As per section 177 of Companies Act, 2013 and Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014, following companies are required to constitute an Audit Committee:
(i) All Listed Companies; or
(ii) The Public Companies having paid up share capital of 10 Cr rupees or more; or
(iii) The Public Companies having turnover of 100 Cr rupees or more; or
(iv) The Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50 Cr rupees:
Note- For the above purpose, paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements.
Audit Committee provisions for listed companies
(Section 177 of Companies Act, 2013 read with Regulation 18 and Part C of Schedule II of SEBI (LODR) Regulation, 2015)
(1) Composition of Audit Committee
(a) Minimum three directors as members
(b) 2/3 of the members shall be independent directors
(c) All members including chairman shall be financially literate and at least 1 member shall have accounting or related financial management expertise
(d) The chairperson shall be an independent director
(e)The Company Secretary shall act as the secretary to the audit committee
“Financially literate” shall mean the ability to read and understand basic financial statements i.e. (B/S, P/L and Cash Flow)
“Accounting or related financial management expertise”
A member shall be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
(2) Meetings of Audit Committee
(a) The audit committee shall meet at least 4 times in a year and not more than 120 days shall elapse between two meetings.
(b)The quorum for meeting shall either be 2 members or 1/3 of the members, whichever is greater, with at least 2 independent directors.
(Note: 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.)
(3) Major Role / Functions of Audit Committee (AC): For the sake of clarity, Role of AC is categorized in below 4 categories:
(A) Role for review of followings:
(1) Financial reporting process and disclosure
(2) Quarterly financial statements
(3) Auditor’s independence and performance, and effectiveness of audit process
(4) Annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to:
(a) Matters included in the director’s responsibility statement in board report (refer section 134(3) (c) of the Companies Act, 2013)
(b) Changes in accounting policies and practices and reasons for the same
(c) Major accounting entries involving estimates based on the exercise of judgment by management
(d) Significant adjustments made in the financial statements arising out of audit findings
(e) Compliance with listing and other legal requirements
(f) Disclosure of related party transactions
(g) Modified opinion(s) in the draft audit report
(5) Performance of statutory and internal auditors, adequacy of the internal control systems and adequacy of internal audit function
(6) Findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board
(7) Functioning of the whistle blower mechanism
(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. The vigil mechanism 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 case. (Refer Rule 7 of Companies (Meetings of Board and its Powers) Rules, 2014)
The details of establishment of such mechanism shall be disclosed by the company on its website and in the Board’s report.)
(8) Utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as on the date of coming into force of this provision.
(9) End use of funds raised through public offers and related matters
(B) Approval of followings
(1) Payment to statutory auditors for any other services
(2) Transactions and any subsequent modification of transactions with related parties
(Note: All related party transactions shall require approval of the Audit Committee and the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company. Omnibus approval shall be valid for a period of one financial year and shall require fresh approval after the expiry of such financial year. (Refer regulation 23 of SEBI (LODR) Regulation, 2015 and rule 6A of companies (Meetings of Board and its Powers) Rules, 2014 as amended)).
(1) Appointment, remuneration and terms of appointment of auditors of the listed entity.
(D) Other Roles / Functions
(1) Scrutiny of inter-corporate loans and investments
(2) Valuation of undertakings or assets of the listed entity, wherever it is necessary
(3) Evaluation of internal financial controls and risk management systems
(4) Look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors
(5) Discussion with internal auditors of any significant findings
(6) Discussion with statutory auditors about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern
(7) Carrying out any other function as is mentioned in the terms of reference of the audit committee
(8) Chairman of Audit committee shall be present at Annual general meeting to answer shareholder queries
(9) The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee:
Provided that occasionally the audit committee may meet without the presence of any executives of the listed entity.
(4) Audit Committee shall mandatorily review the followings:
(1) Management discussion and analysis of financial condition and results of operations
(2) Statement of significant related party transactions (as defined by the audit committee), submitted by management
(3) Management letters / letters of internal control weaknesses issued by the statutory auditors
(4) Internal audit reports relating to internal control weaknesses
(5) The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee
(6) Statement of deviations as per regulation 32(1) and 32(7) of SEBI (LODR) Regulation, 2015
(5) Disclosure under the Board’s Report
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 therefore.
(6) Disclosure under the corporate governance of Annual Report
The Annual report of the company shall disclose the following in corporate governance report:
(a) Brief description
(b) Composition, name of members and chairperson
(c) Meetings and attendance during the year
(The views expressed herein are personal views of the Author. The views expressed herein in not intended and shall not be taken as, legal advice. For any further queries, the author can be reached at following Email id: firstname.lastname@example.org)