ca final paper 3 : advance auditing and professional

CA FINAL – PAPER 3 : ADVANCE AUDITING AND PROFESSIONAL ETHICS

CHAPTER 7 : AUDIT COMMITTEE AND CORPORATEGOVERNANCE

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA 2

Coverage

• Introduction and Applicability• Corporate Governance • Composition and Compliances of the Board and Committees• Audit Committee under LODR Regulations 2015• Role of Auditor in Audit Committee and Compliance Certificate for Corporate Governance• Remuneration of Directors• Obligations of Directors and Senior Management• Adherence to Code of Conduct• Requirements related to Vigil Mechanism• Requirements related to subsidiary of a listed entity• Financial Statements and Annual Report• Secretarial Audit• Role of various Committees• Statement of Deviations• Compliance Certificate• Management Discussion and Analysis report• Other Disclosure Requirements• Report on Corporate Governance• Auditor’s Certificate


Introduction and ApplicabilityObjective

SEBI had notified SEBI (LODR) 2015 on 2nd September, 2015 with two- fold objectives mainly:

• To align provisions of listing requirements with the Companies Act 2013 ; and

• To consolidate the conditions under different securities' listing agreements in one single regulation

Applicability

Unless otherwise provided, these regulations shall apply to a listed entity which has listed any of the following designated securities on recognised stock exchange(s):

(a) specified securities listed on main board or SME Exchange or Innovators Growth Platform ;

(b) non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares;

(c) Indian depository receipts;

(d) securitised debt instruments;

(da) security receipts;

(e) units issued by mutual funds;

(f) any other securities as may be specified by the Board.


Test your Knowledge

Q. Which securities are known as “specified securities”?

a) All types of shares

b) equity shares’ and ‘convertible securities’

c) Irredeemable Preference Shares and Equity Shares

d) All shares and Debentures


Test your Knowledge

Answer(b) equity shares’ and ‘convertible securities’

Reason‘Specified securities’ means ‘equity shares’ and ‘convertible securities’ as defined under Regulation (zj) of sub-regulation (1) of regulation 2 of the securities and Exchange Board of India (Issue of Capital and Disclosure requirements) Regulations, 2009


Corporate GovernanceCorporate Governance

Corporate Governance is the system by which companies are directed and governed by the management. Through use of ethical business processes, the management is able to ensure accountability, transparency and fairness in the company operations, thereby ensuring that the interests of shareholders and all other stakeholders are protected. The Board of Directors are responsible forgovernance of their companies.

Coverage of Corporate Governance

Responsibilities and key functions of the Board, it’s composition, compensation and disclosures;

Code of Conduct and vigil mechanism;

Composition, meetings, powers, role and responsibilities of the Audit Committee which is an important pillar of corporate governance;

Management of subsidiary companies;

Procedures related to risk management;

Disclosures on important issues regarding related party transactions, accounting treatment, etc.;

Content of management discussion and analysis;

Information to shareholders;

Compliance Certificate by the CEO and CFO;

Compliance Certificate from either the auditors or practising company secretaries regarding compliance of conditions on corporate governance


Composition and Compliances of the Board and CommitteesReg 16 : Independent Director is a non-executive director, other than a nominee director of the listed entity:

who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise and experience;

who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity.

Further cannot be a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director:

Reg 17 : Board of Directors - Composition

• Minimum six Directors wef 1 April 2019 (top 1,000 Companies)/ 1 April 2020 (top 2,000 Companies)

• Optimum combination of executive and nonexecutive directors with at least one woman director

• Not less than fifty per cent. of the board of directors shall comprise of non-executive directors

• Mandatory appointment of 1 Independent Woman Director by 1 April 2019 (top 500 Companies)/ 1 April 2020 (top 1,000 Companies)

• In case the Chairman is a Non Executive Director, one third of the Board shall comprise of Independent directors

• In case the Chairman is an Executive Director, half of the Board shall comprise of Independent directors

• Ineligibility of Directorship after 75 years of age unless a special resolution is passed to that effect

• With effect from April 1, 2022, the top 500 listed entities to have a non executive Chairperson


Board Quorum :

Regulation Provision

Quorum shall be 1/3 of its total strength or 3 directors, whichever is higher, including at least One ID:

Participation of the directors by video conferencing or by other audio-visual means shall also be counted for the purposes of

such quorum

17(2A)

Reg 17A : Maximum No of Directorships

Designation Maximum No of Directorships Effective Date

Director 7 Listed Entities 1st April 2020

Independent Director 7 Listed Entities 1st April 2019

MD/ WTD Eligibility for Independent Directorship 3 Listed Entities 1st April 2019

Reg 17(6) (ca) Remuneration To Non Executive Directors

Approval of shareholders by a special resolution shall be obtained every year in which the annual remunerationpayable to a single non-executive director exceeds 50% of the total remuneration payable to all non-executivedirectors.

