Audit Committee – Post 7th May 2018

The Companies Amendment Act, 2017 read with Notification S.O. 1833(E) dated 7th May 2018 amended law related to the audit committee. Certain transactions shall be voidable unless ratified by the audit committee. In this post, we will discuss updated law related to Audit committee.

Requirement

According to Section 177(1) as amended, The Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.[1]

Rule 6 of the Companies (Meeting of the Board and its Powers) Rules, 2014 as amended prescribes, The Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’.[2]

Which means companies prescribed to have audit committee are –

• the Public Companies having paid up share capital of ten crore rupees or more; or
• the Public Companies having a turnover of one hundred crore rupees or more; or
• the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.

Composition

According to Section 177(2) as amended, The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. The majority of members of Audit Committee including its Chairperson shall be persons with the ability to read and understand the financial statement.

In case of Section 8 companies subject to their compliance with exemption notification dated 5^th June 2015, there is no requirement of independent director forming the majority in the audit committee.

Terms of Reference

According to sub-section (4) of Section 177, the term of reference of the audit committee shall be specified by the Board of Directors of the company constituting the audit committee. These terms of reference shall include –

• the recommendation for appointment, remuneration and terms of appointment of auditors of the company;
• review and monitor the auditor’s independence and performance, and effectiveness of audit process;
• examination of the financial statement and the auditors’ report thereon;
• approval or any subsequent modification of transactions of the company with related parties;
• scrutiny of inter-corporate loans and investments;
• valuation of undertakings or assets of the company, wherever it is necessary;
• evaluation of internal financial controls and risk management systems; and
• monitoring the end use of funds raised through public offers and related matters.

According to section 177(6), the Audit Committee may investigate any matter in relation to these items, seek external professional advice and have full access to records of the company. This is its statutory power without any such formal term of reference by the Board of Directors.

The term of reference suggested under clause (iv) of Section 177(4) – approval or any subsequent modification of transactions of the company with related parties – need detailed discussion in a future post here.

Duties regarding auditors

According to Section 177(5), The Audit Committee may call for the comments of the auditors about:

• internal control systems,
• the scope of the audit, including the observations of the auditors,
• 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.

According to Section 177(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.

Reporting in Board Report

According to Section 177(8), the Board’s report under sub-section (3) of Section 134 shall disclose

1. the composition of an Audit Committee, and
2. where the Board had not accepted any recommendation of the Audit Committee, along with the reasons therefor.

Vigil Mechanism

We have discussed vigil mechanism earlier here. It is not prudent to reproduce these provisions again.

[1] From 1^st April 2014 to 6^th Amy 2018 – 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.

[2] The Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’