[Opinion] ROC Slaps a Penalty of Rs 14 Lakh on Co, Its MD & CS for Not Constituting Audit & Nomination and Remuneration Committee
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- Last Updated on 16 October, 2023
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Prof R Balakrishnan – [2023] 155 taxmann.com 243 (Article)
1. The gist of this case
The Registrar of Companies by an adjudication order passed on 8th September 2022, imposed a penalty of Rs 7 lakh on Resonance Eduventures Limited and its chief financial officer and company secretary for failure to constitute the mandatory audit committee pursuant to section 177 of the Companies Act 2013. The Registrar also levied penalty of another Rs. 7 lacs on the company and its chief financial officer and company secretary for failure to constitute the mandatory nomination and remuneration committee pursuant to section 178 of the Companies Act 2013 thereby totalling to a total penalty of Rs. 14 lacs. These decided cases serves as a reminder of the importance of complying with the regulatory provisions read with the applicable rules framed thereunder and the consequences arising out of non-compliance even
Though corrective actions are being taken by the company and its officers post-violation. Let us look into the details of these cases with reference to the mandatory provisions, legal framework, violation committed and its period resulting into penalty on company and its officers – in this case the CFO and CS besides the company and the implications of the non-compliance.
2. Provisions relating to the cases discussed under the Companies Act 2013.
The following are the relevant provisions under the Companies Act 2013, relevant to the cases which are dealt below.
| Companies Act 2013 Chapter XII – Meetings of Board and its Powers Section 177 – Audit Committee |
|
| Section | Provisions |
| 177(1) | The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. |
| 177(2) | The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority: |
| Proviso | Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement. |
| 177 (3) | Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with sub-section (2). |
| 177(4) | Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,— |
| 177(4) (i) | the recommendation for appointment, remuneration and terms of appointment of auditors of the company; |
| 177(4) (ii) | review and monitor the auditor’s independence and performance, and effectiveness of audit process; |
| 177(4) (iii) | examination of the financial statement and the auditors’ report thereon; |
| 177(4) (iv) | approval or any subsequent modification of transactions of the company with related parties; |
| 177(4) (iv) | scrutiny of inter-corporate loans and investments; |
| 177(4) (vi) | valuation of undertakings or assets of the company, wherever it is necessary; |
| 177(4) (vii) | evaluation of internal financial controls and risk management systems; |
| 177(4) (viii) | monitoring the end use of funds raised through public offers and related matters. |
| 177(5) | The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company. |
| 177(6) | The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company. |
| 177 (7) | The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote. |
| 177 (8) | The Board’s report under sub-section (3) of section 134 shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons there for. |
| 177(9) | Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. |
| 177(10) | The vigil mechanism under sub-section (9 ) shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases: |
| Proviso | Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report. |
| Companies Act 2013 Chapter XII – Meetings of board and its powers Section 178 – Nomination and Remuneration Committee and Stakeholders Relationship Committee. |
|
| 178(1) | The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors: |
| Proviso | Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee. |
| 178(2) | The Nomination and Remuneration Committee 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 shall carry out evaluation of every director’s performance. |
| 178(3) | The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. |
| 178(4) | The Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3 ) ensure that— |
| 178(4)(a) | 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; |
| 178(4)(b) | relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and |
| 178(4)(c) | 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: |
| Proviso | Provided that such policy shall be disclosed in the Board’s report. |
| 178(5) | 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. |
| 178(6) | The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company. |
| 178(7) | The chairperson of each of the committees constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company. |
| Companies (Meetings of Board and its Powers) Rules 2014 Rule 6 – Committees of the Board |
|
| Rule 6 | The Board of directos of every listed public company and a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules 2014 shall constitute an “Audit Committee:, and a “Nomination and Remuneration Committee” of the Board. |
| Penalty provision for non-compliance/default for sections 177 and 178 (both) | |
| 178(8) | In case of any contravention of the provisions of section 177 and this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and 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: |
| Proviso | Provided that non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section. |
| Explanation | The expression ”senior management” 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. |
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