Companies Act Section 177

Companies Act Section 177: Establishment and Functioning of the Audit Committee

1. Requirement for Establishing an Audit Committee

The Companies Act mandates that the Board of Directors of every listed public company, as well as other specified classes of companies as prescribed by regulatory authorities, must constitute an Audit Committee. This requirement is aimed at ensuring financial transparency, oversight, and accountability in the corporate governance structure.

2. Composition of the Audit Committee

The Audit Committee shall consist of a minimum of three directors, with independent directors forming a majority. This ensures that the committee operates with an impartial perspective. Furthermore, the majority of the members, including the Chairperson, must be individuals possessing the ability to read and comprehend financial statements. This requirement ensures that the committee members are adequately equipped to analyze financial documents and make informed decisions.

3. Reconstitution of Existing Audit Committees

For companies that had an existing Audit Committee before the commencement of the Act, there is a requirement to reconstitute the committee within one year of the Act’s implementation. The reconstitution must comply with the revised criteria outlined in sub-section (2), ensuring alignment with updated corporate governance standards.

4. Responsibilities and Scope of the Audit Committee

The Audit Committee shall operate in accordance with the terms of reference specified in writing by the Board of Directors. These terms shall include, but are not limited to:

Recommending the appointment, remuneration, and terms of engagement of auditors.
Reviewing and monitoring the auditor’s independence, performance, and the overall effectiveness of the audit process.
Examining financial statements and the auditors’ report to ensure accuracy and compliance with regulations.
Approving or recommending modifications to related-party transactions.
Scrutinizing inter-corporate loans and investments.
Conducting valuation assessments of company undertakings or assets when necessary.
Evaluating internal financial controls and risk management systems.
Monitoring the end-use of funds raised through public offerings and other related financial matters.
Special Provisions Related to Related-Party Transactions

The Audit Committee is permitted to grant omnibus approval for related-party transactions, subject to prescribed conditions.
If the Audit Committee does not approve a related-party transaction, it must refer the matter to the Board with appropriate recommendations.
Any transaction involving an amount not exceeding one crore rupees, entered into by a director or officer without prior approval of the Audit Committee, must be ratified within three months. If not ratified, the transaction is voidable at the discretion of the Audit Committee.
If such a transaction involves a related party to any director, the concerned director must indemnify the company against any losses incurred.
These provisions do not apply to transactions between a holding company and its wholly-owned subsidiary, unless covered under Section 188.
5. Authority of the Audit Committee

The Audit Committee has the power to seek the comments of auditors on internal control systems, audit scope, and financial statements. It may also discuss these matters with statutory and internal auditors as well as with the company’s management. Additionally, the committee is authorized to investigate any matters specified in sub-section (4) or referred by the Board and may seek professional advice from external experts. The committee has full access to all records and information of the company relevant to its responsibilities.

6. Rights of Auditors and Key Managerial Personnel

Auditors and key managerial personnel have the right to be heard during meetings of the Audit Committee when the committee considers the auditor’s report. However, they do not have the right to vote on committee decisions.

7. Disclosure of Audit Committee Composition in the Board’s Report

The Board of Directors must disclose the composition of the Audit Committee in its report under sub-section (3) of Section 134. If the Board does not accept a recommendation made by the Audit Committee, the reasons for such a decision must be explicitly stated in the report.

8. Establishment of a Vigil Mechanism

Every listed company and other prescribed classes of companies must establish a vigil mechanism to enable directors and employees to report genuine concerns regarding misconduct or unethical practices. The mechanism must provide adequate safeguards against victimization of individuals who report concerns. It should also include provisions allowing direct access to the Chairperson of the Audit Committee in appropriate or exceptional cases.