Board of Directors in India: Composition and Committees under the Board

The article will discuss the concept of the board of directors, their power, and restrictions on their power. It will enlighten the readers about the committees of the board, their role, and functions
Estimated Reading Time: 10 minutes

Introduction

Board of directors in India oversee the management and evaluate the performance of the company. They exhibit the interest of the shareholders before the management of the company. They play the role of a leader and take major decisions for the company. Board ensures that the best corporate practices are adopted by the company. This article will discuss the concept of the board of directors in India, their power, and restrictions on their power. It will enlighten the readers about the committees of the board, their role, and functions.

Meaning of Board and Board of Directors in India

As per section 2(10) of Companies Act 2013 ‘Board’ or ‘Board of Directors(BOD)’ means the collective body of directors of the company. They are appointed by shareholders of the company. The board of directors is constituted for general surveillance of the management of the company. The management is entrusted with the task of taking decisions and actions to execute the aim of a company but the BOD is existing to review those actions and decide whether they are in the best interest of the company or not.  The BOD ensures that the healthy standards of corporate governance are followed by the company. The BOD is accountable to the shareholders and represents their will in the meeting of the board. They are put above the management and can take decisions about hiring or firing any personnel. Sometimes it is seen that the officers of the company tend to enrich themselves in the name of the company. Therefore, the Board of Directors is constituted to safeguard the company from such damages. They harmonize the conflict of interest between the company and the management.

Composition of the Board of Directors in India

The board shall consist of a minimum three members in a public company, two members in a private company, and one member in case of a one-person company.A maximum of fifteen directors can be appointed by a company. A special resolution in a general meeting needs to be passed to appoint more than fifteen directors. As per the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 board shall consistof both executive and non-executive with at least  one woman director. Not less than fifty percent of the members shall be non-executive directors. Where the chairperson of the board is non-executive director, then the board shall have one-third independent directors and if the chairperson is not a non-executive director then one-half of the members shall be independent directors.

Board of directors has crushing responsibilities cast upon them by the company. So, they are also vested with wide power in order to fulfil the given obligations.As per section 179(1) of the companies act, the board of directors can exercise all such powers as the company is authorized to exercise. They have the power to take action on all the matters which the company can. The powers of the board are subject to provisions of Companies Act 2013, Memorandum or Article, and the regulations made by the company in the general meeting. The board cannot exercise any power or do any act which only the company can exercise or do in a general meeting. Board does not have the power to make any regulation which nullifies any earlier valid act of the board.

The board can exercise its power on following matters by passing a resolution at a board meeting:[1]

  1. Making calls on shareholders in respect of money unpaid on their shares;
  2. To authorize buy-back of securities under section 68;
  3. Issuing of securities, including debentures, whether in or outside India;
  4. To borrow monies.
  5. To invest the funds of the company.
  6. To grant loans or give guarantee or provide security in respect of loans.
  7. To approve the financial statement and the Board‘s report.
  8. To diversify the business of the company.
  9. To approve amalgamation, merger, or reconstruction.
  10. Take over a company or acquire a controlling or substantial stake in another company.
  11. Any other matter which may be prescribed.

The powers to borrow money, invest funds, grant loans, and provide security against loans can be delegated to a committee of the board or managing director or manager or principal officer of the company.

Powers of the Board of Directors in India

Section 180 of the companies act 2013 restricts the exercise of power by the board. There are few matters in which the board can exercise its power only with the consent of the company by a special resolution. Following are such matters:

  1. BOD can sell, lease or dispose of the whole or substantially the whole of the undertaking of the company. If the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings. The conditions concerning the use, disposal, or investment of the money from sale must be included in the resolution.
  2. BOD can invest compensation received by the company as a result of any merger or amalgamationin trust securities.
  3. BOD can borrow money in case where the money to be borrowed, together with the money already borrowed by the company will exceed an aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company‘s bankers in the ordinary course of business. The amount of monies that may be borrowed shall be specified in the resolution.
  4. BOD can remit or give time or both for the repayment of any debt due from a director.

