Section 177 of the Companies Act, 2013 (“the Act”) read with Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014 (“the Rules”) deals with Audit Committee. The requirements relating to audit committee was first introduced by the Companies (Amendment) Act, 2000. Audit committees are a measure of ensuring self discipline, constituted with the object to strengthen and oversee management in public companies and to ensure that the board of directors discharge their functions effectively. The Companies Act, 2013 acknowledges the importance of an audit committee and entrusts it with additional roles and responsibilities.
Applicability of Audit Committee
Section 177(1) of the Act read with Rule 6 set forth the requirement of constitution of audit committee:
- all listed companies; and
- all public companies
- with a paid up capital of Rs.10 Crores or more;
- having turnover of Rs.100 Crores or more;
- having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores or more.
[The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule.]
Under the 1956 Act, only a public company having paid-up capital of not less than Rs.5 Crores was required to constitute an audit committee.
Composition of Audit Committee
- The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.
- The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
- The Board’s report under section 134(3) of the Act shall disclose the composition of an Audit committee and where the Board had not accepted any recommendations of the Audit Committee, the same shall be disclosed in the report along with the reasons.
Reconstitution of Audit Committee
In term of section 177(3) of the Act, every company which was required to constitute an audit committee under section 292A of the Companies Act, 1956 is required to reconstitute the audit committee within one year of such commencement of the Rules or appointment of Independent Directors, whichever is earlier. (i ,e., on or before 31st March 2015).
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;
- Examination of the financial statement and the auditors’ report thereon;
- Approval or any subsequent modification of transactions of the company with related parties;
- Scrutiny of inter-corporate loans and investments;
- Valuation of undertakings or assets of the company, wherever it is necessary;
- Evaluation of internal financial controls and risk management systems;
- Monitoring the end use of funds raised through public offers and related matters.
Powers of Audit Committee
The Audit committee shall have the authority –
- 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.
Right to be heard
The auditors of a company and the Key Managerial Personnel (KMP) 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.
Establishment of Vigil Mechanism
- Every listed company, companies which accept deposits from the public and companies which have borrowed money from banks and public financial institutions in excess of Rs.50 crores shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.
- The companies which are required to constitute an audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee to deal with the matter on hand.
- Where the companies are not required to constitute an audit committee, the Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.
- The existence of the mechanism may be appropriately communicated within the organization. The details of establishment of Vigil mechanism shall be disclosed by the company in the website, if any, and in the Board’s Report.
Safeguard to employees & Directors
The vigil mechanism shall provide adequate safeguards against victimization of employees and directors who avail of the Vigil mechanism and also provide for direct access to the chairperson of the Audit committee or the director nominated to play the role of audit committee, as the case may be, in exceptional cases.
Action against Frivolous complaints
In case of repeated frivolous complaints 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.
- Company – Fine of Rs.1 Lakh to Rs.5 Lakhs
- Officer in Default – Imprisonment up to 1 year or Fine of Rs.25,000/- to Rs.1, 00,000 or both