Company Law and Practice · Meetings of Board and its Committees

Board Committees: Audit, Nomination and Remuneration, Stakeholders

Updated 11 October 2026 · Fact-checked

Board committees are smaller groups of directors that handle specific tasks for the Board. The Companies Act, 2013 requires an Audit Committee (section 177), a Nomination and Remuneration Committee and a Stakeholders Relationship Committee (both section 178). To answer questions, state who must form it, its composition, its functions and the penalty for default.

Understand Board Committees: Audit, Nomination and Remuneration, Stakeholders

A Board cannot examine every detail itself. So the law lets it hand specific work to committees. Three statutory committees come up most often: the Audit Committee, the Nomination and Remuneration Committee (NRC) and the Stakeholders Relationship Committee (SRC).

Each committee has a different job. The Audit Committee watches financial reporting, auditors, related party transactions and internal controls. The NRC deals with who sits on the Board and in senior management, how they are evaluated and how they are paid. The SRC resolves the grievances of security holders.

The key point is that these committees are built to be independent of the management. That is why the law asks for independent directors in the Audit Committee and the NRC, and a non-executive chairperson in the SRC. Independence is what makes the oversight meaningful.

A committee works under the Board's terms of reference. The Board may not give away powers that the law keeps with it. For the special case of Producer Companies, section 378U says the Board must not delegate any of its powers or assign the powers of the Chief Executive to a committee, and that committee minutes go to the Board at its next meeting.

In the exam, you are usually asked to (a) state who must constitute a committee, (b) give its composition, (c) list its functions, or (d) apply these to a given company. Learn the three committees side by side so you can compare them.

Key rules to remember

Audit Committee: who must form it: Every listed public company and such other classes of companies as may be prescribed (section 177(1)); The Act says 'listed public company' after the 2018 amendment. The prescribed classes come from the Rules.
Audit Committee: composition: Minimum 3 directors; independent directors form a majority (section 177(2)); Majority of members, including the Chairperson, must be able to read and understand financial statements.
Audit Committee: right to be heard: Auditors and KMP may be heard when the auditor's report is considered, but cannot vote (section 177(7)); Do not say they are members.
NRC: who must form it: Every listed public company and such other classes as may be prescribed (section 178(1)); Same coverage as the Audit Committee.
NRC: composition: 3 or more 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.
NRC: functions: Identify persons qualified to be directors or senior management; recommend appointment and removal; specify manner of evaluation of Board, committees and directors; formulate criteria for qualifications, positive attributes and independence; recommend remuneration policy (section 178(2) and (3)); The remuneration policy must be on the company website, if any, and its salient features in the Board's report (section 178(4) proviso).
SRC: who must form it: Board of a company with more than 1,000 shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year (section 178(5)); The test is the number of security holders, not listing.
SRC: composition and role: Chairperson must be a non-executive director; other members as decided by the Board; considers and resolves grievances of security holders (section 178(5) and (6)); Inability to resolve a grievance in good faith is not a contravention (proviso to section 178(8)).
Attendance at general meetings: Chairperson of each committee, or a member authorised by him, must attend general meetings (section 178(7)); Applies to committees under section 178.
Penalty for default: Company: fine not less than ₹1,00,000, up to ₹5,00,000; every officer in default: penalty of ₹1,00,000 (section 178(8)); The text as supplied is worded unclearly about the officer's penalty. Confirm the exact officer figure from your study material.

How to solve Board Committees: Audit, Nomination and Remuneration, Stakeholders questions

Use this method for any question on statutory Board committees, whether it is theory, a comparison or a case study.

1Identify the committee asked about: Audit (section 177), NRC or SRC (section 178).
2State who must constitute it: listed public companies and prescribed classes for Audit and NRC; more than 1,000 security holders for SRC.
3Give the composition with exact numbers: 3 directors with independent majority; 3 non-executive directors with at least half independent; non-executive chairperson for SRC.
4List the functions that match the facts in the question. Pick the ones relevant, do not dump everything.
5Apply to the facts: count directors, check independence and whether a person is executive or non-executive, and check the number of security holders.
6Mention consequences: penalty under section 178(8) for default, and any exception such as good-faith inability to resolve a grievance.
7Close with a clear conclusion that answers the exact question asked.

Quickest way: Three-committee comparison grid

When to use it: Use it when a question asks for differences or when you must recall composition quickly.