Committees under Board

Board committee is a working group of directors who are themselves members of board. They are appointed to help the board with its work. Every committee appointed by the board has some exclusive task to do, they perform the groundwork and provide the board their recommendations then the board takes its decision. The board is ultimately responsible for the acts of the committees.[2] Board determines the structure and responsibilities of the committees. The committees consistof experts who assist the board to carry out an in-depth analysis of the concerns.

A company needs a board committee whenever a new issue comes up, for example- expansion of the company, or when any concern needs special attention of the board. Under the Companies Act 2013, board of a company has to constitute various committees. Now we will discuss some of the committees established under this act.

1. Audit committee

The audit committee supervises the audit process of the company and examines the financial reports. They are also charged with the job of internal financial controls and risk management. Section 177 of the companies act 2013 mandates the constitution of Auditors committee in every listed company and certain other class or classes of companies.Section 177 of the Act read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 the Board of directors of every listed company and the following classes of companies are required to constitute an Audit Committee of the Board- (i) Public companies with a paid-up capital of ten crore rupees or more; (ii) Public companies having turnover of one hundred crore rupees or more; (iii) Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more. The paid-up share capital or turnover or outstanding loans or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited financial statements shall be taken into account for the purposes of this rule.[3]

Composition of the Audit Committee

The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. The majority of members of the Audit Committee including its Chairperson shall be persons with financial expertise. The Revised Clause 49 of the listing agreement effective from 1st October 2014, provides that the audit committee of a listed company shall have minimum three directors as members. Two-thirds of the members of the audit committee shall be independent directors. All members of the audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.[4]

Meetings of the Audit committee

According to clause 49 of the listing agreement, the audit committee shall meet four times in a year and not more than four months shall have passed between two meetings. The quorum of the meeting is either two members or one-third of the members of the audit committee whichever is greater. There should be a minimum of two independent directors present in the meeting.

Functions of the Audit committee

Section 177(4) of the companies act 2013 provides that the board of directors shall specify in writing the terms of reference and the audit committee shall act as per it. The terms of reference specified by the board which describes the functions of the comiitee are:[5]

  1. This committee recommends for appointment, remuneration and terms of appointment of auditors of the company.
  2. It review and monitor the auditor‘s independence and performance, and effectiveness of audit process.
  3. It examines the financial statement and the auditors‘ report thereon.
  4. It discharges the function of approval or any subsequent modification of transactions of the company with related parties.

The Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.

  • It scrutinize the inter-corporate loans and investments.
  • It determines or calculate the value of undertakings or assets of the company.
  • It evaluate the internal financial controls and risk management systems.
  • It monitor the end use of funds raised through public offers and related matters.
  • They review the related party transaction.

Powers of Audit Committee

Under section 177 of the act, the audit committee has the following powers:

The audit committee can ask the auditor for his comment about internal control systems, the scope of audit, including the observations of the auditors and review of financial statements before their submission to the Board. The committee may also discuss any related issues with the internal and statutory auditors and the management of the company. It has the power to access all the information contained in the financial reports of the company.The audit committee has the power to investigate any matter referred to it by the board. It can also investigate into the matter specified under subsection 4 of section 177. The auditors and the key managerial personnel have the right to be heard in the meeting of audit committee but cannot vote. It can also seek the help of experts from outside the company with respect to the financial issues.

2. Nomination and Remuneration Committee

Section 178 of the Act and Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014, provides that the Board of directors of every listed company and the following classes of companies are required to constitute a Nomination and Remuneration Committee of the Board-

  1. Public companies with a paid-up capital of ten crore rupees or more.
  2. Public companies having a turnover of one hundred crore rupees or more.
  3. Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.

Composition of Nomination and Remuneration Committee

As per section 178 of Companies Act 2013, the committee consists of three or more non-executive directors out of which not less than one-half shall be independent directors. The chairman of the company can be the member of the committee but shall not chair the committee. In the absence of the chairperson, any other member of the committee authorized by him shall attend the meetings of the board.

