पाठशाला Pathshala · संचालन Sanchālan, Operations · Lesson 27 · Scale

Governance: committees, independent directors and the audit committee

Indian company law switches governance on by threshold. Build it a year before the law or a late-stage investor asks, and choose the first independent director for the audit committee.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

An empty conference room with a long table and chairs set around it, lit by daylight. — Photograph: Skills Media · Pexels

Governance in an Indian company does not arrive in one decision. It arrives clause by clause, as turnover, borrowings or a change of company type cross thresholds set in the Companies Act, and a company that has not watched them finds itself out of compliance in the same quarter a late-stage investor starts diligence.

This lesson sets out what the law requires and when, with a figure that shows which obligations a company of your size has switched on. It then covers why to build governance ahead of the law, how to choose independent directors, how to run an audit committee that earns its place, the sequence for a company heading towards a listing, and the annual calendar. It assumes a working board; [the board meeting that works](/library/board-meeting-that-works) covers that.

What the law requires, and when

The Companies Act 2013 treats a private company lightly. It needs at least two directors, and nothing in section 149 requires it to appoint an independent one. The heavier obligations attach to public companies. Every listed company must have at least one-third of its board independent. Under rule 4 of the directors’ rules, an unlisted public company must have at least two independent directors once it has paid-up share capital of ₹10 crore or more, turnover of ₹100 crore or more, or loans, debentures and deposits above ₹50 crore; wholly owned subsidiaries and dormant companies are excluded. The same classes must constitute an audit committee of at least three directors with independent directors forming a majority, and a nomination and remuneration committee of three or more non-executive directors, at least half of them independent.

Other obligations arrive by their own thresholds whatever the company type. CSR: any company with net worth of ₹500 crore, turnover of ₹1,000 crore or net profit of ₹5 crore in a financial year must have a CSR committee of three or more directors, at least one of them independent, and spend at least two per cent of its average net profit of the three preceding years; where that amount is ₹50 lakh or less, the board can do the committee’s work. Internal audit: a private company with turnover of ₹200 crore or bank borrowings above ₹100 crore must appoint an internal auditor. Vigil mechanism: a company with bank and financial-institution borrowings above ₹50 crore must have one for directors and employees to report concerns. Stakeholders relationship committee: any company with more than 1,000 security holders.

Move the type from private to unlisted public at the defaults and three obligations appear at once, because ₹150 crore of turnover is above the rule 4 threshold. That is the moment most founders meet governance: not when the company grows, but when it converts to a public company before an IPO and discovers that it is already well past every threshold. A listed company adds SEBI’s listing regulations, which ask for a larger independent share of the board and more committees again.

Why build it before the law asks

There are three reasons to start early, and none of them is compliance. Investors: late-stage and crossover investors look at governance in diligence and may ask for an independent director and an audit committee as a condition of investing, whatever the Act says about a private company. Time: a good independent director takes months to find, and a committee takes a year of meetings to become useful; a company that waits for the threshold appoints whoever is available. Decisions: the questions an audit committee asks, about revenue recognition, related-party transactions, controls and the auditor’s findings, are questions the founder needs answered anyway. [Related-party transactions](/library/related-party-transactions-founders-conflicts) are the clearest case: section 177 gives approval of them to the audit committee, and a committee that already exists can do that cleanly.

Choosing independent directors

The Act sets the floor. Under section 149(6) an independent director is not a promoter, employee or nominee, has no material financial relationship with the company in the two preceding years or the current one, has no relative with significant shareholdings or dealings, and has not been a partner of its auditors in the recent past; they declare their independence at their first board meeting and every year after. Under sections 149(10) and 149(11) they serve terms of up to five consecutive years, at most two in a row, with a three-year gap before they can return.

Above the floor, choose for the job. The first independent director should be able to chair the audit committee: a former CFO, a chartered accountant who has been a partner in an audit firm, or an executive who has run finance in a listed company. The second should bring what the board lacks, often someone who has taken a company through a listing or run the business at three times its present size. Avoid friends of the founder, investors’ former colleagues who will vote with them, and anyone whose name is the main qualification. Interview them as you would an executive, ask how they handled a disagreement with a CEO, and check references with a founder they served.

Know the terms before the first conversation. Under section 149(9) an independent director is not entitled to stock options; they may be paid sitting fees, reimbursed for attending meetings and, with shareholders’ approval, paid a commission linked to profit. Founders used to paying advisers in ESOPs need a different offer, and in a loss-making company the sitting fee is most of it. Section 149(12) limits an independent director’s liability to acts done with their knowledge, attributable through board processes, with their consent or connivance or where they did not act diligently. A careful candidate will ask about that, and about directors’ and officers’ insurance; have the answers ready.

An independent director is worth appointing only if the founder can name the decision they would want that person to disagree with.

An audit committee that does its job

Section 177(4) gives the committee its work: recommending the auditors and their pay, reviewing their independence and the audit, examining the financial statements, approving related-party transactions, scrutinising loans and investments, and evaluating internal financial controls and risk management. In practice the committee does four things well or it does nothing. It meets before every board meeting that approves numbers, with a pre-read from the finance head a week ahead. It meets the statutory auditor and the internal auditor without management at least twice a year and asks what they could not get. It owns the related-party register and approves every transaction in it. It reads the whistle-blower log, where there is one, and decides what is investigated.

Close-up of a gold fountain pen nib resting on textured black paper. — Financial statements are signed by directors. An audit committee is how the ones who did not prepare them come to understand what they are signing. Photograph: Pixabay · Pexels

Give the first year an agenda so the committee is not invented one meeting at a time. First quarter: the accounting policies, especially revenue recognition, and the auditors’ letter from the last audit. Second quarter: internal financial controls and the internal audit plan, starting with the areas the [internal controls lesson](/library/internal-controls-and-fraud-you-did-not-expect) names: payments, payroll and the vendor master. Third quarter: the related-party register and a review of fraud risks. Fourth quarter: the auditors’ evaluation and fee, and the plan for the year-end close.

The chair matters more than the membership. A chair who reads the numbers, asks the second question, and is willing to tell the founder that a revenue policy will not survive an IPO review is the most useful governance a growing company can buy. Minute every meeting as carefully as the board’s, following the same [secretarial discipline](/library/board-resolutions-minutes-secretarial-record).

The sequence for a company heading to scale

A sequence that works for many companies, offered as a rule of thumb rather than law. After Series A or B, a board of five with one independent director, chosen for finance. At Series C or around ₹100 crore of revenue, a voluntary audit committee of three with the independent as chair, and a second independent. Two years before a listing, convert to a public company, complete the statutory committees, add independents to reach the listing-regulation ratio, appoint an internal auditor and test the vigil mechanism. Each step is cheaper and better done a year before it becomes mandatory.

The governance calendar

Each quarter: the audit committee meets before the board, reviews the numbers, the related-party register and the auditors’ open points, and the chair reports to the board in five minutes. Each half year: the committee meets the auditors without management. At the first board meeting of the financial year: independents give their declarations and directors disclose their interests. Each year: review the board’s composition against the thresholds in the figure and against the next eighteen months of the plan, evaluate each director, and record when each independent’s term ends. Before any change of company type or fundraise: rerun the thresholds.

Thresholds and rules were checked on 11 October 2026 and are amended often; confirm the current text with a company secretary. Nothing here is legal advice.