Board Committees: formula sheet

Key formulas

Powers to be exercised only at Board meetings

Section 179(3): calls, buy-back, issue of securities, borrowing, investing, loans/guarantee/security, financial statements and Board's report, diversification, amalgamation/merger/reconstruction, takeover/controlling stake, other prescribed matters

These need a Board resolution passed at a meeting.

Delegable powers

Section 179(3) proviso: clauses (d) to (f) only = borrow monies, invest funds, grant loans/guarantee/security

Delegation is by a resolution passed at a meeting, to a committee of directors, MD, manager or other principal officer, on stated conditions.

Audit Committee composition

Section 177(2): minimum 3 directors; independent directors form a majority

Majority of members, including the Chairperson, must be able to read and understand financial statements.

Audit Committee requirement

Section 177(1): every listed public company and prescribed classes

Acts on written terms of reference set by the Board.

Auditors and KMP at Audit Committee

Section 177(7): right to be heard when the auditor's report is considered; no right to vote

Applies to the auditors and key managerial personnel.

Disclosure of Audit Committee

Section 177(8): Board's report discloses its composition and any recommendation not accepted, with reasons

Links committees to the Board's report.

Power to constitute committees (s. 378U(1))

Board may constitute such number of committees as it deems fit, to assist it in efficient discharge of its functions

The purpose is assistance. The number of committees is left to the board.

Limit on delegation (proviso to s. 378U(1))

Board shall not delegate any of its powers, or assign the powers of the Chief Executive, to any committee

The Chief Executive is the one appointed under section 378W. Quote this proviso in any delegation question.

Co-option (s. 378U(2))

Co-option allowed with Board approval; Chief Executive or a director must be a member

The number of co-opted persons is as the committee deems fit, but only after the Board approves.

Control of the Board (s. 378U(3))

Committee functions under Board's general superintendence, direction and control, for such duration and in such manner as the Board directs

The board sets the life and working method of the committee.

Fee and allowances (s. 378U(4))

Fee and allowances of members = as determined by the Board

The committee cannot fix its own fee.

Minutes (s. 378U(5))

Minutes of each committee meeting → placed before Board at its next meeting

This applies to each meeting, not once a year.

Contrast: Audit Committee composition (s. 177(2))

Minimum 3 directors; independent directors form a majority

Compulsory for every listed public company and prescribed classes. Do not apply this to a s. 378U committee.

Contrast: Nomination and Remuneration Committee (s. 178(1))

3 or more non-executive directors; not less than one-half independent

The company's chairperson may be a member but shall not chair it.

Who must constitute it

Every listed public company + prescribed classes of companies

Section 177(1). Say 'prescribed' for unlisted classes.

Composition

Minimum 3 directors; independent directors = majority

Section 177(2). Majority including Chairperson must be able to read and understand financial statements.

Terms of reference

Written terms specified by the Board

Section 177(4). The listed items are 'inter alia', so not exhaustive.

Related party transactions

Audit Committee approves or modifies; omnibus approval allowed on prescribed conditions

Section 177(4)(iv) and its provisos.

Unapproved small transaction

Amount not exceeding ₹1 crore, not ratified within 3 months → voidable at the Committee's option

Applies where a director or officer entered it without approval. Director concerned indemnifies the company if the transaction is with a related party of a director or authorised by another director.

Right to be heard

Auditors and KMP: heard, no vote

Section 177(7), when the committee considers the auditor's report.

Vigil mechanism

Listed companies and prescribed classes; direct access to Audit Committee chairperson in appropriate or exceptional cases

Section 177(9) and (10). Disclose on website, if any, and in Board's report.

Penalty for contravention of Sections 177 and 178

Company: fine ₹1 lakh to ₹5 lakh; officer in default: penalty as stated in Section 178(8)

Quote the company fine range; for officers, refer to the penalty in Section 178(8).

