The Hindu Business Line : Directors need to talk to the auditors

THE Companies (Amendment) Act, 2000 introduced a new Section 292A which provides for the constitution of audit committee. The constitution of such a committee is required only in case of public companies having a paid-up capital of not less than Rs 5 crore.

A board resolution should be passed for constitution of audit committee and for approval of the terms of reference. The committee should have a minimum of three directors, and the maximum number will be as decided by the board of directors.

Two-thirds of the members of the audit committee shall be directors other than the managing or whole-time directors. And the chairman shall be elected from amongst themselves.

The audit committee shall hold discussions periodically with the auditors regarding the internal control systems, the scope of audit, including the observations of the auditors, the half-yearly and annual financial statements review before submission to the board and about ensuring compliance of the internal control system

The audit committee should have the authority to investigate into any matter in relation to its role, or referred to it by the board, and for this purpose shall have full access to information contained in the records of the company and external professional advice, if necessary.

The constitution of the audit committee should be disclosed in the annual report of the company. The auditor, internal auditor and the director-in-charge of finance shall attend and participate at meetings of the audit committee but they shall not have right to vote. The audit committee shall make recommendations on any matter relating to the financial management, including the audit report, and the report shall be binding on the board.

The recommendations of the audit committee should be considered and adopted by the board at its meeting.

The recommendations are binding on the board and if the board does not accept them, it shall record the reasons thereof and communicate the same to the shareholders.

The chairman of the audit committee shall attend the annual general meeting (AGM) of the company and provide clarification on matters relating to audit.

In the case of listed companies, the provisions of clause 49 of the Standard Listing Agreement should also be duly complied with.

Inter-corporate loans

IN THE course of its business, a company may require funds for meeting additional working capital requirements or bridge loans to incur project expenditure until the release of term loan or equity funds. These requirements are normally met through inter-corporate loans from non-banking finance companies or from companies which have got surplus funds which can be invested for a short-term at a higher rate of interest.

Raising of funds through inter-corporate loans is a popular method since short-term funds can be raised without much formalities and at a reasonable rate of interest. For companies which are lending, it gives them a good return on surplus funds not required immediately. Similarly, companies may provide security or guarantee in connection with a loan.

Board resolution should be passed for approving the proposal for making loan/providing security/giving guarantee, for convening a general meeting of the company and for authorising an officer to comply with the formalities. The resolution for making the loan or giving guarantee or securities should be passed at the board meeting with the consent of all the directors present at the meeting and the prior approval of the public financial institution referred to in Section 4A, where any term loan is subsisting should be obtained. However, such prior approval from the public financial institution shall not be required:

Where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made does not exceed 60 per cent of the company's paid-up capital and free reserves; and

If there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

No loan to any body corporate shall be made at a rate of interest lower than the prevailing bank rate, being the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934.

Where the aggregate of inter-corporate loans, guarantee, security and investment exceeds 60 per cent of the company's paid-up share capital and free reserves or 100 per cent of its free reserves, whichever is higher, the proposal should be previously authorised by a special resolution. However, the board may give guarantee without previous authorisation by a special resolution if:

a resolution is passed in a board meeting authorising to give guarantee as per Section 372A;

there exists exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution;

the board resolution is confirmed within 12 months in a general meeting of the company or the AGM held immediately after passing of the board resolution, whichever is earlier.

Annual accounts

EVERY company must prepare the annual accounts for the financial year for adoption by members at the AGM and also for income-tax purposes.

The board must lay before the AGM a balance-sheet as at the end of the financial year and the profit and loss (P&L) account for that financial year. In the case of companies not carrying on business for profit, an income and expenditure account should be laid down before the AGM instead of the P&L account, which shall relate:

in the case of the first AGM, to the period beginning from the date of incorporation and ending with a day which shall not precede the day of the meeting by more than nine months; and

in the case of the subsequent AGMs, to the period beginning with the day immediately after the period for which account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where extension of time has been granted for holding the AGM, by more than six months and the extension so granted.

Every company should render to the shareholders an account of its expenditure and income even though they may have been incurred or received during the period of construction (Letter No. 2/17/64-PR, dated January 29, 1964).

Preservation of documents

THE books of account and other documents of the company are to be kept by the company at its registered office as per the following legal requirements:

Register of Members, Index of Members, Register of Debenture-holders, Index of Debenture-holders, Copies of Annual Return and certificates and documents-related papers to be annexed thereto. The period during which the documents are to be preserved are:

Register of Members-Permanent, Index of Members-Permanent, Register of Debenture-holders — 15 years after redemption of debentures; index of debenture-holders — 15 years after redemption of debentures; copies of annual return and certificates and documents, related papers to be annexed thereto — eight years from the date of filing; and books and papers of an amalgamated company can be destroyed only with the approval of Central Government.

The Registrar of Companies, by an order in writing, can direct any company to preserve the aforesaid documents for a period longer than the prescribed period.

(Edited excerpts from Company Law Procedures 2003. Book courtesy: Taxmann.)

Article E-Mail :: Comment :: Syndication

Stories in this Section
Directors need to talk to the auditors

How to fix price when profit goal is clear?

Basic doubts on balance-sheet

Expert criminals too leave clues

Mother of all wars