Mandatory Board Committees Under Companies Act, 2013 and SEBI LODR Regulations

Learn about mandatory board committees, their composition requirements, and compliance criteria under Companies Act 2013 and SEBI LODR Regulations. Essential guide for corporate governance professionals.

The Companies Act 2013 and SEBI LODR Regulations 2015 revolutionized corporate governance in India by mandating specific board committees for different categories of companies. These mandatory board committees serve as specialized governance bodies to enhance board effectiveness, ensure regulatory compliance, and strengthen corporate oversight mechanisms.

Understanding the requirements for mandatory board committees is crucial for companies to maintain compliance with Companies Act 2013 provisions and avoid penalties. This comprehensive guide covers all essential aspects of board committee requirements, helping corporate professionals navigate complex regulatory requirements.

Overview of Mandatory Committees

Under the Companies Act 2013 and SEBI LODR Regulations 2015, Indian companies must constitute specific mandatory board committees based on their size, listing status, and financial parameters:

5 Key Mandatory Board Committees:

1. Audit Committee (Section 177 of Companies Act 2013)
2. Nomination and Remuneration Committee (Section 178 of Companies Act 2013)
3. Stakeholders Relationship Committee (Section 178 of Companies Act 2013)
4. Corporate Social Responsibility (CSR) Committee (Section 135 of Companies Act 2013)
5. Risk Management Committee (SEBI LODR Regulation 21)

Each mandatory board committee has specific applicability criteria and functional responsibilities that companies must comply with to avoid penalties.

1. Audit Committee Requirements Under Section 177

The Audit Committee is one of the most critical mandatory board committees under Companies Act 2013, ensuring financial transparency and regulatory compliance.

Who Must Form an Audit Committee?

The Audit Committee under Section 177 is mandatory for:

• All listed companies
• Public companies with paid-up share capital of ₹10 crores or more or
• Public companies with turnover of ₹100 crores or more or
• Public companies with outstanding loans, debentures and deposits in aggregate exceeding ₹50 crores

Exemption: Wholly owned subsidiary

Key Functions

The Audit Committee shall:

• Recommend appointment, remuneration and terms of appointment of auditors
• Review and monitor auditor’s independence and performance
• Examine financial statements and auditor’s report
• Approve or modify transactions of the company with related parties
• Scrutinize inter-corporate loans and investments
• Evaluate internal financial controls and risk management systems
• Monitor end use of funds raised through public offers
• Review functioning of whistle blower mechanism

Click here to read a detailed article on Audit Committee.

2. Nomination and Remuneration Committee under Section 178

The Nomination and Remuneration Committee (NRC) is a mandatory board committee responsible for director appointments and remuneration policies.

NRC Applicability Criteria

The Nomination and Remuneration Committee is mandatory for:

• All listed companies
• Public companies with paid-up share capital of ₹10 crores or more or
• Public companies with turnover of ₹100 crores or more or
• Public companies with outstanding loans, debentures and deposits in aggregate exceeding ₹50 crores

Exemption: Wholly owned subsidiary

Key Functions

The Nomination and Remuneration Committee shall:

• Formulate criteria for determining qualifications, positive attributes and independence of directors
• Recommend to the Board policy relating to remuneration of directors, KMP and other employees
• Formulate criteria for evaluation of performance of independent directors and the Board
• Devise policy on diversity of Board of Directors
• Identify persons qualified to become directors and recommend their appointment/removal
• Determine whether to extend or continue term of appointment of independent director

Click here to read a detailed article on Nomination and Remuneration Committee.

3. Stakeholders Relationship Committee (SRC) under Section 178

The Stakeholders Relationship Committee addresses shareholder grievances and ensures effective stakeholder communication.

When is SRC Mandatory?

The Stakeholders Relationship Committee must be constituted by:

• All listed companies
• Companies having:
  • More than 1,000 shareholders
  • More than 1,000 debenture holders
  • More than 1,000 deposit holders
  • More than 1,000 holders of any other security

Key Functions

The committee shall consider and resolve:

• Grievances of security holders including complaints related to transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends
• Review measures taken for effective exercise of voting rights by shareholders
• Review adherence to service standards adopted for various services
• Review various measures and initiatives for reducing quantum of unclaimed dividends

4. Corporate Social Responsibility (CSR) Committee under Section 135

The CSR Committee oversees corporate social responsibility activities and ensures compliance with CSR spending obligations.

CSR Committee Applicability Criteria

CSR Committee under Section 135 is mandatory for companies meeting any criteria in the preceding financial year:

• Net worth of ₹500 crores or more
• Turnover of ₹1,000 crores or more
• Net profit of ₹5 crores or more

Exemption from CSR Committee

Where the CSR spending obligation does not exceed ₹50 lakhs, the requirement for constitution of CSR Committee is not applicable and the Board can directly discharge the functions

Key Functions

The CSR Committee shall:

• Formulate and recommend CSR Policy indicating activities to be undertaken
• Recommend amount of expenditure to be incurred on CSR activities
• Monitor CSR Policy implementation from time to time
• Prepare transparent monitoring mechanism for ensuring implementation of projects/programs

Click here to read a detailed article on CSR Committee.

