Audit Committee under Section 177 of Companies Act,2013

Section 177 of the Companies Act,2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules,2014 deals with the Audit Committee.

Applicability of Audit Committee:

The Board of directors of every listed companies and the following classes of companies, as prescribed under Rule 6 of Companies (Meetings of Board and its powers) Rules,2014 shall constitute an Audit Committee.

(i) all public companies with a paid up capital of Rs.10 Crores or more;

(ii) all public companies having turnover of Rs.100 Crores or more;

(iii) all public companies, having in aggregate , outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores or more.

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.

Composition:

The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.

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

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 there for.

Reconstitution:

Every Audit Committee of a company existing immediately before the commencement of this Act shall be reconstituted within one year of such commencement.(i,e., on or before 31 st March 2015)

Functions of Audit Committee:

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;

(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.

Powers of Audit Committee:

The Audit committee shall have the authority –

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

To discuss any related issues with the internal and statutory auditors and the management of the company. To investigate into any matter in relation to the items or referred to it by the Board

To obtain professional advice from external sources

To have full access to information contained in the records of the company.

The auditors of a company and the 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:

Every listed company and the companies belonging to the following class or classes, as prescribed under Rule 7 of Companies (Meetings of Board and its powers) Rules,2014 shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances-

Companies which accept deposits from the public

Companies which have borrowed money from Banks and PFI in excess of Rs.50 Crores.

Mandatory Companies 

The companies which are required to constitute an audit committee shall operate the vigil mechanism through the audit 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.

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 existence of the mechanism may be appropriately communicated within the organization. The details of establishment of Vigil mechanism shall be disclosed by the company in the website, if any, and in the Board’s Report.

Safeguard to employees & Directors:

The vigil mechanism shall provide adequate safeguards against victimization 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.

Action against Frivolous complaints:

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.

Penalty:

Company `Fine of Rs.1 Lakh to Rs.5 Lakhs
Officer in Default Imprisonment up to 1 year or Fine of Rs.25,000/- to Rs.1,00,000 or Both

Companies Act,2013 Vs Companies Act,1956:

CS M. Kurthalanathan