Background:-

Audit Committee is required to be constituted under Section 177 of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules of 2014 as well as SEBI (LODR) 2015. An audit committee is a governing body responsible for overseeing financial reporting and ensuring compliance with statutory audit requirements. Its primary duties include promoting accountability, ensuring adherence to regulatory standards, and facilitating transparent financial disclosures. 

Applicability of Audit Committee:- 

The requirement to constitute an Audit Committee is mandated under Section 177 of the Companies Act, 2013. According to this section, the following companies are required to form an Audit Committee –

(i)   Every Listed Public Company                                                                               

(ii)  Public companies with a paid-up capital of Rs.10 crore or more                                         

(iii) Public companies with a turnover of Rs.100 crore or more                                              

(iv) Public companies with outstanding loans, borrowings, debentures, or deposits of Rs.50 crore or more.

Exception: unlisted public joint venture, unlisted public wholly owned subsidiary, unlisted public dormant company

Composition of Audit Committee:-

As per Section 177 of Companies Act 2013:

• The Audit Committee must have a minimum of three directors, with the majority being independent directors.
• The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.

Additional requirements in case of Listed Entity (Regulation 18 of SEBI (LODR) Regulations, 2015):

• 2/3rd members should be independent directors (all members to be independent directors in case of outstanding SR equity shares)
• All members to be financially literate and 1 member to have accounting/financial management expertise
• Chairman of Audit committee should be an independent director & present at AGM
• CS to act as Secretary to the Committee

In case of HVDLE (Regulation 62F of SEBI (LODR) Regulations, 2015)

• Every HVDLE shall constitute an Audit committee and it should have minimum 3 directors as members.
• 2/3rd members should be independent directors.
• All members to be financially literate and 1 member to have accounting/financial management expertise.
• Chairperson of Audit committee should be an independent director & present at AGM
• CS to act as Secretary to the Committee.
• Role of the audit committee and the information to be reviewed by the audit committee shall be as specified in Part C of Schedule II.

Note: Provisions of 62F shall not be applicable during the period HVDLE is undergoing corporate insolvency process under Insolvency Code. Roles and responsibilities of committee shall be fulfilled by IRP/RP.

Meetings of Audit Committee: Audit Committee must hold 4 meetings in a financial year and gap of maximum 120 days between 2 consecutive meetings.

Quorum: 2 or 1/3rd of members of committee whichever is more (at least 2 independent directors)

Functions of Audit Committee:-

• Section 177(4) of companies Act 2013, states that every audit committee must operate in accordance with the written term of reference set forth by the board which must include :

(i)The recommendation for appointment, remuneration and terms of appointment of      auditors of the

(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

• The Audit Committee may 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 and may also discuss any related issues with the internal and statutory auditors and the management of the company. (Section 177(5) of the Companies Act, 2013)

Institutional Mechanism for Prevention of Insider Trading on Annual Basis

As per Regulation & 9A (4) SEBI (Prohibition of Insider Trading) Regulations, 2015

• The Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review compliance with the provisions of SEBI (PIT) Regulations, 2015 at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.

Disclosures in Board’s Report:

• The Board’s Report under sub-section (3) of Section 134 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 therefor.

Establishment of Vigil Mechanism:

As per Section 177(9) and (10) of the Companies Act, 2013, Regulation 22 & Regulation 62J (for HVDLE) of SEBI (LODR) Regulations, 2015

• Every listed company and certain specified classes of companies must establish a vigil mechanism to enable directors and employees to report genuine concerns or grievances.
• Specified classes of companies here means:
  (a) Companies that accept deposits from public, and
  (b) Companies that have borrowed over ₹50 crore from banks and public financial institutions.
• 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.  
• 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.
• The vigil mechanism shall provide for adequate safeguards against victimisation 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.
• 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 for Non-Compliance:

• As per Section 450 of the Companies Act, 2013 In case of default, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees.

• SEBI (LODR) Regulations, 2015

1.Regulation 18  / 62F – For non-constitution of Audit Committee- Rs. 2000/- per day.
Failure for non compliance for 2 consecutive quarters may lead to suspension of trading.

2.Regulation 22/62J – Vigil Mechanism:

General penalty : Listed entity/any other person who contravenes any provision of the regulations shall be liable for one or more of the following penalties/actions as deemed fit by the regulator : a) action as per Securities Law, b) fine, c) suspension of trading, d)freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories, e) any other action specified by Board

• SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations)

1.Regulation 9A(4) – Review of Internal control mechanism by Audit Committee: Reg 10 of PIT Regulations provides that any contravention under the PIT Regulations shall be dealt by SEBI as per SEBI Act,1992.

• Penalty for contravention where no separate penalty has been provided.

1.Section 15HB of SEBI Act,1992 : Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupee.