UNIT - 1

BOARD COMMITTEES
Need for Board Committees
 A Board Committee is a small working group identified by the Board,
consisting of Board members, for the purpose of supporting the
Board’s work. Committees are generally formed to perform some
work requiring expertise, and thus, The members of the Committees
are expected to have expertise in the specified field.
 Committees are usually formed as a means of improving Board’s
effectiveness and efficiency, in areas where more focused,
specialized and technical discussions are required. These Committees
prepare the groundwork for decision-making and report at the
subsequent Board meeting. Committees enable better management of
Board’s time and allow an in-depth scrutiny and focused attention.
 Committees are so appointed by the Board to focus on specific areas
and take informed decisions within the framework of delegated
authority, and make specific recommendations to the Board on
matters and in their areas or purview. All decisions and
recommendations of the Committees are placed before the Board for
information or for approval.
 Through Committees, work can be divided so that far more can be
accomplished than if the entire Board acted on all matters.
Committees provide organizational structure, and at the same time
allow enough flexibility so the Board can adapt quickly to the
changing demands of the environment.
The functions of Board Committees can be divided as under:
 Divide and expedite on the work of the organization by removing
routine tasks from monthly Board’s consideration;
 Utilize the specific talents and knowledge of Board members
 Permit broader participation by all Board members
For a Committee to operate effectively, it needs:
 A specific terms of reference so that it is aware of its responsibility, timeline,
and the limits of its authority.
 A capable staff for assistance when needed
 An effective Committee Chairperson who:
o Understands the decision-making process o Knows how to lead a group through
that process
o Enables the Committee to arrive at appropriate decisions
 Responsible Committee members who:
o Spend the time and effort as may be necessary
o Understand how to contribute and evaluate the adequacy of available data and
its limits
o Brain storm for alternative course of actions
However, the Board of Directors is ultimately responsible for the acts of the
Committees. Board is responsible for defining the Committees’ roles as well as
structure
 The key reasons for having different committees include:
• Specialized Oversight:
Committees allow for a focused and specialized approach to different aspects of
company operations. For example, an Audit Committee can concentrate on financial
reporting and internal controls, while a Nomination and Remuneration Committee
can focus on matters related to board appointments and executive compensation.
• Effective Decision-Making:
Committees provide a platform for in-depth discussions and deliberations on specific
matters. By delegating certain functions to committees, the board of directors can
ensure that decisions are made with careful consideration and expertise.
• Diverse Skill Sets:
Committees often comprise members with diverse skills, expertise, and backgrounds.
This diversity ensures a well-rounded perspective and a thorough examination of
issues, leading to more informed decision-making. They strengthen the governance
arrangements of the company and support the Board in the achievement of the
strategic objectives of the company.
• Risk Management:
The Risk Management Committee, if constituted, helps in identifying, assessing, and
mitigating risks faced by the company. This specialized focus on risk management is
crucial for ensuring the long-term sustainability of the business.
• Independent Oversight:
Committees like the Audit Committee and Nomination and Remuneration Committee
typically include independent directors, which adds an extra layer of objectivity and
credibility to the oversight process. They maximise the value of the input from non-
executive directors, given their limited time commitment.
• Shareholder Protection:
Committees such as the Stakeholders Relationship Committee and the Corporate Social
Responsibility (CSR) Committee contribute to protecting the interests of shareholders and
other stakeholders. They address grievances, oversee CSR activities, and ensure
compliance with legal and ethical standards.
• Compliance with Regulations:
Many committees are mandated by the Companies Act or other regulatory frameworks.
Adhering to the requirements ensures that the company is in compliance with legal and
governance standards.
• Stakeholder Confidence:
The existence of committees, especially those involving independent directors, can
enhance stakeholder confidence by demonstrating a commitment to good governance
practices and transparency.
• Efficient Governance:
Committees allow for a more efficient use of resources. Rather than burdening the
entire board with every operational detail, committees can handle specific areas of
responsibility, leading to streamlined governance. The existence of committees,
especially those involving independent directors, can attract best standard practices.
Lastly, the committees under the Companies Act contribute to the overall
effectiveness of corporate governance by enabling focused attention on specific areas,
promoting diversity of thought, and ensuring compliance with legal and regulatory
standards. They play a vital role in maintaining the integrity and sustainability of
businesses.
Thus, formation of various committees serves diverse purposes leading to an effective
corporate governance regime.
