Home»Corporate Law»Companies Act 2013»Audit Committee to be constituted by BOD of specified Company

Audit Committee to be constituted by BOD of specified Company

Know the provisions for requirement, constitution and functions of Audit committee of a company under section 177 of the Companies Act, 2013.

Chapter-XII (Section 173195) of the Companies Act, 2013 (CA 2013) deals with the provisions related to meetings of board of directors of a company and its powers. Section 177 of CA 2013 specifically provides for Audit Committee. Section 177 come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.

Recently, we have discussed the provisions of section 176 of the Companies Act, 2013 and come to know about the defects in appointment of directors not to invalidate actions taken. Today, we shall discuss about the provisions of section 177 i.e. Audit Committee. You should read section 177 of CA 2013 with the Companies (Meetings of Board and its Powers) Rules, 2014.

Constitution of Audit Committee of a Company

Constitution of Audit Committee:

According to Section 177(1) of CA 2013, the Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. The CG has now prescribed the class of companies which shall require to constitute Audit Committee.

As per Rule 6 (Committees of the Board) of the Companies (Meetings of Board and its Powers) Rules, 2014, the Board of directors of every listed companies and the following classes of companies shall constitute an Audit Committee and a Nomination and Remuneration Committee of the Board:

All public companies having:

  • Paid-up Capital ≥ ₹10 Crore;
  • Turnover ≥ ₹100 Crore;
  • Loans + Borrowings + Debentures + Deposits ≥ ₹50 Crore.

Note that the date of last audited Financial Statements shall be taken into account for the purposes of calculating paid-up share capital or turnover or outstanding loans, or borrowings or debentures or deposits.

Composition of Audit Committee:

As per section 177(2) of CA 2013, the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.

In case of Section 8 (Non-profit) Companies, in sub-section (2) of section 177, the words “with independent directors forming a majority” shall be omitted. – Notification No. G.S.R. 466(E) dated 5th June, 2015.

Disclosure of Composition:

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 therefor to comply the provisions of sub-section (8) of section 177 of CA 2013.

Reconstitution of Audit Committee:

In compliance with the provisions of section 177(3) of CA 2013, 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).

Functions of Audit Committee:

According to Section 177(4) of CA 2013, 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;

However, in case of Government company, the audit committee shall only recommend for remuneration of auditors of the company vide Notification No. G.S.R. 463(E) dated 5th June, 2015.

(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.

Approval of Related Party Transaction:

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.

The Central Government has now prescribed such conditions in Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014.

Accordingly, all related party transactions shall require approval of the Audit Committee and the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to the following conditions, namely: –

(l) The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely: –

(a) maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;
(b) the maximum value per transaction which can be allowed;
(c) extent and manner of disclosures to be made to the Audit the time of seeking omnibus approval;
(d) review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;
(e) transactions which cannot be subject to the omnibus approval by the Audit Committee.

(2) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) repetitiveness of the transactions (in past or in future);
(b) justification for the need of omnibus approval.

(3) The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.

(4) The omnibus approval shall contain or indicate the following: –

(a) name of the related parties:
(b) nature and duration of the transaction;
(c) maximum amount of transaction that can be entered into;
(d) the indicative base price or current contracted price and the formula for variation in the price, if any; and
(e) any other information relevant or important for the Audit Committee to take a decision on the proposed transaction:

Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

(5) Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.

(6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(7) Any other conditions as the Audit Committee may deem fit.

Power of Audit Committee:

As per sub-section (5) and sub-section (6) of section 177, the Audit Committee shall have authority:

  1. 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;
  2. To discuss any related issues with the internal and statutory auditors and the management of the company.
  3. To investigate into any matter in relation to the items specified in section 177(4) or referred to it by the Board;
  4. To obtain professional advice from external sources;
  5. To have full access to information contained in the records of the company.

Note that 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:

According to Section 177(9) of CA 2013, 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.

The Central Government has now prescribed the following manner of establishment of vigil mechanism in Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014.

Accordingly, the following companies shall establish a Vigil Mechanism:

i) Every Listed Company;
ii) Companies which accept deposits from the public; and
iii) Companies borrowed more than ₹50 Crore money from Banks and Public Financial Institutions.

In case of other companies, 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 companies which are required to constitute an audit committee shall manage 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 would deal with the matter on hand.

The vigil mechanism shall provide for adequate safeguards against victimisation 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.

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.

The vigil mechanism 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.

The details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

In case of specified IFSC public company, section 177 shall not apply vide Notification No. G.S.R. 08(E) dated 4th January, 2017.

Ask Your Query
If you don't want to miss our daily Notes and Updates then you may Subscribe to AUBSP via Email | Facebook | Twitter | and Google Plus

Leave a Reply

Your email address will not be published. Required fields are marked *

Top