Corporate and Economic Laws · Corporate Governance and Social Responsibility and Sustainability

Corporate Governance Framework under the Companies Act, 2013

Updated 11 October 2026 · Fact-checked

The Companies Act, 2013 builds governance through a balanced board, independent directors, and mandatory committees: Audit Committee (section 177), Nomination and Remuneration Committee and Stakeholders Relationship Committee (section 178). To answer questions, identify the company type, apply the composition rule for each committee, then state the duties and the consequence of default.

Understand Corporate Governance Framework under Companies Act, 2013

Corporate governance is the system by which a company is directed and controlled. The Companies Act, 2013 turns good practice into legal duty. It does this mainly by putting independent voices on the board and by giving specific committees specific jobs.

Three committees matter most for this topic. The Audit Committee (section 177) watches financial reporting, auditors, related party transactions, internal financial controls and risk management. The Nomination and Remuneration Committee (section 178) picks and evaluates directors and senior management and sets the remuneration policy. The Stakeholders Relationship Committee (section 178) resolves grievances of security holders.

Each committee has its own composition rule. Audit Committee: at least three directors, independent directors in a majority. Nomination and Remuneration Committee: three or more non-executive directors, at least one-half independent. Stakeholders Relationship Committee: a non-executive director as chairperson, other members as the Board decides. Do not mix these up. Examiners test exactly this.

The Act also adds safeguards around the committees. Auditors and key managerial personnel have a right to be heard at Audit Committee meetings on the auditor's report but cannot vote. A vigil mechanism must give direct access to the Audit Committee chairperson in appropriate cases. The Board's report must disclose the Audit Committee's composition and any recommendation the Board did not accept, with reasons.

Independent directors tie it together. They sit on these committees, and section 160 even waives the ₹1,00,000 deposit for a person proposed as an independent director, or recommended by the Nomination and Remuneration Committee or the Board. Study the separate topic on Independent Directors for qualifications and duties.

Key rules to remember

Who must constitute the Audit Committee (s.177(1)): Every listed public company + other prescribed classes; Board constitutes it. The Act's wording is 'every listed public company', not every listed company.
Audit Committee composition (s.177(2)): Minimum 3 directors; independent directors form a majority; The majority of members, including the Chairperson, must be able to read and understand financial statements.
Nomination and Remuneration Committee composition (s.178(1)): 3 or more non-executive directors; not less than one-half independent; The company chairperson may be a member but cannot chair this committee.
Stakeholders Relationship Committee (s.178(5)): Required where security holders exceed 1,000 at any time in the financial year; chairperson must be a non-executive director; Security holders include shareholders, debenture-holders, deposit-holders and others. Other members are decided by the Board.
Chairperson at general meetings (s.178(7)): Committee chairperson (or authorised member) attends general meetings; Applies to the chairperson of each committee under section 178.
Penalty for contravention of ss.177 and 178 (s.178(8)): Company: fine ₹1,00,000 to ₹5,00,000; officer in default: penalty as stated in the section; Good-faith inability to resolve or consider a grievance is not a contravention.
Director candidature deposit (s.160): Notice at least 14 days before the meeting + deposit ₹1,00,000 (or higher prescribed amount); Refunded if elected or if more than 25% of total valid votes are secured. No deposit for an independent director, or one recommended by the NRC or Board.

How to solve Corporate Governance Framework under Companies Act, 2013 questions

Use this sequence for any governance question on committees or the board.

1Identify the company: is it a listed public company or a prescribed class? Note the number of security holders if given.
2Name the committee the facts point to: Audit, Nomination and Remuneration, or Stakeholders Relationship.
3State the composition rule for that committee and test the facts against it, counting independent and non-executive directors.
4List the relevant functions or powers from the section that match the facts (for example related party approval, remuneration policy, grievance resolution).
5Check the safeguards: right to be heard, vigil mechanism, Board's report disclosure, website disclosure of the remuneration policy.
6Conclude clearly: compliant or not, what the company must do, and the penalty exposure under section 178(8) if relevant.

Quickest way: Three-committee comparison grid

When to use it: For MCQs and short case questions asking which committee, what composition, or who can chair.

Audit: 3 directors minimum, independents in majority.
NRC: 3 or more non-executive directors, at least half independent, chairperson of the company cannot chair it.
SRC: chair is non-executive, trigger is more than 1,000 security holders.
Match the trigger word in the question: auditors or related parties means Audit; remuneration or appointment means NRC; grievances means SRC.