Composition and Compliances of the Board and Committees



Reg 17(6) (e) Remuneration to Executive Directors

The fees or compensation payable to ED who are promoters or members of the promoter group, shall be subject to theapproval of the shareholders by special resolution in general meeting, if-(i) the annual remuneration payable to such ED exceeds Rs.5 Cr. or 2.5 % of the net profits of the listed entity,

whichever is higher; or(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 % of

the net profits of the listed entity:Provided that the approval of the shareholders under this provision shall be valid only till the expiry of the term of suchdirector.Explanation: For the purposes of this clause, net profits shall be calculated as per section 198 of the CA, 2013.



minimum 3 Directors

2/3rd shall be Independant Director

shall be an Independant Director

shall be present at AGM to answer Share Holder queries

at least 4 times in a year

maximum 120 days time gap between 2 meetings

2 or 1/3rd of members, whichever is greater

with at least 2 Independant Director

Audit Committee Reg. 18

Members

Chairman

No. of Meetings

Quorum

minimum 3 Directors (all shall be Non Executive Director)

at least 50% shall be Independant Director

shall be an Independant Director

shall be present at AGM to answer Share Holder queries

No. of Meetings shall meet at least once in a year

2 or 1/3rd of members, whichever is greater

including at least one Independant Director in attendance

Nomination And Remuneration Committee Reg. 19

Composition

Chairperson

Quorum



Constitution/

reference

The listed entity shall constitute a Stakeholders Relationship

Committee to specifically look into [various aspects of interest] of

shareholders, debenture holders and other security holders.

Members At least 3 Directors, with at least one being an Independant Director

Chairperson shall be present atAGM to answer queries of security holders.

No. of Meetings shall meet at least once in a year

Stakeholders Relationship Committee (Reg 20)

shall meet at least once in a year

functions of RMC shall specifically cover cyber security

Risk Management Committee (Reg. 21)

Provisions of this regulation shall be applicable to top 500 listed


Audit Committee – Regulation 18Criteria

• Shall be Qualified and Independent

• All members of shall be financially literate and at least one member shall have accounting or related financial management expertise.

• Chairperson shall be independant

• Company Secretary shall be the Secretary to the Committee

Meeting of Audit Committee

• shall meet at least four times in a year and not more than one hundred and twenty days shall lapse between two meetings.

• The quorum shall be either two members or one third of the members of the Audit Committee, whichever is greater, but there should be a minimum of two independent directors present.

Powers

To investigate any activity within its terms of reference.

• To seek information from any employee.

• To obtain outside legal or other professional advice.

• To secure attendance of outsiders with relevant expertise, if it considers necessary


Role of Audit Committee – Part C(A) of Schedule II

• Oversight of the listed entity’s financial reporting process

• Recommendation for appointment, remuneration and terms of appointment of auditors

• Approval of payment to statutory auditors

• Reviewing the annual financial statements and auditor's report

• Reviewing quarterly financial statements before submission to the Board for approval;

• Reviewing the statement of uses/application of funds raised through an issue

• Reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process;

• Approval of transactions with related parties;

• Scrutiny of inter-corporate loans and investments;

• Valuation of undertakings or assets of the listed entity


Role of Audit Committee – Part C(A) of Schedule II Contd

• Evaluation of internal financial controls and risk management systems;

• Reviewing the internal control systems;

• Discussion with internal auditors of any significant findings and follow up there on;

• Reviewing the findings of any internal investigations in case of suspected fraud

• To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders and

creditors;

• To review the functioning of the Whistle Blower mechanism;

• Approval of appointment and credentials of Chief Financial Officer

• Reviewing the utilization of loans and/ 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.


Resignation of Statutory Auditors from Listed Entities and their Material Subsidiaries

• Audit Committee to recommend appointment, remuneration and terms of appointment of auditors

• Clause A in Part A of Schedule Ill under Regulation 30(2) of SEBI LODR Regulations requires detailed reasons to be disclosed by the listed entities to the stock exchanges in case of resignation of the auditor of a listed entity as soon as possible but not later than twenty-four hours of receipt of such reasons from the auditor.

•Regulation 36(5) disclosures to be made part of the notice to the shareholders for an AGM, where the statutory auditors are proposed to be appointed/re-appointed, including their terms of appointment.


