The primary purpose of a company’s audit committee is to provide oversight of the financial reporting process, the audit process, the company’s system of internal controls and compliance with laws and regulations.
This Committee is sometimes set up as the requirement of law and sometimes setting up as adoption of best practices of good corporate governance.
Constitution of Audit Committee ( Section 177(1) and Rule 6 of the Companies (Meetings of the Board and its Powers) Rules,2014)
- Every Listed Public Companies
- Public Companies with paid up capital of 10crore rupees or more
- Public Companies having Turnover of 100crore rupees or more
- Public Companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50crore rupees.
The paid up share capital or turnover or outstanding loans or borrowings or debentures or deposits, will be taken into considered as existing on the date of last audited financial statements shall be taken into account for the purpose of this rule.
Following Unlisted Public Companies are not covered under this rule
- Wholly Owned Subsidiary
- Joint Venture
- Dormant Company under Section 455
Composition of Audit Committee [Section 177(2)]
- Minimum 3 Directors, with majority being Independent Director
- Chairperson should able to read and understand the financial statement.
- Requirement of Independent Directors is not applicable to Section 8 Companies.
Composition of Audit Committee under SEBI (LODR) Regulations, 2015
- Minimum 3 Directors
- Two-third members shall be independent Director and in listed entity having outstanding SR equity shares, it shall only comprise of Independent Directors.
- All members shall be financially literate and at least one member shall have accounting or related financial management expertise.
- Chairperson shall be the Independent Director.
Number of Meetings and Quorum
For Unlisted Company
As it deems fit to serve the purpose it may meet as number of times as required.
Minimum numbers of meetings and quorum may be decided by the Board of Directors
Listed Companies:
- At least 4 times in a year and not more than 120 days should elapse between meetings
- Two members or One- Third of the members of the audit committee, whichever is greater, with at least two Independent Directors.
Functions of Audit Committee:
Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include-
- The recommendation for appointment, remuneration and terms of appointment of auditors of the company.
- Review and Monitor the auditor’s independence and performance and effectiveness of audit process,
- Evaluation of internal financial controls and risk management systems.
- Monitoring the end use of funds raised through public offers and related matters.
- Scrutiny of inter-corporate loans and investments.
Powers of Audit Committee:
- To 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.
- To discuss any related issues with the internal and statutory auditors and the management of the company.
- To investigate into any matter in relation to the items or referred to it by the board.
- To obtain professional advice from external sources.
- To have full access to information contained in the records of the Company.
Establishment of Vigil Mechanism:
Every Listed Company and the companies belonging to the following class or classes, as prescribed under Rule 7 of Companies (Meetings of Board and its powers) Rules, 2014 shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances-
- Companies which accept deposits from the public.
- Companies which have borrowed money from Banks and PFI in excess of Rs. 50 Crores.
The Vigil mechanism shall provide adequate safeguards against victimization of employees and directors who avail of the Vigil mechanism and also provide the role of Audit Committee, as the case may be, in exceptional cases.
Action taken against Frivolous Complaints
In case of repeated frivolous complains being filed by a Director or an employee, the audit committee or the Director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.
The Details of establishment of such mechanism shall be disclosed on the Company’s website and in Board Report, also appropriately communicated within the organization.
Penalty for Violation of Audit Committee Provistions:
For Company: Fine of Rs. 1 lakh to Rs. 5 lakhs
For every officer of Company in default: Imprisonment up to 1 year or with fine of Rs. 25000 to Rs. 1 lakh or with both.
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