Audit committee (Section 177 of the Companies Act, 2013)

Audit committee (Section 177 of the Companies Act, 2013) :

Section 177 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for Audit committee. According to this section:

(i) Formation of an Audit Committee: An audit committee shall be constituted by the Board of directors of:

(a) Every listed company, and

(b) Such other class or classes of companies as may be prescribed.

Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 have prescribed the following classes of companies that shall constitute Audit Committee:

(a) all public companies with a paid up capital of 10 crore rupees or more;

(b) all public companies having turnover of 100 crore rupees or more;

(c) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Explanation.- The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule.

“Provided that public companies covered under this rule which were not required to constitute Audit Committee under section 292A of the Companies Act, 1956 shall constitute their Audit Committee within one year from the commencement of these rules or appointment of independent directors by them, whichever is earlier:

Provided further that public companies covered under this rule shall constitute their Nomination and Remuneration Committee within one year from the commencement of these rules or appointment of independent directors by them, whichever is earlier” .

(ii) Composition of an Audit committee: According to sub section 2 of section 177, the Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.

Provided that the majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.

Disclosure of composition of Audit Committee: The composition of the Audit Committee shall be disclosed in the Board‘s report under section 134(3).

(iii) Transition period: This Act shall, within one year of such commencement, be reconstituted in accordance with the new composition of an Audit Committee as provided for in sub section (2) above.

(iv) Responsibilities of an Audit Committee: According to sub section (4) of section 177, every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,—

(a) the recommendation for appointment, remuneration and terms of appointment of auditors of the company;

(b) review and monitor the auditor‘s independence and performance, and effectiveness of audit process;

(d) approval or any subsequent modification of transactions of the company with related parties;

(e) scrutiny of inter-corporate loans and investments;

(f) valuation of undertakings or assets of the company, wherever it is necessary;
(g) evaluation of internal financial controls and risk management systems;

(h) monitoring the end use of funds raised through public offers and related matters.

(v) Investigation by Audit Committee: According to sub section (6) of section 177, 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.

(vi) Disclosure in Board’s report:

(a) The composition of the Audit Committee shall be disclosed in the Board‘s report under section 134(3).

(b) Where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in Board‘s report under section 134(3), along with the reasons therefor.

(vii) Role of auditor in Audit Committee:

(a) According to section 177(5), the Audit Committee is empowered to:

(1) call for the comments of the auditors about:

(A) internal control systems,

(B) the scope of audit, including the observations of the auditors,

(2) discuss any related issues with the internal and statutory auditors and the management of the company.

(b) Right to be heard in the meeting of Audit Committee: 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.

(vii) Penalty for contravention [Section 178(8)]

(a) The company shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees, and,

(b) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than 25,000 rupees but which may extend to 1 lakh rupees, or with both. Vigil mechanism

(i) Formation of vigil mechanism: According to section 177(9), a Vigil mechanism shall be formed in:

(a) Every listed company, and

(b) Such other prescribed classed of companies.

Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 has prescribed the following classes of companies that shall constitute Vigil mechanism:

(1) the Companies which accept deposits from the public;

(2) the Companies which have borrowed money from banks and public financial institutions in excess of 50 crore rupees.

(ii) Objective of formation of vigil mechanism:

(a) A vigil mechanism shall be formed for directors and employees to report genuine concerns in such manner as may be prescribed.

(b) 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. It is imperative for the company to disclose the details of the establishment of vigil mechanism on the website of the company and in Board‘s report. According to the Companies (Meetings of Board and its Powers) Rules, 2014:

(1) “Persons who use such mechanism” means employees and directors who avail the vigil mechanism.

(2) The companies which are required to constitute an audit committee shall oversee 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

(3) 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.

(4) The employees and directors who avail of vigil mechanism may have 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.

(5) 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.

(iii) Penalty for contravention [Section 178(8)]: Same as penalty mentioned in the topic of Audit Committee.

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