When a Company Outgrows Private-Limited Compliance: The Public-Company Extras

A private limited company that converts to a public company, lists, or simply grows past the prescribed thresholds picks up a second compliance layer: independent directors, board committees, internal audit, secretarial audit and CSR machinery. Several of these duties attach to listed public companies by the Act itself; others attach only to classes of companies the Central Government prescribes by rules (so they can reach a company whether or not it is public or listed); CSR is triggered by financial tests. This is the map of what switches on, in the Companies Act's own order.

Legal basis: Companies Act 2013, ss.135 (CSR), 138 (internal audit), 149 (board composition), 177 (audit committee), 178 (nomination and remuneration committee), 204 (secretarial audit).

---

The board itself changes: three directors, women, independence

A public company needs a minimum of three directors against two for a private company, and a maximum of fifteen; a company may appoint more than fifteen after passing a special resolution under section 114(2) (s.149(1)(a)-(b) and first proviso, Companies Act 2013). Such class or classes of companies as are prescribed must have at least one woman director (second proviso to s.149(1)). Separately, every company must have at least one director who stays in India for a total of not less than 182 days during the financial year; for a newly incorporated company this applies proportionately at the end of the financial year in which it is incorporated (s.149(3) and proviso).

Then independence. Every listed public company must have at least one-third of its directors as independent directors, with any fraction rounded off as one; the Central Government may prescribe the minimum number of independent directors for any class or classes of public companies (s.149(4) with Explanation). The Act itself therefore names listed public companies expressly, while unlisted public companies depend on what has been prescribed for their class. Whether an unlisted public company has an independence duty is thus a question of whether it falls in a prescribed class, to be checked in the rules.

The definition of "independent director" is deliberately narrow. It excludes a managing director, whole-time director or nominee director, and requires a person who, in the Board's opinion, has integrity and relevant expertise and experience (s.149(6)(a)). He or she must not be or have been a promoter of the company or its holding, subsidiary or associate company, and must not be related to promoters or directors of those companies (s.149(6)(b)). Money relationships (pecuniary relationships) with the company, its holding, subsidiary or associate company, or their promoters or directors are barred. The exceptions are remuneration as a director and transactions within the permitted limit. The bar covers the two immediately preceding financial years and the current one (s.149(6)(c)). Further clauses deal with relatives' holdings and dealings, and past employment or professional links (s.149(6)(d)-(e)). A growing company should test its board against this definition early, because independent directors have to actually be independent.

Audit committee: the board's financial conscience

The Board of every listed public company, and of such other classes of companies as are prescribed, must constitute an Audit Committee of at least three directors with independent directors forming a majority. A majority of its members, including the Chairperson, must be able to read and understand a financial statement (s.177(1)-(2) and proviso, Companies Act 2013).

The Committee works to terms of reference the Board specifies in writing. At minimum these include recommending the appointment, remuneration and terms of appointment of auditors; reviewing and monitoring the auditor's independence and performance and the effectiveness of the audit process; examining the financial statement and the auditors' report; and approving, or approving any subsequent modification of, transactions with related parties (s.177(4)(i)-(iv)). The list continues with scrutiny of inter-corporate loans and investments, valuation of undertakings or assets, evaluation of internal financial controls and risk management systems, and monitoring the end use of funds raised through public offers (s.177(4)(v)-(viii)).

For a company used to the board signing off accounts directly, this interposes a standing committee between management and the auditor. Meeting calendars and a written charter are worth settling before the first year in which the committee is mandatory.

Nomination and remuneration: who governs the governors

The same trigger applies: every listed public company plus such other classes as are prescribed. The Nomination and Remuneration Committee must consist of three or more non-executive directors, not less than one-half of them independent. The chairperson of the company, executive or non-executive, may be a member but must not chair the Committee (s.178(1) and proviso, Companies Act 2013).

Its work is to identify persons qualified to become directors or to be appointed in senior management and recommend their appointment and removal, to specify the manner of evaluating the Board, its committees and individual directors, and to formulate criteria for qualifications, positive attributes and independence and a remuneration policy for directors, key managerial personnel and other employees (s.178(2)-(3)). Founders who have fixed their own pay by simple board resolution will need to move that decision into a committee process with recorded criteria.

Internal audit and secretarial audit: two further audits

Such class or classes of companies as are prescribed must appoint an internal auditor, who is a chartered accountant, a cost accountant or such other professional as the Board decides, to conduct internal audit of the functions and activities of the company (s.138(1), Companies Act 2013). The Central Government may prescribe by rules the manner and intervals in which internal audit is conducted and reported to the Board (s.138(2)).

Every listed company and every company in a prescribed class must annex to its Board's report a secretarial audit report given by a company secretary in practice, in the prescribed form (s.204(1)). It is the company's duty to give that professional all assistance and facilities for auditing the secretarial and related records (s.204(2)), and the Board must explain in full, in its report, any qualification, observation or other remark in the secretarial audit report (s.204(3)). If a company, an officer, or the company secretary in practice contravenes the section, the company and every officer in default, or the practitioner, is liable to a penalty of two lakh rupees (s.204(4)). The statutory audit is therefore no longer the only audit: internal audit looks at functions and activities, and secretarial audit looks at the compliance record itself.

