Board & Audit Committee Advisory: Who Needs It and Who Does Not
Whether Board & Audit Committee Advisory applies to a given business is the first thing worth settling, and it is where most of the early questions land. The questions below are the ones raised most often in practice; the full scope of the service is on the Board & Audit Committee Advisory page.
When does a company legally need to have independent directors?
Under Section 149(4) of the Companies Act 2013 read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, every listed public company must have at least one-third of its board as independent directors, and certain unlisted public companies that cross the Rule 4 thresholds on paid-up share capital, turnover, or aggregate outstanding loans, debentures and deposits must have at least two independent directors (joint ventures, wholly-owned subsidiaries and dormant companies are excluded). Private companies are generally exempt from this requirement unless a specific investment agreement or sector regulation imposes it contractually.
In practice: The turnover and borrowings tests use figures from the last audited financial statement, but the obligation can effectively arise mid-year for a fast-growing company. We recommend checking these thresholds at every quarter-end, not just annually, for companies on a growth trajectory.
What is the minimum size and composition of an Audit Committee?
Under Section 177(2) of the Companies Act 2013, an Audit Committee must have a minimum of three directors, with independent directors forming a majority of the committee. The majority of members, including the chairperson, should be persons with the ability to read and understand financial statements. For listed entities, SEBI LODR Regulation 18 imposes a stricter standard: minimum three directors, at least two-thirds of whom must be independent directors, and the chairperson must be an independent director who is present at the Annual General Meeting to answer shareholder queries.
In practice: A company can meet the lower Companies Act threshold but not the stricter SEBI LODR threshold once it is on a listing track, so checking only the Companies Act minimum is an easy composition gap to miss.
Who qualifies as an 'independent director' under Indian law?
Section 149(6) of the Companies Act 2013 sets out a detailed test. Broadly, an independent director must not be a promoter of the company or its holding, subsidiary, or associate company; must not be related to promoters or directors; must have (or must not have had) no material pecuniary relationship with the company, its holding, subsidiary, or associate company, or their promoters or directors, in the current or two immediately preceding financial years (beyond permitted remuneration and specified transactions); must not, himself or through a relative, hold or have held a KMP or employee position with the company or its holding, subsidiary or associate company, or have been a partner or employee of its audit firm or of a legal or consulting firm with significant transactions with it, in any of the three financial years immediately preceding the year of appointment (a relative's ordinary employment is carved out); and must possess appropriate skills, experience, and knowledge relevant to the company's business.
In practice: The lookback periods are tests candidates commonly fail without realising it — a consulting assignment for the company within the pecuniary-relationship window, or the candidate's own employment or a close relative's KMP role within the three-year window, can disqualify an otherwise well-qualified candidate. We run this check explicitly before any candidate is presented to the Board.
What is the Independent Directors' Databank and is registration mandatory?
The Databank is an online registry maintained under the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019, in which every individual proposing to be appointed as an independent director must register. After registration, the individual must pass an online proficiency self-assessment test within the prescribed period, unless exempted based on cumulative years of experience as a director or key managerial personnel in a listed public company (or other specified categories of exemption). Databank registration must be in place before appointment; the proficiency test must be passed within two years of inclusion in the Databank, failing which the individual's name is removed from it.
In practice: We track Databank registration and proficiency test completion for every independent director we advise on appointing — a missed test within the deadline window can create doubt about the validity of the appointment at the worst possible time, such as during due diligence for a funding round.
What does the Audit Committee actually have to do once it is constituted?
Section 177(4) of the Companies Act 2013 specifies the Audit Committee's mandatory terms of reference: recommending the appointment, remuneration, and terms of appointment of auditors; reviewing and monitoring the auditor's independence and performance; examining financial statements and the auditor's report before they go to the Board; approving (and reviewing modifications to) related-party transactions; scrutinising inter-corporate loans and investments; evaluating the valuation of undertakings or assets where necessary; monitoring the end-use of funds raised through public offers; and evaluating the internal financial controls and risk management systems of the company.
