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Hello Friends,

In continuation of my previous articles on the Corporate Social Responsibility Committee, the Nomination & Remuneration Committee and the Stakeholders Relationship Committee, let us further take a look into another and definitely the most important Committee mandated by the new Companies Act, 2013 ("the new Act").


At present, section 292A of the Companies Act, 1956 requires public companies having paid-up capital of more than Rs. 5 Crore to constitute an audit committee, consisting of minimum three directors and two-third of the total members to be directors other than the Managing Director or the Whole Time Directors of the company. Further, Listing agreement mandates listed entities to constitute audit committee with two-third of the members to be Independent Directors. It also states that all the members of the audit committee should be financially literate (i.e. should have the ability to read and understand the financial statements) and at least one should have accounting or related financial management expertise.

In tune with the present regulations, subsection 1 of section 177 of the new Act, read with the relevant draft rules, states that the Board of Directors of every listed company and every other public company

(i) having paid up capital of One Hundred Crore Rupees or more; or

(ii) having, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Two Hundred Crore Rupees

shall constitute an Audit Committee consisting of a minimum of three directors with independent directors forming a majority. Further, the chairperson and the majority of the members of the audit committee should have the ability to read and understand the financial statements (financially literate).

The old Companies Act, 1956 did not define the role and functions of the audit committee and generalized it by stating that the committee shall act in accordance with the terms of reference specified in writing by the Board. The listing agreement lists down the role of the audit committee in detail. The new act, though states the same as the 1956 act, also includes certain specific functions to be discharged by the committee. The role of the audit committee, inter alia, includes the following activities as per the new Act:3

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;

c. examination of the financial statement and the auditors' report thereon;

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 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.

The audit committee shall have the authority to investigate into any matter in relation to the items specified above or any such matter referred to it by Board. For this purpose, it shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company. Similar to the 1956 Act, the Audit Committee has the power 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 and may also discuss any related issues with the internal and statutory auditors and the management of the company. Furthermore, the recommendations of the Audit Committee shall be binding on the Board and where the Board has not accepted any recommendation of the Audit Committee, the same shall be disclosed in the Board's report along with the reasons therefor.

The existing companies having audit committee are allowed a one-year timeline, from the commencement of this section, for reconstituting its audit committee in accordance with the new requirements.

Subsection 9 of Section 177 further states that each listed company and Companies:

1. which accept deposits from the public; and

2. which have borrowed money from banks and public financial institutions in excess of Fifty Crore rupees;

shall establish a vigil mechanism for directors and employees to report genuine concerns. This is similar to the "whistle blower policy", under the listing agreement, though there it is a non-mandatory requirement. As per the new Act, the vigil mechanism will provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. Companies which are required to constitute an audit committee shall operate the vigil mechanism through the audit committee. Once established, the existence of the mechanism may be appropriately communicated within the organization shall be disclosed by the company on its website, if any, and in the Board's report.

Penalty: Subsection 8 of Section 178 of the new Act further lays down the penalty for contravention of any of these provisions. In case of contravention, the company shall be punishable with fine which shall not be less than One Lakh rupees but which may extend to Five Lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Twenty-Five Thousand rupees but which may extend to One Lakh rupees, or with both.

Conclusion: Prima facie, it appears that the regulations concerning the audit committee in the new act is a step towards harmonization of the 1956 act and clause 49 of the listing agreement. For the first time, the role of whistle-blowers has been legislated. Though the provisions regarding the audit committee is not yet effective, it is expected to be in full force from Financial Year 2014-15. As evident, transparency with self -reporting and disclosure is the foundation of the new Act. Let's hope the new Companies Act, 2013 is successful in achieving effective corporate governance and transparency as intended by the law makers.

P.S: This article is based on the research and contains the views of the author on the above subject. The author does not assure error free content and cannot be held liable for any errors in the article. The users and readers are advised to cross check with the concerned Act before acting upon this article.

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Category Corporate Law, Other Articles by - Vandana J Doshi