Board Committees

Four provisos qualify clause (iv), and they are examinable. The committee may make omnibus approval for related-party transactions subject to prescribed conditions. For a transaction other than one under s.188 that the committee does not approve, it makes its recommendations to the Board. Where a transaction not exceeding one crore rupees is entered into by a director or officer without the committee's approval and is not ratified within three months, it is voidable at the committee's option, and if it is with a party related to any director or was authorised by any other director, that director shall indemnify the company against loss. And the clause does not apply to a transaction, other than one under s.188, between a holding company and its wholly owned subsidiary.

177(5) and (6): the committee's reach. It may call for the comments of the auditors on internal control systems, the scope of audit and their observations, and review the financial statement before submission to the Board, and may discuss related issues with the internal and statutory auditors and the management. It has authority to investigate any matter within sub-section (4) or referred by the Board, with power to obtain professional advice from external sources and full access to the company's records.

177(7): who may speak. The auditors and the key managerial personnel have a right to be heard in the committee's meetings when it considers the auditor's report, but no right to vote.

177(8): the override, disclosed. The Board's report under s.134(3) shall disclose the composition of the Audit Committee and, where the Board has not accepted any recommendation of the committee, that fact with the reasons.

177(9) and (10): the vigil mechanism. Every listed company and prescribed classes shall establish a vigil mechanism for directors and employees to report genuine concerns; it shall provide adequate safeguards against victimisation and direct access to the chairperson of the Audit Committee in appropriate or exceptional cases, and its establishment shall be disclosed on the company's website, if any, and in the Board's report.

Section 178: nomination, remuneration and stakeholders

178(1): composition. Every listed public company and prescribed classes shall constitute a Nomination and Remuneration Committee of three or more non-executive directors, not less than one-half of whom shall be independent directors. A proviso permits the chairperson of the company, whether executive or non-executive, to be a member but not to chair the committee.

178(2): people. The committee shall identify persons qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend their appointment and removal to the Board, and, as substituted, specify the manner for effective evaluation of the performance of the Board, its committees and individual directors, to be carried out by the Board, by the committee, or by an independent external agency, and review its implementation and compliance.

178(3) and (4): pay. The committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend a remuneration policy for directors, key managerial personnel and other employees. In formulating it, the committee shall ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required; that the relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and that remuneration involves a balance between fixed and incentive pay reflecting short and long-term performance objectives.

178(5) to (7): the Stakeholders Relationship Committee. The Board of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee, with a chairperson who is a non-executive director and such other members as the Board decides, to consider and resolve the grievances of security holders. The chairperson, or in his absence any other member authorised by him, shall attend the general meetings of the company.

178(8): the sanction, in the corrected form recorded in the front matter: the company is liable to a penalty of five lakh rupees and every officer in default to a penalty of one lakh rupees for contravention of s.177 or this section. A proviso preserves the position that inability to resolve or consider a grievance in good faith shall not constitute a contravention of s.178.

That proviso is worth naming: a stakeholders committee is not made an insurer of outcomes; it must consider grievances in good faith, and failure to satisfy a complainant is not itself an offence.

A worked example

Deccan Alloys Limited is a listed public company with a board of nine, of whom three are independent and two are executive. It has 1,600 shareholders.

Which committees must it have? All three. An Audit Committee under s.177(1); a Nomination and Remuneration Committee under s.178(1); and, having more than one thousand security holders, a Stakeholders Relationship Committee under s.178(5).

The Audit Committee's composition. At least three directors with independent directors in a majority, so with three independent directors available the committee might be two independent and one other; the majority including the chairperson must be able to read and understand the financial statement.

The Nomination and Remuneration Committee's composition. Three or more non-executive directors with not less than half independent, so a committee of four would need two independent members. The chairperson of the company may sit on it but may not chair it.

A related-party contract for eighty lakh rupees. An officer signs it without the Audit Committee's approval. If it is not ratified by the committee within three months, it is voidable at the committee's option, and if it is with a party related to any director, or was authorised by another director, that director must indemnify the company against loss. Had the amount exceeded one crore rupees, that particular proviso would not apply and the transaction would fall to be dealt with under s.188 and the general law.

The Board disagrees. The Audit Committee recommends against reappointing the statutory auditor; the Board reappoints anyway. It may, but the Board's report must disclose that the recommendation was not accepted, with the reasons, s.177(8), so the disagreement becomes public.

A whistle-blower. An employee reports a suspected diversion of funds through the vigil mechanism. The mechanism must protect him against victimisation and must allow direct access to the chairperson of the Audit Committee in appropriate or exceptional cases, and the fact that the company has such a mechanism must be on its website and in the Board's report.

A shareholder grievance. A member complains that his transfer has not been registered. The Stakeholders Relationship Committee, chaired by a non-executive director, must consider and seek to resolve it; if it considers the grievance in good faith and cannot resolve it, that is not a contravention of s.178.

Distinctions

What it does NOT mean

Not that the committees decide for the Board. Their functions are recommendatory except where the Act gives them an approval power, notably s.177(4)(iv); the Board remains the decision-maker, at the price of public disclosure under s.177(8).

Not that the auditor is a member. Under s.177(7) auditors and key managerial personnel have a right to be heard when the auditor's report is considered, but no right to vote.

Not that s.178(8) reads as India Code prints it. The current text is a penalty of five lakh rupees on the company and one lakh rupees on every officer in default, as the 2020 amending Act's substituted words show.

Quick revision

s.177: listed public companies and prescribed classes; three directors minimum, independent majority, financially literate majority and chairperson; terms of reference include auditor recommendation, auditor independence, examination of the financial statement, related-party approvals with omnibus approval and the one-crore ratification rule, inter-corporate loans, valuation, internal financial controls, end use of public-offer funds; may call for auditors' comments and investigate with external advice and full access to records; auditors and KMP heard, not voting; Board's report discloses composition and any non-acceptance with reasons; vigil mechanism with anti-victimisation safeguards and direct access to the Audit Committee chairperson, disclosed on the website and in the Board's report. s.178: NRC of three or more non-executive directors, half independent, company chairperson a member but not chair; identifies directors and senior management, recommends appointment and removal, specifies the evaluation method; formulates criteria and a remuneration policy balancing sufficiency, performance linkage and fixed against incentive pay; SRC where security holders exceed one thousand, chaired by a non-executive director who attends general meetings; penalty five lakh rupees on the company, one lakh on each officer in default, with good-faith inability to resolve a grievance not a contravention.

Test yourself

1. What is the composition requirement of the Audit Committee? At least three directors with independent directors forming a majority, and the majority of members including the chairperson must be able to read and understand the financial statement.

2. A related-party transaction of eighty lakh rupees is entered into without the Audit Committee's approval. What follows? If not ratified within three months, it is voidable at the option of the Audit Committee; and where the transaction is with a party related to any director or was authorised by another director, that director must indemnify the company against any loss.

3. May the Board reject the Audit Committee's recommendation? Yes, but the Board's report must disclose the non-acceptance with reasons, s.177(8).

4. Who may chair the Nomination and Remuneration Committee? Not the chairperson of the company, who may be a member but is expressly forbidden to chair it; the committee must consist of three or more non-executive directors, not less than half independent.

5. When must a company have a Stakeholders Relationship Committee? Where it has more than one thousand shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year, s.178(5).