The Audit Committee is one of the most important governance structures within a company. It ensures financial discipline. And it strengthens oversight. It also builds trust in disclosures and reporting.
In India, its framework comes from the Companies Act, 2013 and the SEBI (LODR) Regulations, 2015. These two together define who must have an Audit Committee, how it should be structured, and what it must do.
Applicability of Audit Committee
Under Section 177 of the Companies Act, 2013, not all companies are required to constitute an Audit Committee. The requirement depends on size and financial thresholds.
The Audit Committee is mandatory for:
- All listed companies
- Public companies meeting any of the following:
- Paid-up share capital of ₹10 crore or more
- Turnover of ₹100 crore or more
- Outstanding loans, borrowings, debentures or deposits of ₹50 crore or more
Private companies are not required to constitute an Audit Committee. And public companies below these thresholds are also not covered but the position changes when SEBI LODR applies. Under SEBI regulations, every listed entity must have an Audit Committee. Size does not matter here. Thresholds do not matter either. The obligation is absolute.
Composition of Audit Committee
The composition rules ensure independence and financial understanding. Because the committee deals with sensitive financial matters.
Under the Companies Act:
- Minimum three directors are required
- Majority must be Independent Directors
- Members should be financially literate
- At least one member must have financial expertise
SEBI LODR introduces stricter standards for listed companies:
- Minimum three directors
- Two-thirds must be Independent Directors
- Chairperson must be an Independent Director
- All members should be financially literate
Meetings of the Audit Committee
The Companies Act does not prescribe a fixed number of meetings. Committees meet as required. This gives flexibility.
But SEBI LODR takes a stricter approach. It prescribes a minimum of four meetings in a year and the gap between meetings must not exceed 120 days. This ensures continuous monitoring. And it avoids long gaps in financial oversight.
Quorum Requirements
The Companies Act does not prescribe a specific quorum. Companies usually follow internal policies or align with SEBI norms where applicable.
SEBI LODR provides a clear rule that the quorum is two members or one-third of the total members, whichever is higher and at least two Independent Directors must be present
Roles and Responsibilities under the Companies Act
The Audit Committee performs several core functions under the Companies Act. Key responsibilities include:
Oversight of Financial Reporting
The committee reviews financial statements. It checks accuracy, completeness and compliance.
Recommendation of Auditors
It recommends appointment, re-appointment, remuneration and removal of auditors.
Monitoring Auditor Independence
The committee ensures auditors remain unbiased. And their performance remains effective.
Review of Internal Controls
It evaluates internal financial controls and risk management systems.
Approval of Related Party Transactions
All related party transactions require prior approval. And they must be at arm’s length.
Examination of Audit Reports
Internal and statutory audit findings are reviewed. Corrective actions are tracked.
Scrutiny of Loans and Investments
The committee monitors inter-corporate loans, guarantees and investments.
Whistle-Blower Oversight
It supervises the vigil mechanism. And it ensures protection against victimisation.
Compliance Monitoring
The committee ensures adherence to applicable laws and regulations.
Monitoring Utilisation of Funds
For listed companies, it reviews how funds raised are used.
Roles and Responsibilities under SEBI LODR
SEBI LODR expands the role of the Audit Committee. The focus shifts from compliance to continuous governance oversight.
1. Financial Reporting and Disclosures
The committee oversees the financial reporting process. It reviews quarterly and annual statements. And it ensures compliance with standards and disclosure norms.
2. Auditor-Related Functions
It recommends auditors. It approves non-audit services. And it reviews independence and performance.
3. Review of Financial Statements
Key focus areas include changes in accounting policies, significant estimates and judgments, audit qualifications, related party disclosure and compliance with legal requirements
4. Related Party Transactions
The committee approves and reviews all RPTs. Transparency is the key requirement.
5. Internal Control and Risk Management
It evaluates internal controls. And it reviews the effectiveness of internal audit functions.
6. Internal and Statutory Audit Review
Audit reports are examined. Significant issues are discussed. Follow-ups are ensured.
7. Utilisation of Funds
The use of funds from public or rights issues is monitored. Deviations are tracked.
8. Oversight of Loans and Investments
Inter-corporate transactions and valuations are reviewed.
9. Whistle-Blower and Stakeholder Protection
The committee reviews complaints. And it looks into payment defaults.
10. Key Managerial Oversight
It approves the appointment of the CFO. And it reviews internal auditor roles.
11. Strategic Functions
It evaluates mergers, demergers and similar transactions.
Mandatory Review and the Role of the Company Secretary
There are specific documents and reports that the Audit Committee is legally required to review. This includes management discussion and analysis, internal audit reports, auditor communications, statements of fund utilisation deviations and monitoring agency reports
The Company Secretary (CS) plays a technical role in supporting the committee’s functions. The CS is often referred to as the compliance navigator because they handle the following duties:
- Meeting Administration: Organising meetings and preparing agendas in accordance with legal timelines.
- Documentation: Ensuring the presence of a quorum and recording precise minutes of the proceedings.
- Compliance Advisory: Providing guidance on the provisions of the Companies Act and SEBI regulations.
- External Reporting: Facilitating necessary disclosures to stock exchanges and maintaining communication between management and auditors.
Ultimately, the Audit Committee functions as a watchdog for financial integrity. While the Companies Act provides the basic framework for public companies, the SEBI LODR ensures that listed entities adhere to higher standards of accountability. The Audit Committee is central to corporate governance and the system works well when each part performs its role. The committee reviews. The auditors report and the Company Secretary ensure compliance flows smoothly.