Naresh Chandra Committee

On 21st January 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Corporate Affairs of the Union Government of India constituted the Naresh Chandra Committee, an elite advisory board under the chairmanship of Mr. Naresh Chandra.

The primary objective of this committee was to scrutinize and recommend radical amendments, if necessary, for the laws governing auditor-client relationships and the role of independent directors. The theme of the report was to enunciate additional guidelines that can elevate corporate governance in both theory and practice.

IAS aspirants must read about the List of Committees and their purposes at the linked article.

This article gives the details about the Naresh Chandra Committee that can be used by IAS aspirants in their UPSC preparation in IAS Mains Polity and GS-II papers preparation in particular.

An Overview of the Committee’s History

The Naresh Chandra committee is the third major corporate governance initiative launched in India since the mid-1990s, after the first voluntary code of corporate governance by the Confederation of Indian Industry (CII) in 1998, followed by Clause 49 of the Listing Agreement by SEBI in 2000. The committee presented its report on Corporate Governance and Audit in November 2002.

Naresh Chandra Committee Report: Major Recommendations

Candidates appearing for UPSC 2022 or any other civil service examination should be aware of the following recommendations given by the Naresh Chandra Committee on Corporate Governance in their report:

1. Disqualification for audit assignments- The committee recommended certain disqualification for audit assignments which prohibits the audit firm, the partners, or their direct relatives to:
2. Financially benefit directly from the client.
3. Receive loans and/or guarantee from or on behalf of the audit client.
4. Have any business relationship with the client.
5. Have any personal relationship with the client.
6. Have undue dependence on audit clients.
7. Incur service or cooling off period unless a period of 2 years has elapsed from the date of the audit engagement.
8. Prohibited non-audit services- The committee recommended certain services that the audit firm shall not provide to any of their audit clients:
9. Internal audit
10. Accounting and bookkeeping
11. Actuarial services
12. Investment banking
13. Outsourced financial service
14. Valuation service
15. Financial information systems design and implementation
16. Staff recruitment
17. Compulsory rotation of auditors- Audit partners and not less than 50% of engagement team engaged in an audit of any listed company, or such companies whose paid-up share capital and free reserves exceed Rs. 10 crores, or companies whose annual turnover exceeds Rs 50 crores must be rotated every five years.
18. Appointment of auditors- For audit committees to have a larger role in audit procedures, the audit committee shall have the first power to appoint an auditor.
19. Auditor’s disclosure of contingent liabilities- Management shall specify each of the material risks and liabilities of contingent nature in a clear description, followed by auditor’s comments on the management view, which shall be specified in the auditor’s report.
20. Auditor’s annual certification of independence- Before agreeing on the terms of the audit engagement, the audit firm is required to submit a certificate of independence to the Audit Committee or Board of Directors (BoD) of such company, as the case may be.
21. CEO and CFO certification of audited accounts- Designated CEO (or MD) and CFO of listed companies and public limited companies whose paid-up share capital and free reserves exceed Rs. 10 crores or whose turnover exceeds Rs 50 crores, should certify their companies’ annual accounts.
22. Setting up Independent QRB- Three independent Quality Review Board (QRB) should be set, one for each ICAI, ICSI and ICWAI, to examine audit quality.
23. Percentage of independent directors- At least 50% of the BoD of any listed company and unlisted public limited companies having paid-up share capital and free reserves of Rs. 10 crores or more, or a turnover of Rs 50 crores or more, should be the independent directors. The minimum board size of such companies should be 7, with at least four independent directors. Audit committees of such companies should consist of only independent directors.
24. Audit committee charter- The role and functions that an audit committee shall discharge in a company should be laid out in an audit committee charter.
25. Exempting non-executive directors from certain liabilities- The non-executive and independent directors shall be exempted from criminal and civil liabilities mentioned in the Negotiable Instruments Act, Provident Fund Act, ESI Act, Factories Act, Financial disputes Act, etc.

The Naresh Chandra Committee on Corporate Governance UPSC is a vital topic. For further knowledge and good marks, aspirants must refer to our study materials and learn the other recommendations as well.

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