In practice: A committee that exists on paper but only rubber-stamps items already decided elsewhere is not fulfilling its statutory role — and that gap becomes visible the moment a related-party transaction or auditor decision is challenged. We draft the terms of reference to specifically cover each Section 177(4) function, and we advise on the practical meeting agenda so the committee is doing the substantive review, not a formality.
What is the difference between the Companies Act Audit Committee requirement and the SEBI LODR requirement?
The Companies Act, 2013 sets the baseline requirement applicable to all companies that cross the specified thresholds — minimum 3 directors, independent directors in the majority. SEBI LODR applies additionally to listed companies and is stricter in several respects: minimum two-thirds independent directors (versus a simple majority), a mandatory independent chairperson who must attend the AGM, and additional disclosure and review obligations including quarterly financial results review and management discussion. A listed company must satisfy both sets of requirements simultaneously — SEBI LODR does not replace the Companies Act obligation, it layers additional requirements on top of it.
In practice: A listed company can technically meet the Companies Act's 'majority independent' test but fail the SEBI LODR 'two-thirds independent' test — an easy gap to miss if the composition is checked against only one framework.
What is a Stakeholders' Relationship Committee?
Under Section 178(5), any company with more than 1,000 shareholders, debenture-holders, deposit-holders, or other security holders at any point during a financial year must constitute a Stakeholders' Relationship Committee, chaired by a non-executive director, to specifically consider and resolve grievances of security holders. For listed entities, SEBI LODR Regulation 20 imposes an equivalent requirement regardless of the 1,000-holder threshold (subject to the Regulation 15(2) exemption for smaller and SME-listed entities). This is separate from the Audit Committee and NRC, though it is often reviewed as part of the same overall governance restructuring.
In practice: Companies with a wide shareholder base — often a legacy from an earlier public issue, ESOP allotments, or a large investor syndicate — sometimes overlook this specific threshold. We check the security-holder count as part of the initial governance diagnostic.
Can an existing employee or consultant of the company become an independent director?
Generally, not straight away. A former employee or key managerial personnel of the company, or of its holding, subsidiary or associate company, cannot be appointed as an independent director until three full financial years have passed since that role ended (Section 149(6)(e)(i)). For consultants, Section 149(6)(c) excludes anyone who has, or had in the current or two immediately preceding financial years, a material pecuniary relationship with the company, its holding, subsidiary, or associate company, or their promoters or directors — beyond permitted remuneration as a director and transactions not exceeding prescribed limits. A former full-time employee within the three-year window, or a consultant who provided significant paid services within the pecuniary-relationship window, would typically fail the independence test and cannot be validly appointed as an independent director in that period.
In practice: This is a frequently misunderstood aspect of the independence test — clients often propose a trusted former employee or long-standing consultant as an independent director, not realising the employment and pecuniary-relationship lookbacks disqualify them for the specified period.
What is the resident director requirement and how does it interact with independent director appointments?
Section 149(3) requires every company to have at least one director who has stays in India for a total period of not less than 182 days during the financial year (applied proportionately for a newly incorporated company in its first financial year). This resident-director requirement is separate from, and does not have to be satisfied specifically by, an independent director — any director on the board, executive or non-executive, can fulfil it. However, companies with a majority of foreign or NRI directors sometimes need to plan both requirements together to ensure the overall board composition satisfies each rule independently.
In practice: We check the resident director requirement as part of the overall board composition review, even though it is not directly tied to the independent director mandate — companies restructuring their board for independence often shuffle other director roles at the same time, and it is worth confirming the resident-director condition is not inadvertently broken.
Where this sits in the wider engagement
Board & Audit Committee Advisory rarely arrives on its own. The statutory basis and the current requirements are set out on the Board & Audit Committee Advisory service page, and the related services are grouped under Corporate Law.
What PNPC does
PNPC Global has practised since 1986 across India and the UAE. On Board & Audit Committee Advisory we take the work end to end — reviewing the facts, preparing and filing what is required, and dealing with the authority through to closure.