Board Effectiveness and Building Better Boards: formula sheet

Key formulas

Three core roles of the board

Board effectiveness = Strategy + Oversight + Accountability

A memory aid, not a legal formula. Use it as the skeleton of any definition answer.

Four inputs to effectiveness

People + Information + Processes + Culture

Use these as headings when asked for characteristics or factors.

Board quorum (Section 174(1))

Quorum = higher of (one-third of total strength) or 2 directors

Fractions are rounded up to one. Total strength excludes vacant places. Participation by video conferencing counts.

Audit Committee composition (Section 177(2))

Minimum 3 directors; independent directors in majority

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

NRC composition (Section 178(1))

3 or more non-executive directors; at least one-half independent

The company chairperson may be a member but cannot chair the committee.

Stakeholders Relationship Committee trigger (Section 178(5))

More than 1,000 security holders at any time in a financial year

Chairperson must be a non-executive director.

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. Applies to every listed public company and prescribed classes.

NRC composition (section 178(1))

3 or more non-executive directors; at least one-half independent

The company chairperson may be a member but cannot chair the NRC. Applies to every listed public company and prescribed classes.

Stakeholders Relationship Committee (section 178(5))

Chairperson must be a non-executive director

Required where the company has more than 1,000 shareholders, debenture-holders, deposit-holders and other security holders at any time in the financial year.

Executive vs non-executive vs independent

Executive = in day-to-day management; Non-executive = on board, not in management; Independent = non-executive with no material link

Every independent director is non-executive, but not every non-executive director is independent.

Committee chairs at general meetings (section 178(7))

Chairperson of each committee, or an authorised member, attends general meetings

Applies to committees constituted under section 178.

Audit Committee composition (section 177(2))

Minimum 3 directors; independent directors form a majority

A majority of members, including the Chairperson, must be able to read and understand financial statements. Section 177(1) requires it for every listed public company and such other classes as prescribed.

Audit Committee terms of reference (section 177(4))

Specified in writing by the Board

Include auditor appointment and remuneration, auditor independence, financial statements, related party approval, inter-corporate loans and investments, valuation, internal financial controls and risk management, end use of funds from public offers.

Audit Committee authority (section 177(6))

Investigate; obtain external professional advice; full access to records

Applies to matters in section 177(4) or referred by the Board.

Board's report disclosure (section 177(8))

Disclose Audit Committee composition and any recommendation not accepted, with reasons

Made in the Board's report under section 134(3).

Vigil mechanism (section 177(9) and (10))

Safeguards against victimisation; direct access to Audit Committee chairperson in appropriate or exceptional cases

Details must be disclosed on the website, if any, and in the Board's report.

Board evaluation statement (section 134(3)(p))

Listed companies and prescribed public companies state how formal annual evaluation of the Board, Committees and individual directors was made

Evaluation feeds training and succession planning.

Who specifies the evaluation method

NRC specifies the manner of evaluation - Section 178(2)

The NRC specifies the manner and reviews implementation and compliance. It is not required to conduct the evaluation itself.

Who may carry out the evaluation

Board OR NRC OR independent external agency

Section 178(2) lists these three options. Say all three in your answer.

What is evaluated

Board + its committees + individual directors

Three levels. Do not leave out committees.

NRC composition

At least 3 non-executive directors; not less than one-half independent - Section 178(1)

The chairperson of the company may be a member but cannot chair the NRC.

Criteria for directors

NRC formulates criteria for qualifications, positive attributes and independence - Section 178(3)

These criteria support the evaluation of individual directors.

Penalty for contravention of section 177 and 178

Company: fine of ₹1,00,000 to ₹5,00,000; each officer in default: penalty as stated in section 178(8)

Quote the company fine range. For officers, the text supplied has been amended, so state the penalty only in general terms unless you are sure.

Status of Section 313

Section 313 = omitted w.e.f. 15-11-2016

Omitted by s. 255 and the Eleventh Schedule (Act 31 of 2016), w.e.f. 15-11-2016. Section 314 is omitted the same way.

Appointment of Company Liquidator

Tribunal appoints at the time of the winding up order (Section 275)

Appointed from insolvency professionals registered under the IBC. Terms and fee are fixed by the Tribunal.

Declaration of independence

Within 7 days of appointment (Section 275(6))

Filed with the Tribunal in the prescribed form, disclosing any conflict of interest. The duty continues throughout the term.

