Corporate Governance: Mandatory Committees and Their Functions

In India’s dynamic and rapidly evolving economic landscape, the significance of strong corporate governance for businesses, irrespective of their size, cannot be overstated. It forms the bedrock upon which sustainable enterprises are built, ensuring transparency, accountability, and ethical conduct. A crucial element within this framework is the establishment and effective functioning of board committees. These committees are specialized sub-groups of the Board of Directors, designed to delve deeper into specific areas requiring focused oversight. This post aims to demystify the mandatory committees and their functions as stipulated by Indian regulations, particularly the Companies Act, 2013, and SEBI guidelines for listed entities. Understanding these committees is not just a compliance checkbox; it’s fundamental for building investor trust, ensuring ethical operations, mitigating risks, and paving the way for sustainable growth. This knowledge is relevant for business owners aiming for robust structuring and compliance, and equally for salaried individuals seeking to understand their employer’s governance structure or potentially exploring future board roles within the broader Indian corporate governance framework committees. This article will detail the key mandatory committees and their functions under Indian law, explaining their specific roles, composition requirements, and overall significance in the corporate ecosystem.

What is Corporate Governance and Why Does it Matter in India?

Defining Corporate Governance in the Indian Context

Corporate governance essentially refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. In the Indian context, shaped significantly by the Companies Act, 2013, and SEBI regulations, corporate governance provides the framework for attaining a company’s objectives. It encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. The core principles underpinning effective corporate governance in India are Transparency (ensuring timely and accurate disclosure of information), Accountability (clarifying roles and responsibilities of the board and management), Fairness (protecting shareholders’ rights and ensuring equitable treatment of all stakeholders), and Responsibility (acting ethically and responsibly towards all stakeholders and the environment). Adherence to these principles helps build a corporate culture of integrity and consciousness.

The Importance of Governance Committees in India

Governance structures, and particularly board committees, are essential pillars supporting the edifice of good corporate governance. They represent a mechanism for the Board of Directors to manage its workload efficiently and effectively, enabling deeper scrutiny and specialized focus on critical areas that might otherwise receive only superficial attention at the full board level. The importance of governance committees in India stems from several key benefits they provide. These committees enhance overall board effectiveness by allowing for detailed deliberation on complex issues like financial reporting, risk management, executive compensation, and stakeholder relations. They play a vital role in risk management by providing dedicated oversight in specific high-risk areas. Furthermore, well-functioning committees significantly boost stakeholder confidence – investors, lenders, employees, and customers are more likely to trust companies with robust governance structures, including active and independent committees. This increased confidence can directly translate into easier access to capital and better valuations. Ultimately, strong governance, supported by effective committees, is intrinsically linked to regulatory compliance and long-term business success and sustainability in the competitive Indian market.

For those interested in the foundational aspects of starting a business with appropriate governance, you might find insights in our guide on Company Registration in India.

Understanding the Legal Framework for Mandatory Committees in India

Key Regulations Driving Committee Requirements

The requirement for specific board committees in India is not merely a matter of best practice; it is enshrined in law and regulation, primarily driven by two key pieces of legislation. The cornerstone is The Companies Act, 2013, which significantly revamped India’s corporate law landscape and introduced mandatory provisions for certain committees for specified classes of companies. Key sections like Section 177 mandate the Audit Committee, Section 178 deals with the Nomination and Remuneration Committee (and also the Stakeholders Relationship Committee), and Section 135 lays down the requirements for the Corporate Social Responsibility Committee. Complementing the Companies Act, especially for companies whose shares are traded on stock exchanges, are the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR). These regulations often impose stricter or additional requirements regarding the composition and functioning of committees for listed entities, aiming to protect investor interests and enhance market integrity. Together, these regulations form the backbone of the Indian corporate governance mandatory committees framework.

Applicability Criteria: Which Companies Need These Committees?