CSR: the committee that spending follows

CSR works on financial tests, not on public or listed status. Every company with net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more during the immediately preceding financial year must constitute a Corporate Social Responsibility Committee of three or more directors, at least one of whom is an independent director (s.135(1), Companies Act 2013).

Where a company is not required to appoint an independent director under section 149(4), its CSR Committee needs two or more directors instead (proviso to s.135(1)). The Act scales the committee to the board the company is required to have, rather than forcing independence through CSR. Either way, the Board's report under section 134(3) must disclose the Committee's composition (s.135(2)).

Because the tests run on the immediately preceding financial year, a breakout year is followed by a year in which the committee is needed, so the governance should be budgeted before the spending.

Knowing when you cross the line

The Act's architecture is consistent. Listed companies are covered directly in some sections, and "such other class or classes of companies as may be prescribed" are added by rules (ss.149(4), 177(1), 178(1), 138(1), 204(1), Companies Act 2013). The prescribed classes and their thresholds sit in the rules made under the Act, such as the Appointment and Qualification of Directors Rules, the Management and Administration Rules and the Companies (Corporate Social Responsibility Policy) Rules, and the rules have been amended over time. Confirm the current text of each rule against the company's latest numbers before deciding which duties apply. A practical habit is to test the company against those rules at every financial year-end, since a class change can bring committees, auditors and disclosures into the next year without any fresh incorporation step.

A crossing-the-line checklist

• Board strength: three directors minimum for a public company; a director meeting the 182-day presence test; a woman director if the company is in a prescribed class (s.149(1), (3), Companies Act 2013).
• Independence: one-third independent directors if listed, or as prescribed for the company's class; test every candidate against s.149(6) (s.149(4), (6)).
• Committees: Audit Committee (independent majority, financially literate majority) and Nomination and Remuneration Committee (three or more non-executive directors, half independent) where triggered (ss.177(1)-(2), 178(1)).
• Audits: internal auditor where the company is in a prescribed class (s.138(1)); secretarial audit report annexed, with qualifications explained, where listed or prescribed (s.204(1)-(3)).
• CSR: committee constituted when any s.135(1) test is met in the preceding financial year, composition disclosed (s.135(1)-(2)).

What to do now

• Next step: list the company's status (listed or unlisted public, private) and its latest net worth, turnover and net profit, then check them against the current rules for prescribed classes (ss.149(4), 177(1), 178(1), 138(1), 204(1), Companies Act 2013).
• Deadline: there is no single date. The CSR tests look at the immediately preceding financial year (s.135(1)), and the secretarial audit report goes with the Board's report (s.204(1)).
• Consequence: contravening s.204 attracts a penalty of two lakh rupees on the company and each officer in default (s.204(4)).

Have a CA review your facts before you act or file.

FAQ

We converted to a public company but are unlisted. Do committees apply immediately?
Sections 177(1) and 178(1) name every listed public company and such other classes as are prescribed (Companies Act 2013). Conversion changes the three-director floor (s.149(1)(a)); the committees follow listing or the prescribed class, so check the current rules for the company's numbers.

Can our promoter-director count as independent?
No. A person who is or was a promoter of the company or its holding, subsidiary or associate company is excluded, as is anyone related to promoters or directors (s.149(6)(b), Companies Act 2013), and certain pecuniary relationships also disqualify (s.149(6)(c)).

Does the audit committee replace the statutory auditor?
No. It recommends the auditor's appointment, remuneration and terms, and reviews and monitors independence and performance (s.177(4)(i)-(ii), Companies Act 2013). The statutory audit under section 139 continues alongside.

We met a CSR threshold this year. When is the committee due?
The test uses the immediately preceding financial year (s.135(1), Companies Act 2013), so a year in which a threshold is met leads to the committee being needed for the following year, with its composition disclosed in the Board's report (s.135(2)).

What if the secretarial auditor qualifies our report?
The Board must explain in full every qualification, observation or other remark in its report (s.204(3), Companies Act 2013). The company must also have given the practitioner all assistance and facilities (s.204(2)).

We listed this year. Does SEBI add a third layer?
Listing brings SEBI's regulations on top of the Companies Act sections above. This guide covers only the Companies Act layer.

Can one independent director sit on all three committees?
The Act sets composition floors, not exclusivity: audit needs three directors with an independent majority (s.177(2)); the nomination and remuneration committee needs three or more non-executive directors, half independent (s.178(1)); CSR needs three or more directors with one independent where independence applies (s.135(1)). Count seats and ratios before promising committee roles to new appointees.

---

See Also

• Audit Committee and Vigil Mechanism Under Section 177: Composition, Powers and Disclosure
• CSR under section 135: the board's annual cycle, from trigger test to unspent-amount transfers
• Who Picks Directors and Sets Their Pay? The NRC and Stakeholders Committees Under Section 178