Board Committees

In one line

A listed public company and other prescribed companies must have an Audit Committee of at least three directors with a majority of independent directors, and a Nomination and Remuneration Committee of three or more non-executive directors half of them independent; a company with more than a thousand security holders must have a Stakeholders Relationship Committee; and a listed company must have a vigil mechanism giving whistleblowers direct access to the Audit Committee's chairperson.

In exam wording: section 177 creates the Audit Committee and the vigil mechanism; section 178 creates the Nomination and Remuneration Committee and the Stakeholders Relationship Committee.

Why the law has this at all

A Board of a dozen people meeting a few times a year cannot itself examine the auditor's independence, read every related party contract, design a remuneration policy and answer a shareholder whose dividend warrant never arrived. So the Act carves out the work that most needs sustained attention and gives it to standing committees, each with a composition designed for its task.

The design of each committee follows from its job.

The Audit Committee checks the numbers and the people who certify them, so it needs a majority of independent directors and members who can read and understand a financial statement.

The Nomination and Remuneration Committee decides who joins the Board and what everybody is paid, so it must contain no executive directors at all and at least half independent ones. Nobody should be setting his own salary.

The Stakeholders Relationship Committee answers complaints, so it needs only a non-executive chairperson and whatever members the Board decides.

And the vigil mechanism exists because the person who knows about a fraud is usually junior to the person committing it, which is why the Act gives that person direct access to the chairperson of the Audit Committee and safeguards against victimisation.

Some words this chapter uses

Independent director is defined in section 149(6). Non-executive director means a director who is not a managing or whole-time director. Senior management is defined in the Explanation to section 178. Omnibus approval is a standing approval for a class of transactions rather than a single one. A vigil mechanism is what is commonly called a whistleblower policy.

Who must have an Audit Committee: section 177(1) to (3)

The Board of Directors of every listed public company and such other class or classes of companies as may be prescribed shall constitute an Audit Committee.

Note the words "listed public company". They were substituted for "listed company", so a listed private company, if such a thing exists in a given case, is outside the compulsion.

Section 177(2): the composition. The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.