Role of Auditor in Audit Committee and Compliance Certificate for Corporate Governance

• Auditor’s responsibility in certifying compliance with the requirements of corporate governance

• Verification and certification of factual implementation of requirements of corporate governance

• Does not amount to an audit/ opinion on the financial statements/ assurance as to the future viability/ efficiency of

management

• Compliance with applicable Standards on Auditing to be tested

• Auditor to comply with the “Code of Ethics”

• Documentation Requirements under SA 230 to be complied

• Management Representations under under SA 580 to be taken where required

• Composition of Board of Directors to be verified

• Limited Review to be carried out for entities to be consolidated with the Listed Entity


Remuneration of Directors

Approval

• Compensation to non-executive directors and independent directors to be recommended by the Board and shall require approval of shareholders in general meeting.

• The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors (Independent director shall not be entitled to any stock option)

• Approval of shareholders by special resolution shall be obtained every year, in case the annual remuneration payable to a single non-executive director exceeds fifty percent of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof.

• Requirement of obtaining prior approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013

• The fees or compensation payable to executive promoter directors shall be subject to the approval of the shareholders by special resolution in if-

◦ - the annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 percent of the net profits of the listed entity, whichever is higher; or

◦ - where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 percent of the net profits of the listed entity:


Remuneration of Directors - Disclosure

All elements of remuneration package of individual directors

summarized under major groups, such as

salary, benefits ,bonus , stock option, pension

etc.

Details of fixed component and

performance linked incentives , along with

the performance criteria.

Service contracts.Notice Period.

Severance fees.

Stock option details , if any – and whether

issued at a discount as well as the period over

which accrued and over which exercisable.

pecuniary relationship or transactions of the

non-executive directors

Criteria of making payments to non-

executive directors


Obligations of Directors and Senior Management• Board to meet at least 4 times a year

• Gap between two consecutive meetings not to exceed 120 days

• Director shall not be a member in more than ten committees or act as Chairperson of more than five committees across all listed entities

• Periodic review of all applicable laws

• Non-executive directors shall be required to disclose their shareholding

• The independent directors of the listed entity shall hold at least one meeting in a year, without the presence of non-independent directors and management

• Senior management shall make disclosures to the board relating to all material financial and commercial transactions,

• An independent director who resigns or is removed from the Board of Directors of the listed entity shall be replaced by a newindependent director at the earliest but not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later.

• Ensure that company operations are conducted in accordance with laws and regulations

• Directors to ensure that Financial Statements to be prepared and presented giving all relevant disclosures in line with applicable laws and Standards on Accounting

• The auditor shall obtain sufficient appropriate audit evidence regarding compliance of laws and regulations impacting the determination of material amounts and disclosures in the financial statements.


Audit Committee under Companies Act, 2013

As per section 177 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, every listed public company and the following classes of companies shall constitute an Audit Committee - all public companies with a paid-up capital of ten crore rupees or more;

o all public companies having turnover of one hundred crore rupees or more;

o all public companies, having in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.

o However, following class of unlisted public companies shall not be covered:

o a joint venture;

o wholly owned subsidiary; and

o a dormant company as covered u/s 455.

Functions of the Audit Committee

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall inter alia, include,—

◦ the recommendation for appointment, remuneration and terms of appointment of auditors of the company (However, in case of Government Company, it is limited to the recommendation for remuneration);

◦ review and monitor the auditor’s independence and performance, and effectiveness of audit process;

◦ examination of the financial statement and the auditors’ report thereon;

◦ approval or any subsequent modification of transactions of the company with related parties;



(However, the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.

In case of transactions other than transactions referred to in section 188 of the Companies Act 2013, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board.

Also, in case any transaction involving an amount not exceeding Rupees 1 crore is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorized by any other director, the director concerned shall indemnify the company against any loss incurred by it.

These provisions shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.

◦ scrutiny of inter-corporate loans and investments;

◦ valuation of undertakings or assets of the company, wherever it is necessary;

◦ evaluation of internal financial controls and risk management systems;

◦ monitoring the end use of funds raised through public offers and related matters.

◦ The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations

◦ 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

◦ The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee

◦ 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 therefor



The Audit Committee shall mandatorily review the following information as per Part C(B) of Schedule II :

1. Management discussion and analysis of financial condition and results of operations;

2. Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;

3. Management letters / letters of internal control weaknesses issued by the statutory auditors;

4. Internal audit reports relating to internal control weaknesses;

5. The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject to review by the Audit Committee; and

6. Statement of deviations: (a) quarterly statement of deviations including report of monitoring agency if applicable and (b) annual statement of funds

utilized for purposes other than those stated in the offer document/ prospectus/ notice.


Test your Knowledge

Question (From Suggested Answers Nov 2020)

Mr. BK, Partner in M/s. BK and Associates, as part of their audit presentation to the Audit Committee of M/s. XYZ Limited, a listed

company, highlighted the following:

◦ · Difficulties faced during the audit

◦ · Disagreements with the management

◦ · Management Letter Points

◦ · Draft Management Representation letter to be provided by the Company in connection with the audit.