 Mandatory Committees of the Board are
prescribed under Companies Act, 2013 (for
certain class of companies) and SEBI (Listing
Obligations and Disclosure Requirements)
Regulations, 2015 for listed companies.
 Mandatory Committees under the Companies Act,
2013 are:
1. Audit Committee
2. Nomination and Remuneration Committee
3. Stakeholders Relationship Committee
4. Corporate Social Responsibility Committee
AUDIT COMMITTEE
 Audit Committee is one of the main pillars of the
Corporate Governance mechanism in any company.
 The Committee is charged with the principal oversight of
financial reporting and disclosures and aims to enhance
the confidence in the integrity of the company’s financial
reporting, the internal control processes and procedures
and the risk management systems.
 The constitution of Audit Committee is mandated under
the Companies Act, 2013 and SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015.
Constitution of Audit Committee
 Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies
(Meetings of the Board and its Powers) Rules, 2014, provides that the Board of Directors
of following companies are required to constitute an Audit Committee of the Board-
 (i) Every listed public company;
 (ii) All public companies with a paid up capital of 10 crore rupees or more;or
 (iii) All public companies having turnover of 100 crore rupees or more;or
 (iv) All public companies, having in aggregate, outstanding loans, debentures and deposits
exceeding 50 crore rupees .
The paid up share capital or turnover or outstanding loans, debentures and deposits, as the
case may be, as existing on the last date of latest audited financial statements shall be
taken into account for the purposes of this rule.
The following classes of unlisted public companies shall not be covered for the above
purpose:-
(a) a joint venture;
(b) a wholly owned subsidiary; and
(c) a dormant company as defined under section 455 of the Act.
Composition of Audit Committee
 Audit Committee shall consist of a minimum of three Directors, with majority being
independent.
 The majority of members including the Chairperson should be persons with ability to
read and understand the financial statement.
 The requirement of Independent Directors forming a majority is not applicable to
Section 8 companies.
Audit Committee for the listed entities, according to SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015
 Every listed entity shall constitute a qualified and independent audit Committee in
accordance with the terms of reference, subject to the following:
(a) The audit Committee shall have minimum three Directors as members.
(b) Two-thirds of the members of audit Committee shall be Independent Directors
and in case of a listed entity having outstanding SR equity shares, the audit Committee
shall only comprise of Independent Directors
(c) All members of audit Committee shall be financially literate and at least one
member shall have accounting or related financial management expertise.
 The word “financially literate” shall mean the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss
account, and statement of cash flows.
 Further, it has been explained that a member shall be considered to have
accounting or related financial management expertise if he or she
possesses experience in finance or accounting, or requisite professional
certification in accounting, or any other comparable experience or
background which results in the individual’s financial sophistication,
including being or having been a Chief Executive Officer, Chief Financial
Officer or other senior officer with financial oversight responsibilities.
 The regulation further provides that the Chairperson of the audit committee
shall be an Independent Director and he shall be present at the Annual
General Meeting to answer shareholders’ queries. The Company Secretary
shall act as the Secretary to the Audit Committee.
 The Audit Committee at its discretion shall invite the Finance Director or
head of the finance function, head of internal audit and a representative of
the statutory auditor and any other such executives to be present at the
meetings of the committee:
Provided that occasionally the Audit Committee may meet without the presence
of any executives of the listed entity.
 Number of Meetings and Quorum
 In case of unlisted public companies, audit committee may meet as often
as necessary subject to the minimum number and frequency prescribed
by any law or any authority or as stipulated by the Board.
 For listed companies, Regulation 18 of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 provide for the minimum
number of meetings and quorum of the audit committee.
(i) The Audit Committee of a listed entity shall meet at least four (4) times
in a year and not more than 120 days shall elapse between two
meetings.
(ii) The quorum for audit Committee meeting shall either be 2 members, or
1/3rd of the members of the Audit Committee, whichever is greater;
with at least 2 Independent Directors.
Functions/Role of the Audit Committee
Every Audit Committee shall act in accordance with the terms of reference specified
in writing by the Board. Terms of reference as prescribed by the Board shall inter
alia, include, –
(a) The recommendation for appointment, remuneration and terms of appointment
of auditors of the company; (In case of Government Companies, in Clause (1) of
sub-section (4) of section 177, for the words “recommendation for appointment,
remuneration and terms of appointment” the words “recommendation for
remuneration” shall be substituted – Exemption Notification dated 05-06-2015)
(b) Review and monitor the auditor’s independence and performance, and
effectiveness of audit process;
(c) Examination of the financial statements and the auditors’ report thereon;
(d) Approval or any subsequent modification of transactions of the company with
related parties;
The Audit Committee may make omnibus approval for related party transactions
proposed to be entered into by the company subject to such conditions as prescribed
under rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014
(e) Scrutiny of inter-corporate loans and investments;
(f) Valuation of undertakings or assets of the company, wherever it is necessary;
(g) Evaluation of internal financial controls and risk management systems;
(h) Monitoring the end use of funds raised through public offers and related matters.
