Corporate Law Audit Committee Prof.

Koushik Chatterjee
Committees
Sections AC : Section 177 CSR C : Section 135 NRC : Section 178 SRC : Section 178

Name of the Audit Committee Corporate Social Nomination and Stakeholders

Committees Responsibility Remuneration Relationship
Committee Committee and Committee

Audit Committee
The Audit Committee is one of the main pillars of the corporate governance system in public companies.
Charged with the principal oversight of financial reporting and disclosure, the Audit Committee aims to
enhance the confidence in the integrity of the company’s financial reports and announcements, the
internal control processes and procedures and the risk management systems.
The focus of the Audit Committee under Companies Act, 2013 has shifted specifically on new committee
dynamics, financial reporting, risk oversight, oversight and evaluation of performance and effectiveness of
the audit process, rotation of the statutory auditor, interaction with the statutory auditor and the internal
auditor, oversight and evaluation of internal financial controls, related party transactions, vigil mechanism,
and more importantly for the first time on the monitoring of the end use of funds raised through the public
offers. The natural implication of the new set of responsibilities is that investors and stakeholders would
now place greater reliance on the judgment of the Audit Committee to appropriately oversee these areas.

Section 177 of the Companies Act,2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers)
Rules,2014 deals with the Audit Committee.

1. Applicability of Audit Committee:

The Board of directors of every listed companies and the following classes of companies, as prescribed
under Rule 6 of Companies (Meetings of Board and its powers) Rules,2014 shall constitute an Audit
Committee.
(i) all public companies with a paid up capital of Rs.10 Crores or more;
(ii) all public companies having turnover of Rs.100 Crores or more;
(iii) all public companies, 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.

2. Composition:

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) 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 there for.

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Corporate Law Audit Committee Prof. Koushik Chatterjee
Reconstitution: Every Audit Committee of a company existing immediately before the commencement of this Act
st
shall be reconstituted within one year of such commencement.(i,e., on or before 31 March 2015)
3. 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,—
(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;
(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.
4. 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.
The auditors of a company and the 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.
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.
In addition to the Audit Committee, the New Act has also mandated the constitution of three additional
board committees for all listed companies and such other classes of companies to be specified in the Rules.
• The Nomination and Remuneration Committee is expected to ensure among other things that remuneration
arrangements support the strategic goals of the business and more importantly to conduct performance
evaluations of the board.
• The Corporate Social Responsibility Committee would formulate the Corporate Social Responsibility policy of the
company, recommend the expenditure that can be incurred for this purpose and monitor such policy of the
company from time to time.
• The Stakeholders Relationship Committee would help resolve the grievances of the security holders of the
company.
Section 178 of the New Act lays down the constitution, composition and the roles and responsibilities of the
Nomination and Remuneration Committee and Stakeholders Relationship Committee, whereas
Section 135 lays down constitution, composition and the roles and responsibilities of the Corporate Social
Responsibility Committee.

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Corporate Law Audit Committee Prof. Koushik Chatterjee
5. Scope of Audit Committee
1. Sub section (5) of section 177 of Companies Act, 2013 states
 Audit Committee may the 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 statements before
their submission to the Board.
 Discussing the related issues with the internal, statutory auditors and the management of the
Company.
2. Sub section (6) of section 177 of Companies Act, 2013 states
 Audit Committee has the authority to investigate into matters referred by Board.
 To obtain professional advice from external sources.
 Having full access to the records of the Company.
3. Sub section (7) of section 177 of Companies Act, 2013 states
In addition to the auditor, the KMP shall also have a right to be heard in the meetings of the Audit
Committee when it considers the auditor report, though they shall not have voting rights.
The Board’s report of the Company 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 for not accepting the recommendation.
B. Vigil Mechanism
Section 177(9) of the Companies Act 2013 read with Rule 7 of Companies (Meetings of Board and its
powers) Rules 2014 requires establishment of vigil mechanism for their directors and employees to report
genuine concerns about unethical behaviour/misconduct/actual or suspended fraud/violation of code of
conduct.
1. Applicability of Vigil Mechanism:
a. Every Listed Company and
b. The Companies which accept deposits from the public;
c. The Companies which have borrowed money from banks and public financial
institutions in excess of Rs.50/- crore.
2. Operation of Vigil Mechanism
1. The Audit Committee to oversee the operation of the mechanism
2. For Companies that do not need an audit committee, a director to be nominated by the Board to oversee
the mechanism.
3. Audit Committee member to recue if conflicted: if a member of Audit Committee is conflicted in a given
case, he should rescue himself.
3. Scope of Vigil Mechanism:
1. Safeguard against victimization –The Mechanism provides for adequate victimization of employees and
directors, providing direct access to the Chairperson of Audit Committee or the Director nominated to play
role of audit committee.
2. Frivolous complaints-Audit Committee or the directors to take suitable action (including reprimand)
against repeated frivolous complaints.
Note: Details of establishment of the Vigil Mechanism is required to be discussed by the Company on its
website, if any and in the Board Report.