◦ Some of the Audit Committee members were not happy with the above presentation and asked Mr. BK to take it back and submit

directly to the Board. They believe that Audit Committee is not the forum for discussing such problems and this has to be sorted

out between auditors and the management. Please comment on the above.


Test your Knowledge

Answer:

◦ Mandatory Review Areas of Audit Committee: As per the Auditing Standards, the statutory auditor of the Company is having an obligation to bring certain matters to the attention of those in charge of governance, which inter alia includes aspects such as –

◦ Difficulties faced by them during the audit

◦ Disagreements with the management

◦ Management Letter Points

◦ Draft Management Representation letter to be provided by the Company in connection with the audit.

◦ Further, the Audit Committee is also having an obligation to mandatorily review certain areas before providing their recommendations/inputs to the board.

◦ Given below are the areas required to be mandatorily reviewed by the ACM in the case of listed companies.

◦ The Audit Committee shall mandatorily review among other points the following information as per LODR Regulations:

◦ (i) Management discussion and analysis of financial condition and results of operations;

◦ (ii) Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;

◦ (iii) Management letters / letters of internal control weaknesses issued by the statutory auditors;

◦ (iv) Internal audit reports relating to internal control weaknesses;

◦ The auditor should further ascertain whether the Management Discussion and Analysis report includes discussion on the matters stipulated. Where certain deficiencies or adverse findings are noted by the Audit Committee, the auditor will be required to see that these have been suitably dealt with by the management in the report on corporate governance.

In the instant case, Mr. BK, Partner in M/s BK and Associates highlighted the facts such as difficulties faced during the audit, disagreements with the management, managements letters points and draft management letters to be provided by the Company in connection with the audit. However, some of the audit committee members were not happy and as according to them audit committee is not the forum for discussing such problems. Contention of those audit committee members regarding problems to be sorted out between auditors and the management is not in order as Audit Committee is required to mandatorily review the same in accordance with Schedule II of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.


Meetings of the Board of Directors

• Section 173(1) of the Companies Act, 2013 provides that every Company shall hold its first Board Meeting within 30 days of

Incorporation

• Both the LODR Regulations and Section 173 stipulate that Board meetings shall be held at least four times a year and that the

maximum time gap between any two meetings should not exceed one hundred and twenty days

• Exceptions :

• Section 8 company to shall hold at least one meeting within every six calendar months

• Specified IFSC public and private company, it shall hold the first meeting of the Board of Directors within sixty days of its

incorporation and thereafter hold at least one meeting of the Board of Directors in each half of a calendar year

• Auditor to ascertain

• Requirements related to no of meetings and quorum have been met

• A director of the company is not a member in more than ten committees or is acting as Chairman of more than five committees

across all companies in which he is a director.


Compliance of SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”

• Management’s Responsibility

• Company’s operations are conducted in accordance with laws and regulations

• Provide measures for preventing non-Compliance of Any Statute

• Review mechanism to ensure detection and corrective action of non compliances in a timely manner

• Auditor’s Responsibility

• obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally

recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements

• inquire of the management and, where appropriate, those charged with governance, as to whether the entity is in compliance

with other laws and regulations that may have an effect on the financial statements and inspect correspondence, if any, with

the relevant licensing or regulatory authorities

• obtain written representations that management has disclosed to the auditor all known actual or possible non-compliance

with laws and regulations whose effects should be considered when preparing financial statements


Adherence to Code of Conduct

• The Board shall lay down a code of conduct for all Board members and senior management of the listed entity

• All Board members and senior management personnel shall affirm compliance with the code on an annual basis.

• The Annual Report of the company shall contain a declaration to this effect signed by the CEO.

• The code of conduct shall be posted on the website of the company

• The Code of Conduct shall suitably incorporate the duties of Independent Directors as laid down in the Companies Act, 2013.

• senior management” consists of the core management team excluding Board of Directors. It comprises all members of management

one level below the Directors (including chief executive officer/manager, in case they are not part of the board) and shall specifically

include company secretary and chief financial officer.

• The auditor should ascertain that the Board of Directors has laid down a Code of Conduct for all Board members and senior personnel

of the company and all such personnel have affirmed compliance with the code on an annual basis and that the code has been posted

on company’s website.


Requirements related to Vigil Mechanism

(1) The listed entity shall establish a vigil mechanism for directors and employees to report genuine concerns.

(2) This mechanism should also provide for adequate

safeguards against victimization of director(s) / employee(s) or any other

person who avail the mechanism and also

provide for direct access to the chairperson of the

Audit Committee in appropriate or exceptional

cases.

(3) The details establishment of

such mechanism shall be disclosed by the company on its website and in the

Board’s report.