It is crucial to understand that the mandate to constitute these committees does not apply universally to all companies registered in India. The requirements are tiered based on specific criteria, meaning not *all* companies necessarily need *all* committees, particularly smaller, unlisted private companies. The applicability typically hinges on factors such as:

• Listing Status: Listed companies face the most stringent requirements under SEBI LODR, generally mandating Audit, NRC, SRC, and sometimes Risk Management Committees.
• Paid-up Share Capital: Unlisted public companies exceeding certain thresholds (e.g., ₹10 Crore or more for Audit Committee applicability under the rules) might need specific committees.
• Turnover: Companies crossing specific annual turnover thresholds (e.g., ₹100 Crore or more for Audit Committee applicability) may trigger committee requirements.
• Borrowings: Aggregate outstanding loans, debentures, and deposits exceeding certain limits (e.g., ₹50 Crore or more for Audit Committee) can also necessitate committee formation.
• Net Profit/Net Worth: The CSR Committee requirement, for instance, is triggered if a company meets specific thresholds for net worth (₹500 Crore+), turnover (₹1000 Crore+), or net profit (₹5 Crore+) in any financial year.

These thresholds are defined within the Companies Act, 2013, and its associated Rules, as well as SEBI LODR. Since the specific criteria can vary slightly between committees and are subject to amendment, it is highly advisable for businesses to consult the precise sections of the Companies Act, 2013 (specifically Sections 135, 177, 178 and relevant Rules) and the SEBI LODR regulations to determine their exact obligations based on their current status (listed/unlisted) and financial figures. For the most current and authoritative information, refer to the official government portals: MCA Portal and SEBI Website. These regulations clearly define which Indian corporate governance mandatory committees are applicable to a particular company.

For a deeper understanding of how board roles and independent directors contribute to governance, see our article on the Role and Responsibilities of Independent Directors Under Section 149(4).

Key Mandatory Committees and Their Functions Under Indian Law

This section delves into the composition and primary responsibilities of the key committees in corporate governance India, mandated under Indian law for specified classes of companies. Understanding these roles is vital for ensuring compliance and leveraging the benefits of structured governance. These mandatory committees and their functions play distinct yet complementary roles in overseeing critical aspects of a company’s operations and stakeholder interactions.

Audit Committee

Mandate & Applicability: The Audit Committee is arguably one of the most critical board committees. Its constitution is mandated by Section 177 of the Companies Act, 2013, and Regulation 18 of SEBI LODR. It’s required for all listed companies and specific classes of unlisted public companies meeting thresholds related to paid-up capital, turnover, borrowings, or deposits. Certain private companies meeting higher thresholds may also need it.

Composition: The law prescribes specific composition requirements to ensure effectiveness and independence. It must have a minimum of three directors, with the majority being independent directors. For listed entities, all members must be financially literate, and at least one member must possess expertise in accounting or related financial management. The Chairperson of the Audit Committee must be an independent director.

Key Functions: The Audit Committee performs crucial governance committee functions and roles in India focused on financial integrity and oversight. Its key responsibilities typically include:

• Overseeing the company’s financial reporting process and ensuring the integrity of financial statements and disclosures.
• Reviewing quarterly, half-yearly, and annual financial statements before submission to the Board.
• Recommending the appointment, remuneration, performance evaluation, and terms of appointment of the statutory auditors and internal auditors.
• Approving or subsequently modifying transactions of the company with related parties.
• Scrutinizing inter-corporate loans and investments made by the company.
• Evaluating the company’s internal financial controls and risk management systems, ensuring their adequacy and effectiveness.
• Establishing and overseeing the Vigil Mechanism (Whistle-blower policy) to allow employees and directors to report concerns about unethical behavior, actual or suspected fraud, or violation of the company’s code of conduct.
• Reviewing the utilization of funds raised through public offers.

For more on improving audit processes and practices, explore our article on the Primary Purpose of Internal Audit in the Modern Organization.

