the stipulated time. After completion of the bidding process, the company will determine the Cut-Off price, which is the final price at which the issue will be sold.

Allotment of Shares

Once the IPO price is finalized, the company along with the underwriters will determine the number of shares to be allotted to each investor. In the case of oversubscription, partial allotments will be made. The IPO stocks are usually allotted to the bidders within 10 working days of the last bidding date.

What are Anti-Competitive Agreements?

Anti-competitive Agreements are prohibited Section 3 of the competition act. Section 3 states that any agreement that restricts the production, supply, distribution, acquisition, or control of goods or services, or that causes or contributes to the occurrence of any of the foregoing causes or contributes to the occurrence of any of the foregoing causes or contributes to the occurrence has the potential to have a significant adverse effect on competition (AAEC) in India, is illegal and unenforceable. Horizontal and vertical anti-competitive agreements are examples of anti-competitive agreements.

Horizontal and Vertical Agreement

Horizontal Agreement

Horizontal Agreement can be understood as an agreement between businesses that are all located at the same point in the manufacturing or distribution chain.

Explained under the section 3(3) of the Competition Act is that which

  • Determine purchase or selling prices directly or indirectly: Competitor price-fixing is a horizontal agreement in which rivals agree to increase, lower, fix, or stabilise prices in a certain market. In a competitive market, prices should be established freely based on demand and supply, rather than by an agreement between rivals. It would be anticompetitive for the fix or stabilise pricing to come to an agreement. Such agreements are frequently made in secret, but circumstantial evidence can be used to uncover them. Competitors agree to take efforts to increase, lower, or level the playing field.
  • Restrict or control production, technical development, services, and so on: Production control entails rivals agreeing to limit the amount of products or services on the market. Anticompetitive behaviour might also include competitors deciding to specialise on specific items, product lines, or technology.

Competitors agreeing to focus on specific commodities or a set of items or a set of technologies is also considered as an Anticompetitive behaviour.
Under the Competition Law, an agreement between rivals to limit output is considered significant anticompetitive behaviour. Businesses should make their own business judgments and should never cooperate to limit output.

  • Sharing or splitting markets: This might be as simple as competitors agreeing to share clients or staying out of each other’s geographic region or customer base
  • Engaging in Bid-rigging or collusive bidding.
    Bid-rigging is the practise of taking turns to win competitive tender contracts. This could include:

    • parties agreeing to submit cover bids (high) that are not intended to be successful – with the unsuccessful bidders potentially receiving kickbacks;
    • bid suppression, where parties agree that only one of them will submit a bid for the contract; and
    • bid rotation, where the parties take turns winning contracts.

It’s possible for more than one of these bid-rigging schemes to be active at the same time. If one party to the agreement is chosen to win a certain contract, the other parties might prevent winning by either not bidding (“bid suppression”) or bidding too much (“cover bidding”). This is a deal between rivals in which one of them pledges not to bid in return for working as a subcontractor.

Vertical Agreements

Vertical agreements are agreements reached between companies at various stages of the manufacturing or distribution process. A vertical agreement is, for example, one between a manufacturer and a distributor. Vertical agreements, as defined under Section 3(4) of the Competition Act, include:

  • Tie-in arrangements- Tying happens when customers purchase a product they desire (the tying product) but are pushed (forced) to purchase a product (the tied product) from a different market that they may or may not want. Tying would be anti-competitive since it would limit rivals’ access to the tied goods market. Bundling differs from tying in that bundling typically involves items from the same market that customers would purchase together. For instance, an automobile that is sold (bundled) with tyres.
  • Exclusive distribution agreements- A supplier agrees to sell his items to just one distributor for resale in a certain region under an exclusive distribution agreement. At the same time, the distributor’s active selling into other strictly assigned territory is frequently limited.
  • Refusal to deal- This refers to limiting the number of people/classes of people to whom items are sold in any way. Businesses have the ability to choose whoever they do business with at their choice. However, if this decision is taken in collusion with another rival, firm, or individual, they will very certainly be breaking the law. Refusal to trade is illegal because it causes injury to the boycotting company by shutting them off from a facility, product supply, or market. The competing firms dominate or monopolise the market by unduly limiting competition by damaging the boycotting business in this way.
  • Resale price maintenance- This refers to the sale of commodities with the condition that they be resold at predetermined prices. It usually happens when an upstream seller (Producer) sets a fixed or minimum price that a downstream buyer (Distributor or Retailer) must meet in order to resell the product. A manufacturer, for example, determines the retail price at which its items are sold. As a result, resellers (for example, merchants) do not compete on price. This is seen as anti-competitive behaviour.