The Audit Committee has the power to call for the comments of the auditors about
internal control systems, the scope of audit, including the observations of the
auditors and review of financial statements before their submission to the Board
and may also discuss any related issues with the internal and statutory auditors and
the management of the company.
The Audit Committee has authority to investigate into any matter in relation to the
items specified in terms of reference as per Section 177(4) or referred to it by the
Board and for this purpose the Committee has power to obtain professional advice
from external sources. The Committee for this purpose shall have full access to
information contained in the records of the company.
The auditors of a company and the key managerial personnel have a right to be
heard in the meetings of the Audit Committee when it considers the auditor’s report
but shall not have the right to vote.
VIGIL MECHANISM
Section 177 read with Rule 7 of the Companies (Meetings of Board and its powers) Rules, 2014, every listed
company and the companies belonging to the following class or classes shall establish a vigil mechanism for
their Directors and employees to report their genuine concerns or grievances-
(a) The Companies which accept deposits from the public;
(b) The Companies which have borrowed money from banks and public financial institutions in excess of fifty
crore rupees.
The vigil mechanism set up as above, shall provide for adequate safeguards against victimisation of employees
and Directors who use such mechanism and make provision for direct access to the Chairperson of the Audit
Committee or the Director nominated to play the role of Audit Committee in appropriate or exceptional cases:
The companies which are required to constitute an Audit Committee shall oversee the vigil mechanism through
the Committee and if any of the members of the Committee have a conflicted of interest in a given case, they
should recuse themselves and the others on the Committee would deal with the matter on hand.
In case of other companies (not required to constitute Audit Committee), the Board of Directors shall nominate
a Director to play the role of Audit Committee for the purpose of vigil mechanism to whom other Directors and
employees may report their concerns.
In case of repeated frivolous complaints being filed by a Director or an employee, the Audit Committee or the
Director nominated to play the role of Audit Committee may take suitable action against the concerned
Director or employee including reprimand.
The details of establishment of the Vigil Mechanism is required to be disclosed by the company on its website,
if any, and in the Board’s report.
Disclosure in Board’s Report
Section 177(8) of the Act provides that the Board’s report u/s 134(3) shall disclose the
following –
 Composition of an Audit Committee
 Where the Board had not accepted any recommendation of the Audit Committee, the
same shall be disclosed in the report along with the reasons.
SECTION 178: NOMINATION AND REMUNERATION
COMMITTEE
The Nomination and Remuneration Committee helps the Board of Directors in the preparations relating
to the election of members of the Board of Directors, and in handling matters within its scope of
responsibility that relate to the conditions of employment and remuneration of senior management,
and to management’s and personnel’s remuneration and incentive schemes.
The responsibilities of the Nomination and Remuneration Committee are defined in Nomination and
remuneration policy or terms of reference of the Nomination and Remuneration document.
The Board of Directors of following companies shall constitute Nomination and Remuneration
Committee of the Board:
(a) Every listed Public Company; or
(b) The following class of companies –
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans , debentures and deposits, exceeding
fifty crore rupees .
The following classes of unlisted public company shall not be covered for above purpose:-
(a) a joint venture;
(b) a wholly owned subsidiary; and
(c) a dormant company as defined under section 455 of the Act
COMPOSITION

The Committee shall consist of three or more non-executive Directors out of

which not less than one-half shall be Independent Directors.
The Chairperson of the company (whether executive or non-executive) may be
appointed as member of the Nomination and Remuneration Committee, but shall
not chair such Committee.
The Companies Act 2013 does not provide for Frequency of meeting and
Quoram for the nomination and remuneration Committee.
Additionally, for listed Companies, Regulation 19 of SEBI (LODR) Regulations, 2015
provide the following for the nomination and remuneration Committee
 It shall comprise of :
(a) At least three non- executive directors.
(b) At least 2/3rd of the Directors shall be Independent Directors; and
(c) The Chairperson of the nomination and remuneration Committee shall be an
Independent Director.