Size and independence (Section 178(1))

Members ≥ 3, all non-executive; independent directors ≥ 1/2 of members

Applies to every listed public company and other prescribed classes. Half is enough; it need not be a majority.

Chairperson rule (proviso to Section 178(1))

Company chairperson may be a member but shall not chair the NRC

Applies whether the company chairperson is executive or non-executive.

Functions (Section 178(2) and (3))

Identify and recommend directors and senior management; specify evaluation manner and review it; formulate criteria; recommend remuneration policy

The NRC recommends. The Board takes the decision.

Policy tests (Section 178(4))

(a) reasonable and sufficient pay; (b) clear link of pay to performance; (c) balance of fixed and incentive pay, short and long term

These three conditions apply to directors, KMP and senior management.

Disclosure (proviso to Section 178(4))

Policy on website, if any; salient features, changes and web address in Board's report

Website disclosure applies where the company has a website.

Penalty (Section 178(8))

Company: fine ₹1,00,000 to ₹5,00,000; each officer in default: penalty ₹1,00,000

Section 178(8) also covers contravention of Section 177.

Attendance at general meetings (Section 178(7))

NRC chairperson, or a member authorised by him, attends general meetings

Applies to the chairperson of each committee under Section 178.

Applicability

Security holders > 1,000 at any time during a financial year → constitute SRC

Section 178(5). Count shareholders, debenture-holders, deposit-holders and other security holders together.

Composition

Chairperson = non-executive director; other members = as decided by the Board

Section 178(5). The Act fixes no minimum size and no independent director requirement.

Function

Consider and resolve grievances of security holders

Section 178(6).

Attendance at general meetings

SRC chairperson (or member authorised by him) attends general meetings

Section 178(7). Applies to every committee under the section.

Penalty for contravention

Company: fine ₹1,00,000 to ₹5,00,000; each officer in default: penalty of ₹1,00,000

Section 178(8), as it reads in the supplied text, covers contravention of Section 177 and Section 178. Good-faith inability to resolve a grievance is not a contravention.

Applicability thresholds (Section 135(1))

Net worth ≥ ₹500 crore OR Turnover ≥ ₹1,000 crore OR Net profit ≥ ₹5 crore (in the immediately preceding financial year)

Any one limit triggers the Committee. Test is on the immediately preceding financial year.

Composition (Section 135(1))

Minimum 3 directors, including at least 1 independent director

If the company need not appoint an independent director under Section 149(4), the minimum is 2 or more directors.

Committee functions (Section 135(3))

(a) formulate and recommend CSR Policy; (b) recommend expenditure amount; (c) monitor the CSR Policy from time to time

The policy must indicate activities in areas or subjects specified in Schedule VII.

Board duties (Section 135(4))

Approve CSR Policy after considering Committee recommendations; disclose policy contents in report and on website; ensure activities are undertaken

The Board approves. The Committee only recommends.

Minimum spend (Section 135(5))

Minimum CSR spend = 2% × average net profit of the 3 immediately preceding financial years

Net profit is calculated as per Section 198. For a company not yet three years old, use the immediately preceding years completed.

Exemption from Committee (Section 135(9))

If amount to be spent under Section 135(5) ≤ ₹50 lakh, no Committee; Board discharges its functions

The duty to spend remains. Only the Committee requirement falls away.

Role of any board committee

Committee assists the board; the board remains accountable

Committees work under the board's direction and report to it. They do not replace the board.

Statutory committees for comparison (s.177)

Audit Committee: minimum 3 directors, independent directors in majority

Section 177(4)(vii) lists evaluation of internal financial controls and risk management systems in the audit committee's terms of reference. This is why risk can sit with both committees.

Statutory committees for comparison (s.178)

NRC: 3 or more non-executive directors, at least one-half independent; chairperson of the company may be a member but cannot chair it

Use as a contrast. RMC and ESG committee composition is set by SEBI rules or board choice, not by these sections.