5. Risk Management Committee under SEBI LODR Regulation 21

The Risk Management Committee (RMC) ensures comprehensive risk assessment and mitigation for listed companies.

RMC Mandatory Requirements

The Risk Management Committee under SEBI LODR Regulation 21 is mandatory for:

• Top 1,000 listed entities determined on the basis of market capitalization as at the end of the immediate preceding financial year
• High-value debt listed entities

Key Functions

• Formulating detailed risk management policy
• Ensuring risk mitigation measures are in place
• Periodically reviewing and evaluating risk management policy
• Monitoring and reviewing risk management plan
• Recommending risk management procedures to the Board
• Reviewing appointment, removal and terms of remuneration of Chief Risk Officer

Frequently Asked Questions (FAQs)

General Committee Requirements

Q1: Can the same person be a member of multiple committees? A: Yes, a director can be a member of multiple committees subject to compliance with Regulation 26 of SEBI LODR Regulations. However, care should be taken to ensure adequate time commitment and avoid conflicts of interest.

Q2: What happens if a company fails to constitute mandatory committees? A: Non-compliance attracts penalties as specified above. Additionally, it may affect the company’s corporate governance rating and compliance status.

Q3: Can private companies voluntarily constitute these committees? A: Yes, private companies can voluntarily adopt these governance practices even if not mandatorily required.

Audit Committee Specific

Q4: Who can attend Audit Committee meetings? A: Committee members, auditors (statutory and internal), KMP when required, and other invitees as deemed necessary by the committee.

Q5: Can an executive director be part of the Audit Committee? A: Yes, executive director can be part of the Audit Committee.

Q6: What is the role of Audit Committee in related party transactions? A: The committee must approve or modify all related party transactions and ensure they are at arm’s length and in the ordinary course of business.

Nomination and Remuneration Committee

Q7: Can the Chairperson of the company chair the NRC even though he/ she is executive director? A: Yes, the Chairperson of Company can be a Chairperson of NRC.

Q8: What should the remuneration policy cover? A: The policy should cover remuneration for directors, KMP, and other employees, ensuring transparency and alignment with company performance.

Q9: How often should the Board evaluation be conducted? A: Annual evaluation of Board, committees, and individual directors should be conducted as per the criteria formulated by NRC.

Stakeholders Relationship Committee

Q10: What constitutes a grievance for SRC? A: Any complaint related to share transfers, dividend payments, annual report dispatch, or other shareholder services.

Q11: Is SRC mandatory for all listed companies? A: Yes.

CSR Committee

Q12: What if a company makes losses but had profits in previous years? A: CSR spending is based on average net profits of preceding 3 years. Even if current year shows loss, spending obligation continues if the average is positive.

Q13: Can CSR activities be conducted through other entities? A: Yes, companies can undertake CSR through registered trusts, societies, companies established under Section 8, or other specified entities.

Risk Management Committee Specific

Q14: What is the meeting frequency requirement for Risk Management Committee? A: The gap between two consecutive RMC meetings should not exceed 210 days (recently amended from 180 days).

Q15: Who can be the Chairperson of Risk Management Committee? A: The Chairperson must be a board member, and the committee should have majority board members including at least one independent director.

Compliance and Reporting

Q16: What disclosures are required about committees? A: Annual Report must include composition, meetings held and attendance.

Q17: Can committee meetings be held through video conferencing? A: Yes, subject to compliance with Rules under Companies Act and ensuring secure participation of all members.

Q18: What is the tenure of committee members? A: Generally aligned with director’s tenure on the Board, but committees are reconstituted as needed based on Board changes.

Q19: Is there a maximum limit on committee members? A: While minimum is specified, there’s no maximum limit.

Q20: Can committees delegate their powers? A: Committees can delegate specific functions to management but overall oversight and key decisions must remain with the committee.

Conclusion

The mandatory committee structure under Companies Act 2013 and SEBI LODR Regulations 2015 represents a cornerstone of modern corporate governance in India. Proper constitution and functioning of these committees ensure enhanced oversight, transparency, and accountability in corporate operations.

Companies must carefully evaluate their applicability criteria under both the Companies Act and SEBI regulations to ensure timely compliance with all requirements. Regular training of committee members, robust meeting processes, and effective reporting mechanisms are essential for maximizing the governance benefits of these committees.

The evolving regulatory landscape requires companies to stay updated with amendments and best practices under both regulatory frameworks to maintain high standards of corporate governance and stakeholder confidence.

Stay Compliant, Stay Ahead: Take Action Now

Understanding and implementing the mandatory board committee requirements under the Companies Act 2013 and SEBI LODR Regulations is non-negotiable for responsible corporate governance.

Connect with governance professionals for tailored compliance solutions and best practice implementation.