Section 177: Audit Committee
This section is for establishing and outlining the responsibilities and powers of the Audit Committee in companies.
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In plain terms
(1)The Board of Directors of 1[every listed public company] and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
The Board of Directors of every listed public company and other prescribed classes of companies must form an Audit Committee.
(2)The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority:
The Audit Committee must have at least three directors, with a majority being independent directors, and most members, including the Chairperson, must be able to read and understand financial statements.
provisoProvided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
(3)Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with sub-section (2).
Existing Audit Committees must be reconstituted within one year to meet the new requirements.
(4)Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,—
The Audit Committee's responsibilities include recommending auditor appointments, reviewing financial statements, and approving related party transactions, with some transactions allowed up to one crore rupees without approval.
(4)(i)the recommendation for appointment, remuneration and terms of appointment of auditors of the company;
(4)(ii)review and monitor the auditor’s independence and performance, and effectiveness of audit process;
(4)(iii)examination of the financial statement and the auditors’ report thereon;
(4)(iv)approval or any subsequent modification of transactions of the company with related parties: 1[Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;]
proviso2[Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board:
provisoProvided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it:
provisoProvided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.]
(4)(v)scrutiny of inter-corporate loans and investments;
(4)(vi)valuation of undertakings or assets of the company, wherever it is necessary;
(4)(vii)evaluation of internal financial controls and risk management systems;
(4)(viii)monitoring the end use of funds raised through public offers and related matters.
(5)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.
The Audit Committee can request comments from auditors on internal controls and financial statements, and discuss related issues with auditors and management.
(6)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.
The Audit Committee has the authority to investigate matters related to its responsibilities and can obtain external professional advice and access company records.
(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.
Auditors and key managerial personnel have the right to be heard at Audit Committee meetings but do not have voting rights.
(8)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.
The Board's report must disclose the Audit Committee's composition and any instances where the Board did not accept the Committee's recommendations.
(9)Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.
Listed companies and other prescribed classes of companies must establish a vigil mechanism for reporting genuine concerns.
(10)The vigil mechanism under sub-section (9) 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:
The vigil mechanism must protect against victimisation and allow direct access to the Audit Committee Chairperson in exceptional cases, with details disclosed on the company website and in the Board's report.
provisoProvided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.
The right-hand column is written from the section text, not quoted from it, and it has no legal force. Where the two differ, the left-hand column is the law.
Amendment notes
- 1. Subs. by Act 1 of 2018, s. 57, for “every listed company” (w.e.f. 7-5-2018).
- 1. The proviso ins. by Act 21 of 2015, s. 14 (w.e.f. 14-12-2015).
- 2. Ins. by Act 1 of 2018, s. 57 (w.e.f. 7-5-2018).
- 3. Subs. by Act 1 of 2018, s. 58, for “every listed company” (w.e.f. 7-5-2018).
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Reproduced from the official India Code print for reference. Check the current text on India Code before you rely on it, and read the section alongside its Rules. Nothing here is legal advice.