Requirements with respect to Subsidiaries of Listed Entities – Reg 16, 24, 46 and Part C of Schedule V

As per Regulation 16(c), “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds ten percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year

Reg 24(1) provides that at least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, whether incorporated in India or not.

Explanation - For the purposes of this provision, notwithstanding anything to the contrary contained in regulation 16, the term “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds twenty percent of the consolidated income or net worthrespectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

• The audit committee of the listed entity shall also review the financial statements, in particular, the investments made by the unlisted subsidiary.

• The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed at the meeting of the board of directors of the listed entity.

• The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary.

Explanation - For the purpose of this regulation, the term “significant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the unlisted subsidiary for the immediately preceding accounting year.

• A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding to less than or equal to fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting.


Requirements with respect to Subsidiaries of Listed Entities – Reg 16, 24, 46 and Part C of Schedule V

• Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on anaggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless thesale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal

• Where a listed entity has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned.

• The policy for determining ‘material’ subsidiaries shall be disclosed on the company's website and a web link thereto shall be provided in the Annual Report.


Secreterial Audit

Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its

annual report, a secretarial audit report, given by a company secretary in practice

Role of Nomination and Remuneration Committee

• Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to

the Board of Directors a policy, relating to the remuneration of the directors, key managerial personnel and other employees;

• Formulation of criteria for evaluation of performance of independent directors and the Board of Directors;

• Devising a policy on Board diversity;

• 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 Board 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.

• recommend to the board, all remuneration, in whatever form, payable to senior management.


Role of Stakeholders Relationship Committee

◦ Resolving the grievances of the security holders of the listed entity including complaints related to transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue of new/duplicate certificates, general meetings etc.

◦ Review of measures taken for effective exercise of voting rights by shareholders.

◦ Review of adherence to the service standards adopted by the listed entity in respect of various services being rendered by the Registrar & Share Transfer Agent.

◦ Review of the various measures and initiatives taken by the listed entity for reducing the quantum of unclaimed dividends andensuring timely receipt of dividend warrants/annual reports/statutory notices by the shareholders of the company.

Role of Risk Management Committee

The majority of members of Risk Management Committee shall consist of members of the Board of Directors. However, in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk Management Committee shall comprise of independent directors.

The Chairperson of the Risk Management Committee shall be a member of the Board of Directors and senior executives of the listedentity may be members of the committee.

The risk management committee shall meet at least once in a year.

The Board of Directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring andreviewing of the risk management plan to the committee and such other functions as it may deem fit and such function shall specifically cover cyber security.


The provisions of this regulation shall be applicable to top 500 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

Statement of Deviations

The listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc.:

◦ Indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable;

◦ Indicating category-wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds.

The statement(s) shall be continued to be given till such time the issue proceeds have been fully utilised or the purpose for which these proceeds were raised has been achieved.

Where an entity has raised funds through preferential allotment or qualified institutions placement, the listed entity shall disclose every year, the utilization of such funds during that year in its Annual Report until such funds are fully utilized.

Audit Committee to Review:

◦ Quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted to stock exchange(s) in terms of Regulation 32(1).

◦ Annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice in terms of Regulation 32(7).


Question (from Nov 2020 Suggested Answers)

BG Limited is a large-sized listed company. The Board of directors have constituted Nomination and

Remuneration committee comprising of non-executive and independent directors. The management seeks your

advice on the composition and role of the committee. Elucidate the composition and role of Nomination and

Remuneration committee as per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Test your knowledge


Answer:a) Advice to the Management of BG Limited on the Composition of Nomination and Remuneration Committee(i) The Board of Directors of every listed public company shall constitute the Nomination and Remuneration Committee which shall comprise of at least three directors, all of whom shall be nonexecutive directors and at least half shall be independent directors,(ii) However, in case of a listed entity having outstanding SR equity shares, two thirds shall comprise of independent directors.(iii) Chairperson of the committee shall be an independent director. It may be noted that the Chairperson of the company (whether executive or nonexecutive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such committee. b) Advice to the Management of BG Limited on the Role of Nomination and Remuneration Committee.The role of such committee shall, inter-alia, include the following:(i) Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board of Directors a policy, relating to the remuneration of the directors, key managerial personnel and other employees;(ii) Formulation of criteria for evaluation of performance of independent directors and the Board of Directors; (iii) Devising a policy on Board diversity;(iv) 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 Board their appointment and removal; (v) 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. (vi) recommend to the board, all remuneration, in whatever form, payable to senior management

Test your knowledge


Information to Shareholders

• Soft copy of the full annual report to the shareholders who have registered their email addresses

• If not registered, hard copy with salient features of all the documents, as prescribed in section 136 to be sent not less than twenty-one

days before the annual general meeting.