Committee reporting

Committee minutes → placed before the board at its next meeting

This is stated in section 378U(5) for producer companies. Apply it as good practice for other companies and say so.

Committee resolution by circulation (s.175)

Draft and papers to all members + approval by majority entitled to vote + noted at next meeting

If one-third of directors require a decision at a meeting, the chairperson must put the resolution to a meeting of the Board.

Committee mandate structure

Purpose + composition + chair + quorum + meeting frequency + powers + reporting

Use this checklist when asked to draft or explain terms of reference.

Quick revision

• Audit Committee: minimum three directors, independent directors form a majority.
• Majority of Audit Committee members, including the Chairperson, must be able to read and understand financial statements.
• Audit Committee works under written terms of reference set by the Board.
• Auditors and KMP may be heard at Audit Committee meetings on the auditor's report but cannot vote.
• The Board's report must disclose the Audit Committee's composition and any recommendation the Board did not accept, with reasons.
• Vigil mechanism must safeguard against victimisation and give direct access to the Audit Committee chairperson in appropriate cases.
• NRC: three or more non-executive directors, not less than one-half independent.
• The company chairperson may be an NRC member but cannot chair it.
• NRC recommends the remuneration policy; the policy goes on the company website and its salient features in the Board's report.
• SRC is needed where there are more than one thousand security holders in a financial year; its chairperson must be a non-executive director.
• Committee chairpersons, or an authorised member, must attend general meetings.
• Contravention of sections 177 or 178: company fine of ₹1,00,000 to ₹5,00,000, plus penalty on officers in default.

Common mistakes

• Saying a committee can exercise any Board power. Fix: Remember that only borrowing, investing and loans/guarantees (section 179(3), clauses (d) to (f)) can be delegated. The rest need a Board resolution at a meeting.
• Treating all committees as mandatory. Fix: Say mandatory committees apply to prescribed classes of companies. Risk, ESG and Finance committees are optional unless a regulation requires them for a listed entity.
• Saying the board can delegate any power to a committee under section 378U. Fix: Quote the proviso: the Board shall not delegate any of its powers to any committee. The committee assists and does not take over the board's powers.
• Forgetting that the Chief Executive's powers also cannot be assigned to a committee. Fix: Remember it as two limits in one proviso: board powers and Chief Executive powers.
• Saying independent directors must be two-thirds or at least one-half of the Audit Committee. Fix: Audit Committee: independent directors form a majority. NRC: not less than one-half independent.
• Saying the Audit Committee consists of non-executive directors only. Fix: Section 177(2) only says minimum three directors with independent directors in majority.
• Saying at least two-thirds or a majority of the NRC must be independent. Fix: Remember: NRC needs not less than one-half independent; Audit Committee needs a majority.
• Allowing an executive director to sit on the NRC. Fix: Check two things: every member is non-executive, and at least half are independent.
• Counting only shareholders for the 1,000 threshold. Fix: Section 178(5) counts shareholders, debenture-holders, deposit-holders and any other security holders together.
• Saying the committee is required only for listed companies. Fix: The SRC trigger in the Act is the number of security holders, not listing status.

Exam tips

• Open with a one-line definition, then need, types and limits. This pattern fits most questions.
• In case questions, check whether the delegated power is within section 179(3) clauses (d) to (f) and whether a Board resolution at a meeting exists.
• Give the Audit Committee composition exactly: at least three directors, independent directors in the majority.
• Mention that committee minutes and recommendations go back to the Board, which keeps the final responsibility.
• Give the section number only where you are sure. Otherwise state the rule in plain words.
• Begin every answer with the type of company. Section 378U is for a Producer Company, and examiners reward that precision.
• Quote the proviso on delegation almost word for word. It is the most testable line in the section.
• Use the structure provision, facts, analysis, conclusion. Add one practical drafting point, such as the wording of the board resolution that constitutes the committee.