Wednesday, June 18, 2014

Guest Post: MCA notification on Audit Committee

[The following post is co-authored by Yogesh Chande and Manendra Singh. Yogesh is an Associate Partner and Manendra is an Associate with ELP. Views of the authors are personal.]

In terms of section 177(1) of the Companies Act, 2013 (Act) read with rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 (Rules), following companies are required to constitute an audit committee:

(i)        Listed companies; and

(ii)       All public companies meeting the following criteria:

(a)        paid up capital of INR 100 million or more;

(b)        turnover of INR 1000 million or more; and

(c)        aggregate of outstanding loans or borrowings or debentures or deposits exceeding INR 500 million or more.

In term of section 177(3) of the Act, every company which was required to constitute an audit committee under section 292A of the Companies Act, 1956 (1956 Act) was required to reconstitute the audit committee within one year.

Under the 1956 Act, only a public company having paid-up capital of more than INR 50 million was required to constitute an audit committee.

Ministry of Corporate Affairs has notified Companies (Meetings and Powers of Board) Amendment Rules, 2014 [Sic][1] dated 12 June 2014 (Amendment Notification). The Amendment Notification states that[2] public companies covered under Rule 6 of the Rules which were not required to constitute audit committee under Section 292A of the 1956 Act are obliged to constitute audit committee within one year from the commencement of these rules or appointment of independent directors by them, whichever is earlier.

Following is the comparison of the companies which are required to form an audit committee under the Act and which were required to form an audit committee under the 1956 Act:

A.        Section 292A of the 1956 Act

(1)        Public companies having paid-up capital of not less than INR 50 million.[3]

B.         Section 177 of the 2013 Act read with rule 6 of the Rules

(1)       Public companies with a paid up capital of INR 100 million or more;

(2)        Listed Companies;[4]

(3)        Public companies having turnover of INR 1000 million or more; and

(4)        Public companies having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding INR 500 million or more.

Thus, under the Act, those public companies which were having paid-up capital of not less than INR 50 million are outside the purview of the Amendment Notification, since these companies are not those which were not required to constitute audit committee under Section 292A of the 1956 Act, and therefore the extended time period mentioned in the Amendment Notification to constitute an audit committee will not be available to such companies.

Therefore, only companies mentioned in the row (2), (3) and (4) (Targeted Companies) above are covered by the Amendment Notification.

Other comments relating to the Amendment Notification:

(a)  In terms of the Amendment Notification, Targeted Companies are required to constitute their audit committee within one year from the ‘commencement of these rules’ or appointment of independent directors by them, whichever is earlier. It appears that, the reference is made to the Rules and not to the amended Rule 6 of the Amendment Notification.

(b)  The obligation to constitute an audit committee within one year is triggered at the time of happening of following, whichever is earlier:

(i)  Commencement of ‘these rules’; or

(ii) Appointment of independent directors.        

Assuming the reference is made to commencement of the Rules[5], the deadline for constituting an audit committee is 31 March 2015, since not only the Rules have commenced with effect from 1 April 2014, but even the requirement of appointment of independent director[6] has commenced i.e. to be appointed within one year from 1 April 2014.

It is therefore not clear, should the term “whichever is earlier” when read in relation to appointment of independent director, should be read to mean that, the obligation of constituting an audit committee for such companies will commence when the independent director is “actually” appointed, therefore effectively providing time beyond 31 March 2015 to constitute an audit committee.

- Yogesh Chande & Manendra Singh


[1] Companies (Meetings of Board and its Powers) Rules, 2014
[2] Not yet gazetted
[3] Listed or unlisted
[4] “Listed company” means a company which has any of its securities listed on any recognised stock exchange. This could therefore even include within its purview non-convertible debentures issued on a private placement basis by a private company and which are listed on the debt segment of a recognised stock exchange. Thus, even such a private company will need to constitute an audit committee.
[5] Applicable from 1 April 2014
[6] Section 149(5) of the Act

2 comments:

aishmghrana.me said...

The Amendment Notification already gazetted on 12th June 2014 and available on egazette.nic.in site.

Anonymous said...

Yes, it has been gazetted.

You may like to note that, there is at times, time-lag between the date of sending the guest post to the blogger and actual posting of the same on the blog.

The endaevour is always to provide the latest perspective on the point of law.

Thank you.