The Hindu Business Line : Audit panel must have at least 2 independent directors: Concept Paper

AUDIT committees of public companies may have more teeth in the coming days. The Concept Paper for a new Companies Act has recommended that an audit committee should have at least two independent directors.

Currently, the Companies Act does not insist on the presence of independent directors in such committees. In fact, the Concept Paper has taken a middle path on the controversial issue of having independent directors on the audit committees.

Striking a balance between regulatory pressures and industry interests, the paper has held that the "audit committee shall consist of not less than two independent directors and not more than such number of maximum independent directors as the Centre may prescribe".

The issue of the number of independent directors in an audit committee has been a point of debate both within the Government and in industry circles.

Ever since a host of corporate failures like Enron came to the fore in the West, the voice for packing the audit committee with more independent directors has gained strength.

In fact, the Government-appointed Naresh Chandra Committee on Corporate Audit and Governance had recommended that audit committees of all public companies with a paid-up capital and free reserves of Rs 10 crore and above or turnover of Rs 50 crore and above should comprise exclusively independent directors.

This recommendation almost mirrored the provisions of the Sarbanes-Oxley Act in the US, which has now made it mandatory for all members of the audit committee to be independent directors who are also on the board of the same company.

Currently, the SEBI-prescribed Clause 49 of the listing agreement (LA) stipulates that the committee shall have a minimum of three members, all being non-executive directors, with a majority of them being independent directors and with one director having financial and accounting knowledge.

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