• In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following

information:

•Auditor to ascertain whether all requisite information has been sent to Shareholders as per the particulars above

A brief resume of

the directors;

Nature of his

expertise in specific function

areas;

Disclosure of relationships

between Directors -

inter se

Names of listed entities in which the person also

holds the directorship and the membership of committees of the board;

and

Share holding of non-executive

directors.


TRANSFER OR TRANSMISSION OR TRANSPOSITION OF SECURITIES [REGULATION 40]

The Board of Directors of a listed entity shall delegate the power of transfer of securities to a committee or to the compliance officer or to the registrar to an issue and/or share transfer agents and monitor their performance minimum once a fortnight.

Compliance Certificate (Part B of Schedule II)

The Chief Executive Officer and the Chief Financial Officer shall certify to the Board that:

They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief:

• These statements do not contain any materially untrue or misleading statement

• These statements together present a true and fair view of the listed entity’s affairs

• Are in compliance with existing accounting standards, applicable laws and regulations.

• No fraudulent or illegal transactions have been entered into by the listed entity

• Accept responsibility for establishing and maintaining internal controls for financial reporting

• They have indicated to the auditors and the Audit Committee:o Significant changes in internal control over financial reporting during the year;

o Significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and

o Instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the listed entity’s internal control system over financial reporting.


Part B of Schedule II clearly brings out that -

• The responsibility entrusted to the CEO and CFO is in relation to establishing and maintaining internal controls over financial reporting.

• Compliance certificate to contain the following information :

• Management has evaluated the effectiveness of internal control systems of the listed entity pertaining to financial reporting

• Manner in which deficiencies (if any) in the design or operation of such internal controls has been disclosed to the auditorsand the Audit Committee.

• Steps they have taken or propose to take to rectify these deficiencies in the design or operation of such internal controls pertaining to financial reporting

Auditor to ensure :

• The management has instituted an adequate internal control framework with respect to financial reporting controls

• Assessment process followed for evaluation of controls is reasonable and there is a process by which significant deficiencies aswell as steps taken to correct them is communicated to the Audit Committee and to the auditors;

• Whether all significant changes in the accounting policies and in the system of internal controls are communicated to the Audit Committee and the auditors.

• Adequacy of the process followed for issuing the Compliance Certificate and should review the same in regard to matters stated above and the consideration of the same by the Audit Committee. For this purpose, he should refer to the minutes of the AuditCommittee meetings.

• In situations where negative or adverse comments or exclusions/disclaimers are contained in the Compliance Certificate, the auditor should take cognizance of the same in the Audit Report and/or the certificate of compliance of conditions of corporate governance.


Management Discussion and Analysis Report (Schedule V)

A Management Discussion and Analysis report should form part of the Annual Report and contain the following:

• Industry structure and developments.

• Opportunities and Threats

• Segment–wise or product-wise performance.

• Outlook

• Risks and concerns

• Internal control systems and their adequacy

• Discussion on financial performance with respect to operational performance.

• Material developments in Human Resources/ Industrial Relations front, including number of people employed

• details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, including:

o Debtors/ Inventory Turnover

o Interest Coverage Ratio

o Current Ratio


o Debt Equity Ratio

o Operating/ Net Profit Margin (%)

or sector-specific equivalent ratios, as applicable.

details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof

Disclosure and Transparency

The listed entity shall ensure timely and accurate disclosure on all material matters including the financial situation, performance,

ownership, and governance of the listed entity, in the following manner:

• Information shall be prepared and disclosed in accordance with the prescribed standards of accounting, financial and non-financial disclosure.

• Channels for disseminating information should provide for equal, timely and cost efficient access to relevant information by users.

• Minutes of the meeting shall be maintained explicitly recording dissenting opinions, if any.

Disclosure of events or Information [Regulation 30(1), (5) (8)]

Every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed

company, is material.


Question (From Suggested Answers Jan 2021)

A certificate of compliance of conditions of corporate governance has been issued by CEO of VAM Ltd. In the

context of internal control, which points you as an auditor would like to ensure and examine in the said compliance

certificate?

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Answer:

Compliance Certificate as per Part B of Schedule II: The Chief Executive Officer and the Chief Financial Officer shall certify to the Board that they accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of the internal control systems of the listed entity pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

In the context of internal controls, the auditor should ensure that:

◦ The management has instituted an internal control framework with respect to financial reporting controls. The framework should be examined in the context of the documentation created for each significant process in terms of the related risk and mitigating control;

◦ He has further examined whether the assessment process followed for evaluation of controls is reasonable and there is a process by which significant deficiencies as well as steps taken to correct them is communicated to the Audit Committee and to the auditors; and · He should also examine whether a process exists in the listed entity whereby all significant changes in the accounting policies and in the system of internal controls are communicated to the Audit Committee and the auditors.

