Risk Management Committee – Salient Features of the Consultation Paper of SEBI – Eshwars
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Risk Management Committee – Salient Features of the Consultation Paper of SEBI

Authored by Aishwarya Lakshmi VM

The Securities Exchange Board of India (SEBI) has issued a consultation paper soliciting public comments on or before 10th December 2020, towards the proposed amendments in SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015 (“SEBI LODR”) regarding the applicability and role of Risk Management Committee. Though the Amendments made pursuant to Shri. Uday Kotak Committee’s recommendation fortified the existing Risk Management structure; SEBI has in the backdrop of Covid-19 felt a need for a more robust framework for businesses to manage the multitude of risks faced by them.

The following are the salient features of the Consultation Paper issued by SEBI –

1. Applicability: The Risk Management Committee (hereinafter “RMC”) is proposed to be expanded and made applicable to top 1000 listed entities based on market capitalization, from the existing number at top 500.

2. Number of Meetings: The RMC shall meet at least twice in a year in contrast to the existing requirement of meeting once a year.

3. Quorum for RMC Meetings: Making the quorum to be uniform with that of the audit committee and NRC (Nomination and remuneration committee), SEBI seeks to bring in mandatory quorum for RMC to be two members or one third of the members of the RMC, whichever is greater; with at least one member of the board of directors in attendance.

4. Seeking Information and Expert Opinion: Just as the audit committee has the power to seek information from any employee and seek outside assistance, the consultation paper enables the RMC also to obtain information from employees and also obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, wherever necessary.

5. Roles and Responsibilities: Codification of every aspect seems to be flavor of the season and SEBI has proposed to list out in Schedule II Part D of SEBI LODR, the following as a inclusive list of roles and responsibilities of RMC:

a. Formulating a detailed risk management policy including the framework for identification of risks with a special focus to financial, operational, sectoral, ESG and cyber risks; measures for risk mitigation; systems of internal control and business contingency plans.

b. Monitoring and overseeing the implementation of the policy.

c. Ensuring that systems and processes are in place to monitor and evaluate the risks.

d. Reviewing the policy annually considering the changing dynamics.

e. Keeping the Board informed about nature and content of discussions, recommendations and actions to be taken.

f. Appointing, removing and fixing the remuneration of the Chief Risk Officer (CRO), if any, subject to joint review with the Nomination and Remuneration Committee.

Giving hereunder a comparative snapshot of the four committees under the SEBI LODR:

  Audit Committee

(Reg.18)

Nomination & Remuneration Committee

(Reg.19)

Stakeholder Relationship Committee

(Reg.20)

Risk Management Committee

(in present form –consultation paper is still a proposal)

(Reg.21)

Applicability Every Listed entity. Every Listed entity. Every Listed entity. Top 500 listed entities based on market capitalization.
No. of Members Minimum 3 directors.

 

Minimum 3 directors.

 

Minimum 3 directors. No specification as per SEBI LODR.
Constitution At least 2/3rd being Independent Directors.

 

For a listed entity having outstanding SR Equity Shares: Only independent Directors.

 

All members financially literate.

 

At least one member having financial or accounting or financial management exposure.

 

Chairperson shall be an independent director.

All directors to be Non-Executive directors.

 

At least 50% of the directors shall be independent directors.

 

For a listed entity having outstanding SR Equity Shares, 2/3rd shall be independent directors.

 

Chairperson shall be an independent director.

At least 1 being an independent director.

 

For a listed entity having outstanding SR Equity Shares, 2/3rd shall be independent directors.

 

Chairperson shall be a Non-Executive Director.

Majority shall consist of Board of Directors.

 

For a listed entity having outstanding SR Equity Shares, 2/3rd shall be independent directors.

 

Chairperson shall be a member of the Board; senior executives may be members of the Committee.

Brief outline of the roles and responsibilities Oversight of financial reporting;

 

recommendation of appointment, remuneration and terms of appointment of the Auditors;

 

approval of payment to statutory auditors;

 

reviewing annual financial statements and auditor’s report; reviewing quarterly financial statements;

 

reviewing statement of application of funds;

 

approval for related party transactions;

 

scrutiny of inter-corporate loans and investments; valuation of undertakings or assets etc.

Formulation of a criteria to determine qualifications, positive attributes and independence of directors;

 

recommend a policy to the Board relating to remuneration of Directors and KMP;

 

formulating criteria for evaluation of performance of Independent Director and board;

 

devising a policy on diversity of the Board;

 

recommend remuneration for senior management.

Resolving grievance of security holders;

 

review of measures taken for effective exercise of voting rights;

 

review of adherence to service standards by the Registrar and Share Transfer Agent etc.

No specification as per SEBI LODR.
Minimum number of meetings At least 4 times in a year; not more than 120 days gap between two meetings. At least once a year. At least once a year. At least once a year.
Quorum for meetings 2 Members or 1/3rd of the Members of the Audit Committee whichever is greater, with at least 2 minimum Independent Directors. 2 Members or 1/3rd of the Members of the Audit Committee whichever is greater, with at least 1 Independent Director in attendance. No specification as per SEBI LODR. No specification as per SEBI LODR.
Powers To investigate activities within its scope;

 

To obtain outside expertise and information from employees.

Chairperson may be present at the AGM to answer the questions.

 

However, Chairperson of the AGM to decide who answers the questions.

Chairperson shall be present at the AGM to answer the questions.

 

Subject to delegation by the Board, monitoring and reviewing the risk management plan and other functions, including cyber security.

CONCLUSION: While codification is necessary, SEBI will do well to specify the principles that are to be followed by the RMC and the other committees that are to be constituted under SEBI LODR. The absence of specifying the principles, will only make these committees into a box ticking approach, rather than serving the real objective that they intend to serve.

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