Nomination and Remuneration Committee (NRC)

Mandate & Applicability: The Nomination and Remuneration Committee (NRC) is mandated by Section 178 of the Companies Act, 2013, and Regulation 19 of SEBI LODR. Similar to the Audit Committee, it applies to all listed companies and certain classes of unlisted public companies based on paid-up capital, turnover, or borrowings thresholds.

Composition: The NRC must consist of at least three non-executive directors, out of which not less than one-half must be independent directors. For listed entities, the Chairperson of the committee must be an independent director. This composition aims to ensure objectivity in critical decisions regarding board appointments and executive pay.

Key Functions: The NRC handles vital aspects of board composition and executive compensation, defining key corporate governance and committee roles India. Its primary functions involve:

• Identifying individuals who are qualified to become directors and who may be appointed in senior management positions in accordance with the criteria laid down.
• Recommending to the Board their appointment and removal.
• Formulating the criteria for determining qualifications, positive attributes, and independence of a director.
• Formulating criteria for the evaluation of the performance of the Board, its committees, and individual directors (including independent directors).
• Formulating the policy relating to the remuneration for the directors, Key Managerial Personnel (KMPs), and other employees, ensuring that the level and composition of remuneration is reasonable and sufficient to attract, retain, and motivate directors of the quality required.
• Ensuring that remuneration involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals.

Stakeholders Relationship Committee (SRC)

Mandate & Applicability: Mandated by Section 178(5) of the Companies Act, 2013, the Stakeholders Relationship Committee (SRC) is required for companies that have more than one thousand shareholders, debenture-holders, deposit-holders, or any other security holders *at any time during a financial year* (as per Rule 5 of Companies (Management and Administration) Rules, 2014). Additionally, Regulation 20 of SEBI LODR mandates this committee for all listed entities.

Composition: The Companies Act requires the committee to have a chairperson who is a non-executive director (for listed entities as per LODR). Other members are decided by the Board. SEBI LODR specifies that the chairperson must be a non-executive director and requires a minimum of three directors, with at least one being an independent director for entities with outstanding SR equity shares.

Key Functions: The primary focus of the SRC is to safeguard the interests of various security holders. Key governance committee functions and roles in India for the SRC include:

• Considering and resolving the grievances of the company’s security holders, including complaints related to the transfer or transmission of shares, non-receipt of annual reports, non-receipt of declared dividends, issue of duplicate certificates, etc.
• Ensuring expeditious share transfer processes and prompt redressal of stakeholder complaints.
• Reviewing measures taken for effective exercise of voting rights by shareholders.
• Reviewing adherence to service standards adopted by the listed entity in respect of various services being rendered by the Registrar & Share Transfer Agent.
• Reporting to the Board on the status of stakeholder grievances and the steps taken to resolve them.

Corporate Social Responsibility (CSR) Committee

Mandate & Applicability: The requirement for a Corporate Social Responsibility (CSR) Committee stems from Section 135 of the Companies Act, 2013. It applies to companies having a net worth of ₹500 crore or more, or a turnover of ₹1000 crore or more, or a net profit of ₹5 crore or more during any financial year. Such companies are required to spend at least 2% of their average net profits of the preceding three financial years on CSR activities.

Composition: The CSR Committee must consist of three or more directors, out of which at least one director must be an independent director (if an independent director is required on the board). However, for companies not required to appoint an independent director, they can have the committee with two or more directors. For private companies with only two directors, the committee can be formed with just those two directors.

Key Functions: The CSR Committee plays a pivotal role in guiding and overseeing the company’s social responsibility initiatives. Its main functions are:

• Formulating and recommending a detailed CSR Policy to the Board, outlining the activities to be undertaken by the company as specified in Schedule VII of the Companies Act, 2013.
• Recommending the amount of expenditure to be incurred on the activities referred to in the CSR policy.
• Monitoring the CSR policy of the company from time to time to ensure it is being implemented effectively and in line with the company’s objectives and legal requirements.
• Instituting a transparent monitoring mechanism for the implementation of CSR projects or programs undertaken by the company.
• Ensuring compliance with all CSR obligations under the Act and reporting on the same in the Board’s report.

For an in-depth look at CSR obligations, you may refer to our post on Corporate Social Responsibility (CSR) Mandate: Section 135 Explained.

The Interplay and Importance Within the Corporate Governance Structure

How Committees Enhance Board Effectiveness

The establishment of mandatory committees significantly enhances the overall effectiveness and efficiency of the Board of Directors. Instead of the full board attempting to delve into the intricate details of every critical area, these specialized committees allow for a delegation of responsibilities. This delegation ensures that complex issues like financial auditing, risk assessment, executive compensation policies, and stakeholder grievance redressal receive the focused attention and in-depth scrutiny they require from directors with relevant expertise or independence. The committees conduct the detailed groundwork, analysis, and deliberation, subsequently presenting their findings and recommendations to the full board for consideration and final decision-making. This structure allows the main board to concentrate on broader strategic direction, major policy decisions, and overall supervision, leveraging the specialized work done by its committees. The corporate governance structure India committees thus create a more robust system of checks and balances, fostering more informed and effective governance.

Significance for Compliance and Trust

The existence and proper functioning of these committees are paramount for ensuring compliance with the legal and regulatory framework laid out by the Companies Act, 2013, and SEBI LODR. Failure to constitute these committees where mandated, or failure to adhere to their composition and operational requirements, can lead to significant legal repercussions. Beyond mere compliance, however, lies the immense value these committees add in building and maintaining trust among various stakeholders. The importance of governance committees in India is clearly visible here. An active Audit Committee with independent members assures investors and lenders of the integrity of financial reporting. A diligent NRC signals fairness in executive appointments and compensation. An effective SRC demonstrates the company’s commitment to its security holders. Visible CSR activities guided by a dedicated committee enhance the company’s social license to operate. Functioning corporate board committees India thus act as tangible proof of a company’s commitment to transparency, accountability, and ethical conduct, which are crucial for attracting investment, retaining talent, and building a strong market reputation.

Consequences of Non-Compliance

Ignoring the legal mandates regarding the constitution and functioning of these board committees can lead to serious consequences for the company and its officers. The Companies Act, 2013, and SEBI Regulations prescribe penalties for non-compliance. These can range from monetary fines levied on the company itself to penalties imposed on the ‘officers in default,’ which typically includes directors and key managerial personnel responsible for ensuring compliance. For instance, failure to comply with provisions relating to the Audit Committee (Section 177) or NRC/SRC (Section 178) can attract penalties under Section 178(8). Similarly, non-compliance with CSR provisions under Section 135 carries specific penalties. Beyond direct financial penalties, non-compliance can result in regulatory scrutiny, potential disqualification of directors, damage to the company’s reputation, loss of investor confidence, and difficulties in raising capital or accessing financial markets. Therefore, ensuring adherence to committee requirements is a critical aspect of corporate risk management.

Conclusion

In summary, the mandatory board committees – namely the Audit Committee, Nomination and Remuneration Committee (NRC), Stakeholders Relationship Committee (SRC), and Corporate Social Responsibility (CSR) Committee – form integral components of India’s corporate governance landscape. Each committee has distinct and critical responsibilities, ranging from ensuring financial integrity and fair compensation practices to addressing stakeholder grievances and guiding social responsibility initiatives. Understanding these mandatory committees and their functions is not just essential for companies falling under the specified legal thresholds but provides valuable insights into best practices for all businesses aiming for robust governance.

Effective corporate governance committees India should be viewed not merely as a legal formality or a compliance burden, but as a strategic imperative and a cornerstone of good business practice. They contribute significantly to board effectiveness, enhance transparency and accountability, mitigate risks, build stakeholder trust, and ultimately foster long-term value creation and sustainable growth. As businesses grow and evolve, particularly those nearing the applicability thresholds, it is crucial to proactively evaluate the need for establishing these committees. Existing committees should also be periodically reviewed to ensure they remain compliant with the latest regulations and are functioning effectively to fulfill their intended purpose and contribute positively to the company’s governance framework. Understanding the mandatory committees functions in corporate governance is the first step towards building a resilient and reputable organization.

If your business is approaching these thresholds, or if you need assistance in understanding your specific obligations, setting up compliant committee structures, or reviewing the effectiveness of your current governance framework, expert guidance is invaluable. Contact TaxRobo today for professional assistance with company law compliance, corporate structuring, interpreting committee roles, and related financial and legal advisory services. Let us help you build a strong foundation for sustainable success. Visit our TaxRobo Online CA Consultation Service page to learn more or schedule a consultation.

FAQ Section

Q1: Are these committees mandatory for all private limited companies in India?

A: No, the mandatory constitution of committees like the Audit Committee, NRC, SRC, and CSR Committee primarily depends on specific criteria. These criteria often include listing status (all listed companies have stricter requirements), paid-up share capital, turnover, aggregate borrowings, or net profits exceeding certain thresholds defined in the Companies Act, 2013 and its Rules, or SEBI LODR (for listed companies). Most small, unlisted private limited companies fall below these thresholds and generally have fewer mandatory committee requirements. However, applicability must be checked against the specific rules (e.g., Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 for NRC, Rule 6 for Audit Committee, Rule 5 of Companies (Management and Administration) Rules, 2014 for SRC, and Section 135 for CSR).

Q2: What happens if a company fails to constitute these mandatory committees where required?

A: Failure to constitute mandatory committees or comply with their composition/functioning requirements constitutes non-compliance under the Companies Act, 2013, and/or SEBI Regulations. This can attract significant penalties, typically including fines imposed on the company and also on the directors or officers deemed responsible for the default (‘officers in default’). Beyond monetary penalties, non-compliance can lead to reputational damage, increased regulatory scrutiny, and negatively impact the company’s relationship with investors, lenders, and other stakeholders.

Q3: Can one director serve on multiple mandatory committees?

A: Yes, a director can generally serve on multiple board committees simultaneously. However, they must meet the specific eligibility criteria for each committee they serve on. For instance, the Audit Committee and NRC have specific requirements regarding the number and proportion of independent directors. A director serving on multiple committees must satisfy the independence criteria, financial literacy requirements (for Audit Committee), and other qualifications stipulated by the Companies Act, 2013, and SEBI LODR for each committee role. The overall workload and ability of the director to dedicate sufficient time to each committee should also be considered by the Board.

Q4: Where can I find the exact official rules regarding committee composition and functions?

A: The primary legal sources for rules concerning mandatory committees in India are:
* The Companies Act, 2013: Specifically Sections 177 (Audit Committee), 178 (Nomination and Remuneration Committee, Stakeholders Relationship Committee), and 135 (CSR Committee), along with the relevant associated Rules notified under the Act (e.g., Companies (Meetings of Board and its Powers) Rules, 2014; Companies (Corporate Social Responsibility Policy) Rules, 2014; Companies (Appointment and Qualification of Directors) Rules, 2014).
* SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: Regulations 18 (Audit Committee), 19 (NRC), 20 (SRC), and 21 (Risk Management Committee – mandatory for top listed entities) contain detailed provisions for listed companies.
You can access the official texts on the Ministry of Corporate Affairs website MCA Portal and the Securities and Exchange Board of India website SEBI Website.

Q5: How does good corporate governance, including effective committee functions, benefit my small business even if not legally mandated yet?

A: Even if not legally required to form specific committees, adopting principles of good corporate governance offers significant advantages for small businesses. Implementing structured processes, even through informal advisory committees or clear delegation within the board/management, can improve strategic decision-making and operational efficiency. It enhances transparency, which builds credibility with banks, potential investors, suppliers, and customers. Establishing clear roles and responsibilities early on helps manage risks more effectively and avoids potential conflicts. Furthermore, having good governance practices in place lays a strong foundation for future growth, making it easier to scale, attract funding, and eventually comply with regulations if the business grows beyond the thresholds. It fosters a culture of accountability and ethical conduct from the outset.