An audit committee is a board-level sub-committee that acts as the independent check on a company's financial reporting, internal controls and auditor relationships. It is governed by Section 177 of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, and, for listed entities, by Regulation 18 of the SEBI (LODR) Regulations, 2015. Where both regimes apply, the stricter SEBI requirement prevails.
Which companies must have one
The board of every listed company must constitute an audit committee. Among unlisted public companies, the requirement is triggered if, as on the date of the last audited financial statements, the company has any of the following:
- Paid-up share capital of ₹10 crore or more; or
- Turnover of ₹100 crore or more; or
- Aggregate outstanding loans, borrowings, debentures or deposits exceeding ₹50 crore.
Private companies fall outside this net, though lenders or investors often insist on one through their agreements.
Composition
The composition rules differ slightly between the two regimes, and a listed company must satisfy both. The table below shows where they diverge.
| Requirement | Section 177 (Companies Act) | Regulation 18 (SEBI LODR) |
|---|---|---|
| Minimum members | 3 directors | 3 directors |
| Independent directors | Majority | At least two-thirds |
| Chairperson | No specific rule | Must be an independent director |
| Financial literacy | Majority (including chairperson) able to read and understand financial statements | All members financially literate; at least one with accounting or financial management expertise |
Under SEBI rules the chairperson must also attend the AGM to answer shareholder queries, and a listed entity with outstanding superior-rights (SR) equity shares must have an audit committee comprising only independent directors.
Functions and powers
- Recommending the appointment, remuneration and terms of the statutory auditor, and reviewing auditor independence and performance;
- Examining the financial statements and the auditor's report before they are placed before the board;
- Reviewing internal financial controls, risk management systems and the internal audit function;
- Approving or modifying related-party transactions, including any subsequent modification;
- Scrutinising inter-corporate loans and investments and the end-use of funds raised;
- Reviewing the functioning of the vigil mechanism (whistle-blower framework).
The committee may call for records, obtain outside legal or professional advice, and investigate any matter within its terms of reference.
Meetings and quorum
Listed companies must hold at least four audit committee meetings a year, with no more than 120 days between two consecutive meetings. The quorum is two members or one-third of the committee, whichever is higher, subject to a minimum of two independent directors being present. The CFO, statutory auditors and internal auditors are usually invited to attend but are not members and do not count towards quorum.
Common mistakes to avoid
- Applying only the Companies Act majority test to a listed company and missing SEBI's two-thirds independent-director threshold;
- Letting more than 120 days lapse between meetings, a frequent LODR reporting default;
- Treating related-party approvals as a board-only matter when prior audit committee approval is required;
- Omitting the committee's composition and terms of reference from the board's report and, for listed firms, the corporate governance report.