Powers of Company Liquidator

Section 290(1), subject to Tribunal directions and overall control (Section 290(2))

Includes carrying on business as necessary, selling property, selling the undertaking as a going concern, and suing or defending in the company's name.

Effect on officers and employees

Winding up order = notice of discharge (Section 277(3))

Exception: when the business of the company is continued.

Acts needing Tribunal sanction

Section 343(1): paying a class of creditors in full; compromise or arrangement with creditors; compromising calls, debts and claims

A creditor or contributory may apply to the Tribunal about the exercise of these powers (Section 343(3)).

Intimation of the order

Tribunal to send intimation within 7 days to liquidator and Registrar (Section 277(1))

The Registrar endorses his records, notifies in the Official Gazette, and informs the stock exchanges for a listed company.

Quick revision

• Board effectiveness means the board can direct, oversee and hold management accountable in the long-term interest of the company and its stakeholders.
• Audit Committee (section 177): minimum three directors, independent directors in the majority.
• Most Audit Committee members, including the Chairperson, must be able to read and understand financial statements.
• Nomination and Remuneration Committee (section 178): three or more non-executive directors, at least one-half independent.
• The company chairperson may be a member of the Nomination and Remuneration Committee but cannot chair it.
• Stakeholders Relationship Committee: needed where security holders exceed one thousand; chairperson must be a non-executive director.
• Section 178(2): the manner of evaluating the Board, its committees and individual directors must be specified, and its implementation reviewed.
• Listed companies must have a vigil mechanism with safeguards against victimisation and direct access to the Audit Committee chairperson in appropriate cases.
• Section 313 (cesser of Board's powers on appointment of Company Liquidator) stands omitted w.e.f. 15-11-2016.
• Section 275: the Tribunal appoints the Company Liquidator from registered insolvency professionals; a declaration on conflict of interest is due within seven days.
• Section 276: the Tribunal may remove a liquidator for reasons recorded in writing, after giving a hearing, on grounds such as misconduct, fraud or conflict of interest.
• Section 291: the Company Liquidator may appoint professionals with the Tribunal's sanction.

Common mistakes

• Treating compliance as effectiveness, for example saying a board is effective because it meets the legal minimum of committees and meetings. Fix: State that legal structure is necessary but not sufficient. Add that debate, information quality and challenge decide real effectiveness.
• Confusing the board's role with management's role. Fix: Say the board sets direction and monitors. Management executes and reports. Directors should not run daily operations.
• Treating all non-executive directors as independent. Fix: Remember independence needs no material link to the company, promoters or management. A promoter's relative can be non-executive but not independent.
• Saying the Audit Committee needs half independent directors. Fix: Section 177: independent directors form a majority. Section 178(1): at least one-half. Learn them as a pair.
• Listing practices as bare keywords without explaining why they help. Fix: Add a reason for each practice. Marks go to explanation and application.
• Saying the Audit Committee needs only a majority of independent directors and ignoring the minimum of three directors. Fix: State both limbs: at least three directors, independent directors in a majority, and financial literacy of a majority including the Chairperson.
• Saying the NRC must itself evaluate every director. Fix: Write that the NRC specifies the manner and reviews implementation. The evaluation may be done by the Board, the NRC or an independent external agency.
• Leaving out committees from the scope. Fix: Always write the three levels: Board, its committees and individual directors.
• Quoting Section 313 as a section that is still in force. Fix: Write that it was omitted w.e.f. 15-11-2016 and then use Sections 275, 277, 290 and 343.
• Saying directors are automatically removed from office on a winding up order. Fix: Rely only on what the text says: the order is a notice of discharge to officers, employees and workmen (Section 277(3)), except when the business is continued. Do not add a removal rule that is not in the text.

Exam tips

• Open every answer with a clear definition. Examiners look for the three roles: strategy, oversight, accountability.
• In case questions, identify which input (people, information, processes, culture) has failed and name it.
• Quote Sections 174, 177 and 178 only with the exact conditions. If unsure, state the rule without the section number.
• Add one line on ESG and sustainability in every answer, since this is the ESG paper.
• Use headings or bullets with one-line reasoning. Avoid long unstructured paragraphs.
• Quote the section number with the rule. Examiners reward the legal anchor for 177 and 178.
• In case questions, show the count of members and independents in numbers before concluding.
• Use the pair 'majority' for Audit Committee and 'at least one-half' for NRC to avoid mixing them up.