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

Veda Textiles Ltd, a listed public company, is forming its Audit Committee. The Board proposes four members: two independent directors and two non-independent directors, and will appoint a non-independent director as Chairperson. Which statement about the proposed composition is correct under section 177 of the Companies Act, 2013?

The composition does not comply. Section 177(2) requires at least three directors with independent directors forming a majority. Two independent directors among four members is only half, not a majority, so the Board must add an independent director or change the mix of members.

  1. AIt complies, because the Act requires only three members and does not mention independent directors
  2. BIt does not comply, because independent directors must form a majority, and two of four is not a majorityCorrect
  3. CIt complies, because the Chairperson may be any director appointed by the Board
  4. DIt does not comply, because the Audit Committee must consist only of independent directors

Explanation

Section 177(2) requires a minimum of three directors with independent directors forming a majority. Two out of four is exactly half, not a majority. The Act does not require all members to be independent, so the last option overstates the rule.

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