Functions of the Nomination and Remuneration Committee

As per subsection 2 of section 178, it shall identify the persons who are qualified to be a director or who may be appointed in the senior management of the company inaccordance with the criteria prescribed and shall recommend the appointment or removal to the board. It shall evaluate the performance of the directors.
Subsection 3 provides that it shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.[6]

Key elements for determining the policy under the above provision[7]

  1. The level and composition of remuneration are reasonable and sufficient to attract, retain, and motivate directors of the quality required to run the company successfully.
  2. The relationship of remuneration to performance is clear and meets appropriate performance benchmarks.
  3. Remuneration to directors, key managerial personnel, and senior management 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.

Additional Role of the Nomination and Remuneration Committee under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[8]

  1. It formulates the criteria  for  determining  qualifications,  positive  attributes  andindependence  of  a  director  and recommends to  the  board  of  directors  a  policy relating  to,  the  remuneration  of  the  directors,  key  managerial  personnel  and  otheremployees;
  2. It devises criteria for the evaluation of the performance of independent directors and the board of directors.
  3. It devises policy on the diversity of board members.
  4. It identifies potential directors and senior management officials in accordance with the criteria laid down. It recommends their appointment and removal to the board.
  5. They are responsible to decide whether to extend or continue the term of appointment of the independent director,on the basis of the report of performance evaluation of independent directors.
  6. They recommend all remuneration payable to senior management and the form of payment of the same.

3. Stakeholders Relationship Committee

According to section 178(5) of the companies act 2013,a company that has more than one thousand shareholders, debenture-holders, deposit-holders, and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee.

Composition of Stakeholders Relationship committee

There shall be three members one out of which shall be an independent director[9]. the chairperson of the committee shall be a non-executive director. The chairperson of the committee or any person authorized by him shall attend the general meeting of the company.

Role and Functions of Stakeholder Relationship Committee:

The primary function of the committee is to resolve the grievances of the security holders of a company such as overdue dividends, issues in the transfer of shares, etc. They ensure that shareholders are timely receiving the annual report, notices, and dividend warrant. It reviews measures for the effective exercise of voting rights by the shareholders.

4. Risk Management Committee

The board of directors shall constitute the risk management committee. The majority members of the committee shall be the members of the board of directors and also a senior executive of the company can be the members of the committee. The chairperson must be a member of the board of directors. The board of directors specifies the roles and responsibilities of the committee. The committee monitor and reviews the risk management plan. They monitor the implementation of the risk plan and make sure it is employed according to the strategy and legal norms.

Conclusion

We saw that the board of directors is a necessary body of the company that is essential for its governance. They are responsible for the evaluation of managerial performance, declare shareholder’s dividends, taking major decisions, and for completion of other multifarious tasks. They are the face of the shareholders of the company and carry out their will. Thus, the board is vested with powers to direct the management of the company according to the interest of the shareholders. These powers help them to make major decisions after the management submits its reports of the company.  The board of directors constitutes different committees and delegate its powers empowering them to perform some of its duty. They are called board committees and they focus on specific issues of the company. Committees analyze the issue, determine the solution, and recommend it to the board. The board may or may not approve the recommendation. One such committee is the audit committee which focuses on the financial concerns of the company. Therefore, board committees have a significant role in the governance of the company.

Also read Meeting of the Board of Directors


[1] Section 179 sub-section 3 of Companies Act 2013.

[2] BOARD COMMITTEES A HAND BOOK, The Institute Of Company Secretaries of India. https://www.icsi.edu/media/webmodules/companiesact2013/BOARD%20COMMITTEES.pdf

[3] https://www.icsi.edu/media/webmodules/companiesact2013/BOARD%20COMMITTEES.pdf

[4] Board Committees and its Importance, Lawctopus. https://www.lawctopus.com/academike/board-committees-importantce/

[5] Section 177 of the Companies Act 2013

[6] Section 178 sub-section 3 of Companies Act 2013.

[7] Section 178 sub-section 4 of the Companies Act 2013

[8]Part D Schedule II, Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

[9] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015