 The quorum for a meeting of the nomination and
remuneration Committee shall be either two members or
one third of the members of the Committee, whichever is
greater, including at least one Independent Director in
attendance.
 The nomination and remuneration Committee shall meet at
least once in a year.
 The Committee shall recommend to the Board, all
remuneration, in whatever form, payable to senior
management.
 The Chairperson of the nomination and remuneration
Committee may be present at the annual general meeting,
to answer the shareholders’ queries; however, it shall be up
to the Chairperson to decide who shall answer the queries.
 Functions of NRC
As per section 178(2) of the Act, the Committee shall identify the person qualified to
become Directors and may be appointed in senior management and recommend to
the Board their
 appointment and
 removal and
 shall specify the manner for effective evaluation of performance of Board, its
Committees and individual Directors to be carried out,
 Either by the Board, by the Nomination and Remuneration Committee or by an
independent external agency and
 review its implementation and compliance.
As per section 178(3) of the Act, the Committee shall formulate the criteria, for
determining qualifications, positive attributes and independence of a Director and
recommend to the Board the policy relating to remuneration for Directors, KMPs and
other employees.
As per section 178(4) of the Act, while formulating its policy, the
Nomination and Remuneration Committee shall ensure that
(a) the level and composition of remuneration is reasonable and
sufficient to attract, retain and motivate the directors of the
quality required to run the company successfully;
(b) relationship
of remuneration to performance is clear and meets
appropriate performance benchmarks and
(c) remuneration to Directors, key managerial personnel and senior
management involves a balance between fixed and incentive pay
reflecting short and long-term performance objectives
appropriate to the working of the company and its goals:
Provided that such policy shall be placed on the website of the
company, if any, and the salient features of the policy and changes
therein, if any, along with the web address of the policy, if any,
shall be disclosed in the Board’s report.
STAKEHOLDER’S RELATIONSHIP COMMITTEE
 Section 178(5) of the Companies Act, 2013 provides for constitution of
the stakeholders relationship committee.
 The Board of a company that has more than one thousand
shareholders, debenture-holders, deposit-holders and any other
security holders at any time during a financial year is required to
constitute a Stakeholders Relationship Committee.
 consisting of a chairperson who shall be a non-executive director
and such other members as may be decided by the Board.
 The stakeholders relationship committee shall consider and resolve
the grievances of security holders of the company.
 The Companies Act 2013 does not provide for frequency of meeting of
the Stakeholders Relationship Committee.
 The chairperson of each of the committees constituted under this
section or, in his absence, any other member of the committee
authorised by him in this behalf shall attend the general meetings of
the company.
 As per Regulation 20 of SEBI (LODR) Regulations, 2015, the listed
entity shall constitute a Stakeholders Relationship Committee
 Listed entity even if having less than 1000 debenture holders/security
holders is required to constitute a stakeholder relationship
Committee.
 to specifically look into various aspects of interest of shareholders,
debenture holders and other security holders.
 The stakeholders relationship committee consists of at least three
directors, with at least one being an independent director, shall be
members of the Committee
 The chairperson of this committee shall be a non-executive director.
 The Stakeholders Relationship Committee shall meet at least once in a
year.
 The Chairperson or in his absence, any other member of the
committee authorised by him in this behalf shall attend the annual
general meetings to answer queries of the security holders.
 ROLE OF SRC
 The role of the Stakeholders Relationship Committee shall be as specified as in
Part D of the Schedule II of the SEBI (LODR) Regulations, 2015.
1. Resolving the grievances of the security holders of the listed entity including
complaints related to transfer/transmission of shares, non-receipt of annual report,
non-receipt of declared dividends, issue of new/duplicate certificates, general
meetings etc.
2. Review of measures taken for effective exercise of voting rights by shareholders.
3. Review of adherence to the service standards adopted by the listed entity in
respect of various services being rendered by the Registrar & Share Transfer Agent.
4. Review of the various measures and initiatives taken by the listed entity for
reducing the quantum of unclaimed dividends and ensuring timely receipt of
dividend warrants/annual reports/statutory notices by the shareholders of the
company.
Penalty for Contravention

 Section 178(8) provides that the company shall be liable to a penalty of five
lakh rupees for contravention of provisions of Section 177 and 178. Every
officer of the company who is in default shall be liable to a penalty of one
lakh rupees.
 However, inability to resolve or consider any grievance by the Stakeholders
Relationship Committee in good faith shall not constitute a contravention of
this section.