◦ The auditor should examine the adequacy of the process followed for issuing the Compliance Certificate and should review the same in regard to matters stated above and the consideration of the same by the Audit Committee. For this purpose, he should refer to the minutes of the Audit Committee meetings.

◦ In situations where negative or adverse comments or exclusions/disclaimers are contained in the Compliance Certificate, the auditor should take cognizance of the same in the Audit Report and/or the certificate of compliance of conditions of corporate governance.

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Related Party [Regulations 23, 27, 46 and Schedule V]

• Quarterly compliance report to be submitted to the stock exchange within fifteen days from close of the quarter.

• Details of all material transactions with related parties to be signed either by the compliance officer or the chief executive officer of the listed entity.

• Related party transactions to be displayed on its website

• Disclosure of transactions with any person or entity belonging to the promoter group which hold(s) 10% or more shares

• disclose the policy on dealing with related party transactions on its website and a web link thereto shall be provided in the Annual Report.

• Related party transactions disclosures on a consolidated basis to be submitted within 30 days of publication of its standalone and consolidated financial results for the half year and disclosed on its website.

Disclosure on Sexual Harassment in the Corporate Governance Report

a. number of complaints filed during the financial year

b. number of complaints disposed of during the financial year

c. number of complaints pending as on end of the financial year

Accounting Treatment (Schedule V)

Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA44

Report on Corporate Governance

• Listed entity shall submit a quarterly compliance report on corporate governance to the stock exchange within 15 days from the close of quarter.

• The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the listed entity.

• The auditor should ascertain that the Annual Report has a separate section on corporate governance with a detailed compliancereport on corporate governance.

• Data in the report on corporate governance should be in line with the financial statements.

Auditor’s Certificate

As per Schedule V, a listed entity shall obtain a compliance certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance and shall annex it to the Directors’ Report. The compliances shall cover : In case of non compliances, the Auditor may make an adverse statement without qualifying the Certificate for eg:• A qualified and independent audit committee is not set up.• The Chairman of the audit committee is not an independent director.• The Audit Committee does not meet four times a year.• The necessary powers in terms of Part C of Schedule II have not been vested by the Board in the Audit Committee.• The time gap between two Board meetings is more than one hundred and twenty days.• A director is a member of more than ten committees or acts as Chairman of more than five committees across all companies

in which he is a director.• The information of quarterly results is neither put on the listed entity’s website nor sent in a form so as to enable the stock

exchange on which the entity’s securities are listed to enable such stock exchange to put it on its own website.• The power of share transfer is not delegated to an officer or a committee or to the registrar and share transfer agents.


Test your knowledge

Question (from Jan 21 Suggested Answers)

LDH Ltd., a company incorporated in India and Listed on a recognized Stock Exchange in India has entered

into various related parties transactions during the financial year. You are required to answer the following

keeping in mind the Listing Obligations and Disclosure Requirements (LODR) on corporate Governance.

(i) Who should sign the report of material transactions with related parties?

(ii) What type of transactions and policy are required to be disclosed in relation to related party

transactions?


Test your knowledge

Answer:

An Indian company, LDH Ltd., listed on stock exchange entered into various related party transactions.

(i) The report shall be signed either by the compliance officer or the chief executive officer of the listed entity.

(ii) Disclosures Required:

(a) The company shall disclose the policy on dealing with related party transactions on its website and a web link

thereto shall be provided in the Annual Report.

(b) The listed entity shall disclose the transactions with any person or entity belonging to the promoter/ promoter

group which hold(s) 10% or more shareholding in the listed entity, in the format prescribed in the relevant

accounting standards for annual results.

Disclosures of related party transactions on consolidated financial statements are required to be made by the

listed entity within 30 days from the date of publication of its standalone and consolidated financial results for

the half year.


SCHEDULE II: CORPORATE GOVERNANCE

PART A: MINIMUM INFORMATION TO BE PLACED BEFORE BOARD OF DIRECTORS

[See Regulation 17(7)]

• Annual operating plans and budgets and any updates.

• Capital budgets and any updates.

• Quarterly results for the listed entity and its operating divisions or business segments.

• Minutes of meetings of audit committee and other committees of the board of directors.

• The information on recruitment and remuneration of senior officers just below the level of board of directors, including appointment

or removal of Chief Financial Officer and the Company Secretary.

• Show cause, demand, prosecution notices and penalty notices, which are materially important.

• Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.

• Any material default in financial obligations to and by the listed entity, or substantial non- payment for goods sold by the listed entity.

• Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which,

may have passed strictures on the conduct of the listed entity or taken an adverse view regarding another enterprise that may have

negative implications on the listed entity.