Draw three columns in your rough work: Audit, NRC, SRC.
Fill one row each for section, applicability, minimum members, independence rule and main role.
Audit: 177, listed public, 3 directors, independent majority, financial oversight.
NRC: 178, listed public, 3 non-executive, at least half independent, appointments and pay.
SRC: 178(5), more than 1,000 security holders, non-executive chairperson, grievances.
Copy the relevant row into your answer and add the penalty line.

Common mistakes in Board Committees: Audit, Nomination and Remuneration, Stakeholders

Saying the Audit Committee needs three independent directors.
Students mix up 'majority independent' with 'all independent'.
Fix: Write: minimum three directors, with independent directors forming a majority.
Saying the NRC can have executive directors as members.
Confusion with the Audit Committee, which says 'directors'.
Fix: NRC has three or more non-executive directors, not less than one-half of them independent.
Allowing the company's chairperson to chair the NRC.
Students remember that the chairperson may be a member and forget the limit.
Fix: The chairperson may be a member but shall not chair the NRC.
Linking the SRC to listing.
Students assume all section 178 committees apply to listed companies only.
Fix: The SRC depends on having more than one thousand security holders at any time in a financial year.
Treating auditors as Audit Committee members with voting rights.
Auditors attend meetings, so students think they are members.
Fix: Auditors and KMP have a right to be heard on the auditor's report but cannot vote.
Stating the penalty for any failure of the SRC to resolve a grievance.
Students skip the proviso.
Fix: Inability to resolve or consider a grievance in good faith is not a contravention.

Worked examples

Example 1

Sunrise Textiles Ltd is a listed public company. Its Audit Committee has four members: two independent directors and two executive directors. Does the composition comply with the Companies Act, 2013?

Show the solution

Provision: section 177(2) requires a minimum of three directors with independent directors forming a majority.
Facts: four members, of whom two are independent and two are executive.
Analysis: the minimum number of three is met. A majority of four means at least three members. Two independent directors are exactly half, not a majority.
Also, a majority of members including the Chairperson must be able to read and understand financial statements. Check this separately.

Answer: The composition does not comply. Independent directors are only two of four, which is not a majority. The company should add at least one more independent director, or replace an executive director with an independent one.

Example 2

Bharat Foods Ltd is a public company with 2,400 debenture-holders and shareholders together. It has no Stakeholders Relationship Committee. Is it in breach? What if its chairperson is an executive director?

Show the solution

Provision: section 178(5) requires the Board of a company with more than one thousand shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year to constitute an SRC.
Facts: 2,400 security holders, which is more than 1,000.
Analysis: the company must constitute the SRC. Not doing so contravenes section 178.
On the chairperson: section 178(5) requires the SRC's chairperson to be a non-executive director, so an executive director cannot chair it.
Consequence: under section 178(8) the company faces a fine of not less than ₹1,00,000 which may extend to ₹5,00,000, and officers in default are also liable to penalty.

Answer: Yes, the company is in breach for not constituting the SRC. When it does, the chairperson must be a non-executive director, so an executive director cannot chair it.

Exam tips

Answer in ICSI style: provision, facts, analysis, conclusion. Always cite section 177 or 178.
For 'differentiate' questions, use two or three rows: composition, applicability and functions. Keep each point short.
Count carefully in case studies. 'Majority' and 'one-half' are different tests.
Check whether a director is executive, non-executive or independent before judging composition.
Write the penalty line at the end of each answer. It is an easy mark.

Practice questions from Meetings of Board and its Committees

Board Committees: Audit, Nomination and Remuneration, Stakeholders in other exams

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

Board Committees: Audit, Nomination and Remuneration, Stakeholders: frequently asked questions

What is the minimum size of the Audit Committee?

Section 177(2) requires at least three directors, with independent directors forming a majority. Most members, including the Chairperson, must be able to read and understand financial statements.

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

No. The chairperson of the company, whether executive or non-executive, may be a member of the NRC but shall not chair it, as the proviso to section 178(1) states.

Which companies must have a Stakeholders Relationship Committee?

A company with more than one thousand shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year must constitute one under section 178(5). Listing is not the test.

What is the difference between the Audit Committee and the NRC?

The Audit Committee oversees financial reporting, auditors, related party transactions and internal controls. The NRC deals with appointment criteria, evaluation and remuneration policy for directors, KMP and senior management. Their composition rules also differ.

What is the penalty for not constituting these committees?

Under section 178(8), the company is punishable with a fine of not less than ₹1,00,000 which may extend to ₹5,00,000. Officers in default are also liable to penalty. Read the exact officer figure in your study material.