Introduction
The formation of Committees under the Companies Act 2013 is not just a legal obligation, but a vital tool for ensuring good corporate governance and effective decision making. Committees act as task forces of experts in specific areas of the company’s operations. By delegating tasks to these committees, companies can leverage their members’ knowledge and expertise to make better-informed decisions.
Why are committees formed?
The formation of committees under the Companies Act 2013 is necessary to ensure good corporate governance and effective decision-making within a company. Some of the key reasons for forming committees include:
- Expertise: Committees are typically composed of members with specific knowledge and expertise in a particular area. By delegating tasks to these committees, a company can benefit from the knowledge and expertise of its members, which can lead to more informed and effective decision-making.
- Accountability: Committees help to ensure accountability and transparency within a company. By delegating specific tasks to committees, the company can ensure that these tasks are being carried out systematically and organization and that there is a clear chain of responsibility for their execution.
- Regulatory compliance: the Companies Act, 2013 requires certain types of companies to form specific committees, such as an audit committee and a nomination and remuneration committee for public companies. By forming these committees, companies can ensure that they are meeting their regulatory obligations and avoiding potential penalties or legal issues.
- Stakeholder engagement: Committees such as the stakeholder relationship committee and the corporate social responsibility committee help companies to engage with their stakeholders and address their concerns. This can help to build trust and enhance the company’s reputation.
- Risk management: Committees such as the risk management committee help companies to identify and manage risks, which can help to protect the company’s assets and reputation.
Types of committees under The Companies Act 2013
Under the Companies Act 2013, there are several committees that a company may need to form, depending on its size and nature of operations. These committees include:
Audit Committee:
The Audit Committee is covered under Section 177 of the Companies Act of 2013 and Rules 6 and 7 of the Companies (Meetings of Board and its Functions) Regulations of 2014. The Audit Committee, as per the Companies Act 2013, has several important responsibilities as enumerated below:.
- The committee recommends the appointment, remuneration, and terms of appointment of the company’s auditor.
- It establishes a Vigil Mechanism Policy.
- The committee is tasked with obtaining remarks from auditors about the internal control system.
- The Chairman of the committee must attend the Annual General Meeting to address any queries raised by shareholders.
- The committee is responsible for discussing any issues related to internal and statutory auditors, as well as the management of the company.
These duties are vital for ensuring the transparency and accountability of a company’s financial operations.
Below given companies are required to form audit committee:
- Every listed company and
- the Public Companies having paid up share capital of ten crore rupees or more; or
- the Public Companies having turnover of one hundred crore rupees or more; or
- the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees
Nomination and Remuneration Committee
The Nomination and Remuneration Committee is a crucial committee that plays a pivotal role in establishing appropriate guidelines regarding:
- The qualifications, positive attributes, and independence of directors, and
- Advising the board on the remuneration policy for directors, key managerial personnel, and other employees.
The committee is responsible for ensuring that the right people are selected as directors and that they are appropriately compensated.
They establish criteria for selecting directors based on their qualifications and independence, and they advise the board on how to compensate them, as well as other key employees.
This helps ensure that the company has the right people in leadership positions and that they are motivated to perform at their best.
Below given companies are required to form nomination and remuneration committee:
- Every listed company and
- the Public Companies having paid up share capital of ten crore rupees or more; or
- the Public Companies having turnover of one hundred crore rupees or more; or
- the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees
Stakeholders Relationship Committee
A company which having 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..
Section 178 of the Companies Act of 2013 and Rule 6 of the Companies (Meetings of Board and its Functions) Regulations of 2014 both contain provisions pertaining to the Stakeholders Relationship Committee.
The Shareholders’ Grievance Committee, as per the Companies Act 2013, has a wide range of responsibilities related to resolving complaints from shareholders.
- They address grievances related to the transfer or transmission of shares, non-receipt of annual reports, and non-receipt of declared dividends.
- The committee approves the issue of new or duplicate share certificates, as well as new certificates for splits, consolidations, renewals, etc.
- They also approve transfer or transmission requests and dematerialization of shares.
These important duties ensure that shareholders can exercise their rights effectively and maintain their trust in the company’s operations.
Corporate social responsibility committee
The Corporate social responsibility committee is covered under Section 135 of the Companies Act,2013, read with Companies(CSR Policy) Rules,2014.
The Corporate Social Responsibility (CSR) Committee, as per the Companies Act 2013, has a significant role in guiding a company’s CSR activities.
The committee is responsible for:
- Suggesting and devising a CSR policy that aligns with the Schedule VII of the Act and then recommending the amount of expenditure needed to implement that policy.
- Monitoring of the company’s CSR activities from time to time and establish a transparent mechanism to track and report on the progress of these initiatives.
This ensures that the company is meeting its CSR obligations responsibly and effectively. The committee’s efforts play an important role in demonstrating the company’s commitment to social responsibility and sustainability, while also contributing to the betterment of society.
Risk management Committee
The Companies Act, 2013, does not specifically reference the Risk Management Committee. Yet, the Listing Obligations and Disclosure Requirements (LODR) regulations of the Securities and Exchange Board of India (SEBI) demand the creation of a Risk Management Committee.
The Risk Management Committee is responsible for overseeing and periodically reviewing the risk management policies of the company, reviewing reports from regulatory agencies, approving the risk appetite statement, evaluating risk exposure and tolerance, and identifying and mitigating information technology and cyber security risks.
The committee also reviews the company’s practices for risk assessment and management, and monitors and informs the board on the effectiveness of the risk management framework and process.
Conclusion
Apart from the abovementioned committees, various other committees are formed in the company for the smooth functioning of daily operations. It’s important to note that the formation of these committees is not mandatory for all companies, and the requirement to form these committees depends on the type and size of the company. For example, all listed companies are required to form an audit committee and a nomination and remuneration committee, while private companies may choose to form these committees at their discretion.
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