The Companies Bill 1997, which was tabled in Parliament last Friday, carries a provision that makes it mandatory for large companies to constitute audit committees. The move is designed to institutionalise a system of checks and balances that will ensure a measure of rectitude in board-level decision-making.
Henceforth, companies with a paid-up equity of Rs 5 crore and above will have to set up an audit committee comprising at least three directors, including whole-time directors and managing directors. However, when the strength of the committee is taken as a whole, non-executive directors should account for two-thirds of its strength.
Significantly, the finance ministry had been keen on stipulating that all the members on the audit committee should be non-executive directors. However, this provision was not included in the bill. The provision, which has been introduced for the first time, comes in the wake of a demand from the financial institutions for the constitution of audit committees on the boards of large companies in which they have substantial holdings. A case in point is the audit committee in ITC, the cigarettes-to-hotels conglomerate which has had to face a barrage of charges on Fera violations.
The Companies Bill has also plugged several loopholes that were seen in the recommendations of the expert group that drew up the working draft of the piece of legislation.
For instance, the government has rejected the concept of group resource companies (which are basically research and development arms of companies), tightened appointment norms for sole selling agents, and made postal ballot optional. Moreover, auditors have been brought within the ambit of the definition of officers in default and, in the case of share transfer violations, debenture trustees have also been made liable. The Bill also introduces a measure of clarity about what connotes default by a non-executive director.
The working draft had been comparatively vague when it defined what it meant by default by a non-executive director. It merely stated that default by a non-executive director to mean
