Audit Committee
[ (1) The Board of Directors of 5[every listed public company] and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
(2) The Audit Committee shall consist of a minimum of three Directors 2[with independent Directors forming a majority]:
Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
(3) Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with sub-section (2).
(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,—
3[(i) the recommendation for appointment, remuneration and terms of appointment of auditors of the company;]
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
1 [Provided that 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;]
6[Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board:
Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.]
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
(5) The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.
(6) The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.
(7) The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote.
(8) The Board’s report under sub-section (3) of section 134 shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons therefor.
(9) Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for Directors and employees to report genuine concerns in such manner as may be prescribed.
(10) The vigil mechanism under sub-section (9) shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases:
Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.]
Amendment
1.Inserted by Companies (Amendment) Act, 2015 and is effective from 14th December, 2015.
5. Substituted by the Companies (Amendment) Act,2017 :- Amendment Effective from 7th May 2018
In section 177 in sub-section (1):-
for the words “every listed company”.
the following Clause shall be substituted, namely :-
“every listed public company”.
6.Inserted by The Companies (Amendment)Act,2017.:- Amendment Effective from 7th May 2018
Exceptions/ Modifications/ Adaptations
2. Note: In case of section 8 company, in Section-section 2 of section 177 the words “with independent Directors forming a majority” shall be omitted. – Notification dated 5th june, 2015.
3. In case of Government Company – in clause (i) of Sub-section (4) of section 177 for the words “recommendation for appointment, remuneration and terms of appointment’” the words “recommendation for remuneration” shall be substituted. – Notification dated 5th june, 2015.
4. In case of Specified IFSC Public Company – section 177 shall not apply. – Notification Dated 4th January, 2017.
Analysys of Section 177 of Companies 2013
Every listed public company and certain other types of companies must have an Audit Committee, which is formed by the Board of Directors.
The Audit Committee should consist of at least three Directors, with a majority of them being independent Directors. The majority of members, including the Chairperson, should be able to read and understand financial statements.
Existing Audit Committees of companies must be reconstituted according to the requirements within one year of the start of this law.
The Audit Committee must follow the terms of reference set by the Board. These include:
- Recommending the appointment, remuneration, and terms of auditors.
- Reviewing the auditor’s independence, performance, and effectiveness of the audit process.
- Examining the financial statements and auditors’ reports.
- Approving or modifying transactions between the company and related parties.
- Scrutinizing inter-corporate loans and investments.
- Evaluating internal financial controls and risk management systems.
- Monitoring the use of funds raised through public offers and related matters.
The Audit Committee can request comments from auditors regarding internal control systems, the scope of audits, and financial statements before they are submitted to the Board. They can also discuss related issues with internal and statutory auditors and the company’s management.
The Audit Committee has the authority to investigate any matter related to its responsibilities and can seek professional advice and access company records.
Auditors and key managerial personnel can attend Audit Committee meetings and provide their input but cannot vote.
The Board’s report must disclose the composition of the Audit Committee, and if any of the committee’s recommendations were not accepted by the Board, the reasons must be disclosed.
Every listed company, or as prescribed, must establish a mechanism for Directors and employees to report genuine concerns. This mechanism should have safeguards against victimization and provide direct access to the Audit Committee Chairperson in exceptional cases. The details of this mechanism should be disclosed on the company’s website and in the Board’s report.
Amendment:
The amendment clarified that the requirement applies to every listed public company.
Section 8 companies are exempt from the requirement for independent Directors in the Audit Committee.
For government companies, the recommendation of appointment, remuneration, and terms of appointment are replaced with the recommendation for remuneration.
Specified IFSC (International Financial Services Centre) Public Companies are exempt from Section 177.
Section 177 of the Companies Act, 2013 outlines the provisions related to the Audit Committee. Here are some examples to explain its key points:
Composition of the Audit Committee:
- Example 1: ABC Ltd., a listed public company, constitutes an Audit Committee comprising three Directors, two of whom are independent Directors.
- Example 2: XYZ Pvt. Ltd., a company belonging to a prescribed class, forms an Audit Committee with four Directors, including two independent Directors.
Responsibilities of the Audit Committee:
- Example 1: The Audit Committee of ABC Ltd. recommends the appointment, remuneration, and terms of appointment of auditors for the company.
- Example 2: The Audit Committee of XYZ Pvt. Ltd. examines the financial statements and auditors’ reports to ensure accuracy and compliance.
Approval of Transactions with Related Parties:
- Example 1: ABC Ltd.’s Audit Committee reviews and approves a proposed transaction between the company and a related party, subject to prescribed conditions.
- Example 2: XYZ Pvt. Ltd.’s Audit Committee does not approve a transaction, other than those covered under Section 188, and makes recommendations to the Board for further consideration.
Scrutiny of Inter-corporate Loans and Investments:
- Example 1: The Audit Committee of ABC Ltd. reviews and scrutinizes the loans and investments made by the company to other entities within its corporate group.
- Example 2: XYZ Pvt. Ltd.’s Audit Committee evaluates the financial viability and potential risks associated with inter-corporate loans and investments made by the company.
Evaluation of Internal Controls and Risk Management:
- Example 1: ABC Ltd.’s Audit Committee assesses the effectiveness of internal financial controls and risk management systems implemented by the company.
- Example 2: XYZ Pvt. Ltd.’s Audit Committee evaluates the adequacy of internal controls and risk management practices to ensure compliance with regulatory requirements.
Monitoring End Use of Funds Raised through Public Offers:
- Example 1: The Audit Committee of ABC Ltd. monitors and verifies the appropriate utilization of funds raised by the company through its recent public offering.
- Example 2: XYZ Pvt. Ltd.’s Audit Committee reviews the utilization of funds raised through a public offer and ensures compliance with the stated objectives.
These examples illustrate how Section 177 of the Companies Act, 2013 applies to different scenarios in the Indian context, highlighting the roles and responsibilities of the Audit Committee in various company settings.
Here's a table summarizing the key points mentioned in the passage:
| Provision | Description |
|---|---|
| (1) | The Board of Directors of every listed public company and other prescribed companies shall form an Audit Committee. |
| (2) | The Audit Committee should consist of a minimum of three Directors, with independent Directors forming a majority. The majority, including the Chairperson, should be able to read and understand financial statements. |
| (3) | Existing Audit Committees must be reconstituted within one year of the Act’s commencement. |
| (4) | The Audit Committee’s responsibilities include recommending auditors’ appointment, remuneration, and terms; reviewing auditor independence, performance, and audit effectiveness; examining financial statements and auditors’ reports; approving or modifying transactions with related parties; scrutinizing inter-corporate loans and investments; valuing assets when necessary; evaluating internal financial controls and risk management systems; and monitoring the use of funds raised through public offers. |
| (5) | The Audit Committee may seek comments from auditors about internal control systems, scope of audits, and review financial statements before submission to the Board. They can also discuss related issues with internal and statutory auditors and company management. |
| (6) | The Audit Committee has the authority to investigate matters within its scope and can seek external professional advice and access company records. |
| (7) | Auditors and key managerial personnel can attend Audit Committee meetings, present auditor reports, but cannot vote. |
| (8) | The Board’s report must disclose the Audit Committee’s composition. If the Board doesn’t accept any Audit Committee recommendations, it must disclose the same along with reasons. |
| (9) | Every listed company or prescribed companies must establish a vigil mechanism for Directors and employees to report genuine concerns, with safeguards against victimization. The Chairperson of the Audit Committee should be accessible in appropriate or exceptional cases. |
| (10) | The vigil mechanism details should be disclosed on the company’s website and in the Board’s report. |
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