Key Considerations and Requirements for an Effective Audit Committee in India under Companies Act, 2013, Erstwhile Companies Act, 1956 and SEBI LODR, 2015.
Introduction:
The role of audit committees in overseeing financial reporting, internal controls, and compliance programs is crucial in maintaining trust in the capital markets. They play a significant role in upholding the integrity of financial reporting and internal control. In this article, we will explore the importance of audit committees in the corporate governance system and the requirements set forth by the Companies Act, 2013 in India.
Audit committees are charged with overseeing financial reporting, audit processes, internal controls, ethics and compliance programs, and both external and internal audits. It comes as no surprise that financial reporting and internal controls, including fraud risk, rank high on the committee’s agenda. Audit committees are integral to maintaining trust in the capital markets and play an essential role in upholding the integrity of financial reporting and internal control.
The audit committee is considered one of the main pillars of the corporate governance system in public companies, enhancing confidence in the integrity of the company’s financial reports, internal control processes, and risk management systems.
Companies Act, 1956:
Before the enactment of the Companies Act, 2013, every public company in India with a paid-up capital of not less than five crore rupees was required to constitute an Audit Committee under Section 292A of the Companies Act, 1956. Additionally, Clause 49 of the Listing Agreement, applicable only to listed companies, mandated all listed companies to constitute an Audit Committee with prescribed responsibilities.
Companies Act, 2013:
The mandate of the Audit Committee under the Companies Act, 2013 differs significantly from Section 292A of the Companies Act, 1956, as its constitution has been broadened. The new act requires every listed company and certain other classes of companies to constitute an Audit Committee. The prescribed rules released in September 2013 state that this includes:
- Any public company with a paid-up capital of ten crore rupees or more, or
- Any public company with a turnover of one hundred crore rupees or more, or
- Any public company with aggregate outstanding loans or borrowings/debentures/deposits exceeding fifty crore rupees.
Composition:
In India, the audit committee should consist of at least three directors, and other directors can be added as decided by the board of directors from time to time.
At least two-thirds of the total directors on the audit committee should be other than the whole-time director or managing director, as per Regulation 18(1) of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015).
In the case of shares with superior voting rights (SR equity shares), the committee shall only comprise independent directors, as per Regulation 18(1) of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015).
The majority of the directors should be independent, as per Section 177(2) of the Companies Act, 2013.
Chairman:
The chairman of the audit committee must be an independent director, and the majority of directors must be financially literate, as per Section 177(2) of the Companies Act, 2013.
All directors of the committee must be financially literate, and at least one director should have financial management or accounting expertise, as per Regulation 18(1) of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015.
The chairman of the audit committee or a designated representative must be present at the Annual General Meeting (AGM) to address shareholders’ questions.
Meetings:
The committee should meet at least four times a year, with no more than 120 days between two meetings.
Quorum:
The quorum for an audit committee meeting should be either:
- Two directors, or
- One-third of the directors of the audit committee, whichever is higher, with at least two independent directors.
Conclusion:
Having a well-constituted and effective audit committee is crucial for maintaining transparency, accountability, and investor confidence in public companies in India. The Companies Act, 2013 outlines specific requirements for the composition, chairman, meetings, and quorum of the audit committee. By adhering to these requirements and conducting regular and meaningful meetings, companies can strengthen their corporate governance practices and ensure the integrity of financial reporting, internal controls, and risk management systems. A robust audit committee plays a vital role in upholding the principles of good governance and fostering trust in the business environment.
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