Common mistakes in Corporate Governance Framework under Companies Act, 2013

Saying the Audit Committee needs a majority of independent directors and the NRC also needs a majority.
Both rules mention independent directors, so they blur together.
Fix: Audit: majority independent. NRC: at least one-half independent, and all members non-executive.
Stating that the company chairperson can never be on the NRC.
Students remember the restriction but not its exact form.
Fix: The chairperson may be a member but shall not chair the NRC.
Saying the Stakeholders Relationship Committee is needed when shareholders exceed 1,000.
Memory shortcut drops the other holders.
Fix: The count covers shareholders, debenture-holders, deposit-holders and other security holders, at any time during the financial year.
Writing that auditors vote at Audit Committee meetings.
Confusing the right to be heard with membership.
Fix: Auditors and KMP have a right to be heard when the auditor's report is considered but no right to vote.
Applying the Audit Committee requirement to every listed company.
The pre-2018 wording was 'every listed company'.
Fix: The current text says 'every listed public company' and other prescribed classes.
Treating failure to resolve a grievance as an automatic contravention.
Students read only the penalty.
Fix: Remember the proviso: inability to resolve or consider a grievance in good faith is not a contravention.

Worked examples

Example 1

The Nomination and Remuneration Committee of Kaveri Textiles Ltd, a listed public company, has five members: the non-executive chairperson of the company (who chairs the committee), one other non-executive director who is independent, and three executive directors. Comment on compliance with section 178.

Show the solution

Section 178(1) requires three or more non-executive directors on the NRC.
Here only two members are non-executive and three are executive. The requirement fails.
At least one-half of the members must be independent. Only one of five is independent, which is below one-half.
The proviso lets the company chairperson be a member but not chair the committee. Chairing it is a further breach.
Consequence: contravention of section 178, punishable under section 178(8) with a company fine of ₹1,00,000 to ₹5,00,000, and liability of officers in default.

Answer: The committee is non-compliant on three counts: non-executive composition, the one-half independence requirement, and the chairperson chairing the committee. The company must reconstitute it, or face the section 178(8) consequences.

Example 2

Arjun Pharma Ltd, a listed public company, has an Audit Committee of four directors, of whom two are independent. The statutory auditor attends the meeting that considers his report and votes on a resolution approving it. Evaluate.

Show the solution

Section 177(2) requires at least three directors, with independent directors forming a majority.
Four members with two independent means exactly half, not a majority. Three independents would satisfy the rule.
Under section 177(7), the auditor has a right to be heard when the report is considered but has no right to vote.
So the auditor's vote has no legal standing.
Under section 177(8), the Board's report must disclose the committee's composition, and any recommendation not accepted by the Board, with reasons.

Answer: The committee is improperly constituted because independent directors are not a majority. The auditor may attend and be heard but cannot vote. The company should add at least one independent director, or replace a non-independent member.

Exam tips

Memorise the three composition rules as a single comparison and revise it before the paper; MCQs usually test one detail.
In case-based MCQs, count heads first: total members, non-executive, independent. Then apply the fraction.
Use section numbers (177, 178, 160) in written answers only where you are sure. The ones in this page are from the Act text.
For long answers, structure by committee: composition, functions, safeguards, penalty. Close with a clear conclusion.
Link this topic to Independent Directors and Board Meetings, Committees and Register of Directors in your revision.

Practice questions from Corporate Governance and Social Responsibility and Sustainability

Corporate Governance Framework under Companies Act, 2013 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Corporate Governance Framework under Companies Act, 2013: frequently asked questions

Which companies must have an Audit Committee under the Companies Act, 2013?

Section 177 requires it for every listed public company and other classes of companies prescribed by the rules. The Board constitutes it. It must have at least three directors with independent directors in a majority.

Can the chairperson of the company chair the Nomination and Remuneration Committee?

No. The chairperson, whether executive or non-executive, may be appointed a member of the committee but shall not chair it. The committee itself must have three or more non-executive directors, at least one-half independent.

When is a Stakeholders Relationship Committee compulsory?

When the company has more than one thousand shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year. Its chairperson must be a non-executive director. It considers and resolves grievances of security holders.

What is the penalty for not complying with sections 177 and 178?

Under section 178(8), the company is punishable with a fine of ₹1,00,000 to ₹5,00,000, and officers in default are also liable to a penalty as the section states. Inability to resolve a grievance in good faith is not a contravention.