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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Board Effectiveness and Building Better Boards

Sagar Pharma Ltd, a listed public company, wants its audit committee to strengthen board effectiveness in financial oversight. Which composition of its audit committee satisfies the Companies Act, 2013 requirement?

The correct composition is three directors with two independent, and a majority including the Chairperson able to read and understand financial statements. The Act requires at least three members, independent directors forming a majority, and financial literacy among most members including the Chairperson.

  1. AThree directors, of whom one is independent, and all are executive directors
  2. BThree directors, of whom two are independent, and a majority including the Chairperson can read and understand financial statementsCorrect
  3. CTwo directors, both independent, with the Chairperson able to read financial statements
  4. DFour directors, of whom one is independent, with the Chairperson being the managing director

Explanation

Section 177(2) requires a minimum of three directors with independent directors forming a majority, and a majority including the Chairperson must be able to read and understand financial statements. Only option B meets both tests. Option C fails the minimum of three; A and D lack an independent majority.

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