SCHEDULE II: CORPORATE GOVERNANCE Part A Contd…

• Details of any joint venture or collaboration agreement.

• Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.

• Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations

front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc.

• Sale of investments, subsidiaries, assets which are material in nature and not in normal course of business.

• Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate

movement, if material.

• Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay

in share transfer etc.


Question (from May 19 Suggested Answers)

The Directors and senior management of a listed company of which you are the statutory auditor, want to know

their obligations under the SEBI Regulations in regard to Board or Non-Executive Directors. (Mention any five)

Test your Knowledge

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF

INDIA50

Answer:

Obligations of Director and Senior Management:

(i) The Board shall meet at least four times a year, with a maximum time gap of one hundred and twenty days

between any two meetings.

(ii) A director shall not be a member in more than ten committees or act as Chairperson of more than five

committees across all listed entities in which he is a director. Furthermore, every director shall inform the listed

entity about the committee positions he occupies in other listed entities and notify changes as and when they

take place. It may be noted that for the purpose of considering the limit of the committees on which a director

can serve, all public limited companies, whether listed or not, shall be included and all other companies including

private limited companies, foreign companies and companies under Section 8 of the Companies Act, 2013 shall

be excluded and for the purpose of reckoning the limit under this sub-clause, Chairpersonship/membership of the

Audit Committee and the Stakeholders' Relationship Committee alone shall be considered.

(iii) The Board shall periodically review compliance reports of all laws applicable to the listed entity, prepared by

the listed entity as well as steps taken by the listed entity to rectify instances of noncompliances.

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(iv) Non-executive directors shall be required to disclose their shareholding (both own or held by / for other persons on a

beneficial basis) in the listed entity in which they are proposed to be appointed as directors, prior to their appointment. These

details should be disclosed in the notice to the general meeting called for appointment of such director.

(v) An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity

which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he

had not acted diligently with respect of the provisions contained in the LODR Regulations.

(vi) Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where

they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g., dealing in

company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.)

(vii) An independent director who resigns or is removed from the Board of Directors of the listed entity shall be replaced by a

new independent director at the earliest but not later than the immediate next Board meeting or three months from the date of

such vacancy, whichever is later.

It may be noted that where the listed entity fulfils the requirement of independent directors in its Board even without filling the

vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent

director shall not apply. The Board of Directors of the listed entity shall satisfy itself that plans are in place for orderly succession

for appointments to the Board and to senior management

Test your Knowledge


INDIA52

Question (from suggested Answers May 20)

You have been appointed as an auditor of M/s Real Ltd. in which total number of directors in the board is 9.

As an auditor, state the points to be considered in verification of composition of Board under Regulation 17 of

The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,

2015.

Test your Knowledge


INDIA53

Answer:

Verification regarding Composition of Board [Regulation 17]

(i) The auditor should ascertain whether, throughout the reporting period, the Board of Directors comprises an optimum

combination of executive and non-executive directors, with at least onewoman director and not less than 50% of the Board of

Directors comprising non-executive directors. The minutes of the Board of Directors’ meetings should be verified to ascertain

whether a director is an executive director or a non-executive director.

(ii) The auditor should also verify that where the Chairperson of the Board is a non- executive director, at least one-third of the Board

should comprise of independent directors and in case the listed entity does not have a regular non-executive Chairperson, at least

half of the Board of Directors should comprise independent directors. Further, if the regular non-executive Chairperson is a

promoter of the listed entity or is related to any promoter or person occupying management positions at the Board level or at one

level below the Board, at least one-half of the Board of the listed entity shall consist of independent directors.

In determining the number of requisite independent directors and/or non-executive directors, the fraction, if any, in the number of

one-half or one-third as the case may be, should be rounded off. Since the terms in this clause refer to ‘not less than’ and ‘at least’, it

would be appropriate to compute the number by rounding off any fraction to the next integer. For example, in a Board headed by a

non-executive Chairman and comprising of six other directors (i.e., seven directors), the independent directors should be three or

more.

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Annual disclosure submitted by the directors to the Board of Directors may be examined for this purpose. If the Board of

Directors has followed any particular procedure(s) to ascertain the independence of directors, the auditor should examine

the same. Effect of changes in the composition of the Board and/or its chairman and its impact on compliance throughout

the reporting period should also be examined

An independent non-executive director, apart from receiving remuneration, should not have any material pecuniary

relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the

two immediately preceding financial years or during the current financial year. Also, such independent director, either by

himself or with any of his relatives should not be a material supplier, service provider or customer or a lessor or lessee of

the listed entity and should not also be a substantial shareholder of the listed entity. In determining ‘not a substantial

shareholder’, he (together with his relatives) should not own 2% or more of total voting power of the listed entity.

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Thank You


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