Role of Audit Committee in a Listed Company

An audit committee supervises the financial reporting process, the audit process, and several other internal factors within a company. In India, Section 177 of the Companies Act 2013 read with Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014 deals with the formation of an audit committee consisting of a minimum of three directors with independent directors forming a majority in every public listed company falling any of the three following criteria:
  1. paid-up capital of rupees ten crores or more.
  2. having a turnover of rupees hundred crores or more.
  3. having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding rupees fifty crores or more.
The SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 Schedule II Part C distinctly talks about the role of the Audit Committee in a listed company. This role is divided into review and approval of several processes and intricacies within the company. The role for review of the following:
  1. Financial reporting process and disclosure
  2. Quarterly financial statements
  3. Auditor’s independence and performance, and effectiveness of audit process
  4.  Annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to:
    •  Matters included in the director’s responsibility statement in board report
    • Changes in accounting policies and practices and reasons for the same
    • Major accounting entries involving estimates based on the exercise of judgment by management
    • Significant adjustments made in the financial statements arising out of audit findings
    • Compliance with listing and other legal requirements
    • Disclosure of related party transactions
    • Modified opinion(s) in the draft audit report
  5. Performance of statutory and internal auditors, adequacy of the internal control systems and adequacy of internal audit function
  6.  Findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board
  7. Functioning of the whistle blower mechanism
  8. Utilization of loans or advances from investment by the holding company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower including existing loans, advances, investments existing as on the date of coming into force of this provision.
  9. End-use of funds raised through public offers and related matters
  10. Management discussion and analysis of financial condition and results of operations
  11. Statement of significant related party transactions (as defined by the audit committee), submitted by management
  12. Management letters or letters of internal control weaknesses issued by the statutory auditors
  13. Internal audit reports relating to internal control weaknesses
  14. The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee
  15. Statement of deviations as per regulation 32(1) and 32(7) of SEBI (LODR) Regulation, 2015
Approval of followings
    • Payment to statutory auditors for any other services
    • Transactions and any subsequent modification of transactions with related parties
Recommendation
    • Appointment, remuneration and terms of appointment of auditors of the listed entity.
Other Roles / Functions
    • Scrutiny of inter-corporate loans and investments
    • Valuation of undertakings or assets of the listed entity, wherever it is necessary
    • Evaluation of internal financial controls and risk management systems
    • Look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors
    • Discussion with internal auditors of any significant findings
    • Discussion with statutory auditors about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern
    • Carrying out any other function as is mentioned in the terms of reference of the audit committee
    • Chairman of Audit Committee shall be present at Annual general meeting to answer shareholder queries
    • The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee: Provided that occasionally the audit committee may meet without the presence of any executives of the listed entity.

Role of Nomination and Remuneration Committee wrt Board Evaluation

The Board of Directors (hereinafter referred as “BOD”) of a company lies at the core of the corporate governance practices. They oversee how the management serves and protects the long-term interests of the stakeholders. The position of BOD is that of the trust as the Board is untrusted with the responsibility to act in the best interest of the company and accountable to the shareholders for creating, protecting and enhancing wealth, ensuring optimum utilization of resources of the company, ensuring compliance of various applicable laws and reporting to them on the performance in a timely and transparent manner. Since the BOD represents the stakeholders and investors for conducting and monitoring the affairs of the company, their behaviour and effectiveness are becoming increasingly visible. They are expected to be more engaged, knowledgeable and effective. So, Board evaluation becomes a perfect tool to examine and improve their effectiveness as a part of Corporate Governance. Today’s blog is aimed to discuss the role of the Nomination and Remuneration Committee (hereinafter referred as “NRC”) with respect to Board Evaluation. Section 178 of the Companies Act, 2013 states the formation of NRC by the BOD of every listed companies and such other classes consisting of three or more non-executive directors out of which not less than one-half shall be independent directors. Section 178 (2) states that the NRC shall identify persons qualified to become directors and who may be appointed in senior management in accordance to criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance. The SEBI (LODR) Regulation, 2015, Schedule II (Part D) (A) states the role of NRC as follows:
  • Formulation of criteria for evaluation of performance of independent directors and the BOD.
  • Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the BOD their appointment and removal.
  • Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.
Section 178 (3) says that in order to determine the qualifications, positive attributes and independence of directors the NRC shall formulate the criteria and recommend to the Board policy relating to remuneration of directors, key managerial personnel and other employees. Further Section 178 (4) states the while formulating the policies the NRC must ensure that:
  • To keep a reasonable and sufficient level and composition of remuneration to attract, retain and motivate directors of the quality required to run by the company.
  • Relationship of remuneration to performance is clear and meets appropriate performance benchmarks.
  • Remuneration to directors, Key Managerial Personnel and senior management involves balance between fixed and incentive pay reflecting short and long term performance objectives appropriate to the working of the company and its goals.
The NRC can review the following:
  • Any succession plan for both executive and non-executive directors.
  • The structure of remuneration packages of the Managing or Executive Director and other Key Managerial Personnel.
  • Changes in remuneration package, terms of appointment, notice period, severance fees, recruitment, retention and termination policies and procedures.
Other than board evaluation, the committee serves a crucial purpose in the functioning of the Board by assisting the Directors in matters related to appointment and compensation. The committee also prepares the remuneration policy, a policy on board diversity, composition and remuneration report for the company’s governing bodies.