Companies Act Section 177 — Audit Committee
CHAPTER XII MEETINGS OF BOARD AND ITS POWERS
Commercial / Corporate
Summary
Sub-section (1) requires the board of directors of every listed public company, and any other class of companies that may be prescribed by rules, to set up an Audit Committee.
Sub-section (2) states that the Audit Committee must have at least three directors, and independent directors must form the majority of the committee. It also adds that the majority of committee members, including the Chairperson, must be people who can read and understand financial statements.
Sub-section (3) says that any company that already had an Audit Committee before this Act came into force must reconstitute that committee within one year of the Act's commencement, so that it meets the requirements of sub-section (2).
Sub-section (4) requires every Audit Committee to act according to written terms of reference given by the Board. These terms must include the following items: (i) recommending the appointment, remuneration, and terms of appointment of the company's auditors; (ii) reviewing and monitoring the auditor's independence, performance, and the effectiveness of the audit process; (iii) examining the financial statement and the auditors' report on it; (iv) approving or later modifying transactions of the company with related parties, with the added conditions that the Audit Committee may give omnibus approval for related party transactions subject to prescribed conditions, that if the committee does not approve a transaction (other than those covered by section 188) it must make recommendations to the Board, that if a director or officer enters into a transaction worth up to one crore rupees without committee approval and the committee does not ratify it within three months, the transaction becomes voidable at the committee's option and the director concerned must indemnify the company for any loss if the transaction involves a related party or is authorised by another director, and that these provisions do not apply to transactions between a holding company and its wholly owned subsidiary (other than those covered by section 188); (v) scrutinising inter-corporate loans and investments; (vi) valuing undertakings or assets of the company when necessary; (vii) evaluating internal financial controls and risk management systems; and (viii) monitoring the end use of funds raised through public offers and related matters.
Sub-section (5) allows the Audit Committee to ask auditors for their comments on internal control systems, the scope of the audit, and the auditors' observations, and to review the financial statement before it is submitted to the Board. The committee may also discuss related issues with the internal and statutory auditors and with the company's management.
Sub-section (6) gives the Audit Committee the authority to investigate any matter related to the items listed in sub-section (4) or any matter referred to it by the Board. For this purpose, the committee has the power to obtain professional advice from external sources and full access to information in the company's records.
Sub-section (7) says that the company's auditors and key managerial personnel have the right to be heard at Audit Committee meetings when the committee considers the auditor's report, but they do not have the right to vote.
Sub-section (8) requires the Board's report under sub-section (3) of section 134 to disclose the composition of the Audit Committee. If the Board has not accepted any recommendation of the Audit Committee, that must also be disclosed in the report, along with the reasons for not accepting it.
Sub-section (9) requires every listed company, or any other class of companies as may be prescribed, to set up a vigil mechanism for directors and employees to report genuine concerns, in the manner prescribed by rules.
Sub-section (10) says that the vigil mechanism under sub-section (9) must provide adequate safeguards against victimisation of people who use the mechanism, and must allow direct access to the Chairperson of the Audit Committee in appropriate or exceptional cases. It also adds that the details of how the mechanism is established must be disclosed by the company on its website, if it has one, and in the Board's report.
Official Text
(1) The Board of Directors of 1[every listed public company] and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
(2) The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority:
Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
(3) Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with sub-section (2).
(4) 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: 1[Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;] 2[Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board: Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it: Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.]
(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.
(5) The Audit Committee may 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 and may also discuss any related issues with the internal and statutory auditors and the management of the company.
(6) The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.
(7) 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.
(8) 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.
(9) 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 in such manner as may be prescribed.
(10) The vigil mechanism under sub-section (9) 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 cases:
Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.