Audit Committee
The Audit Committee is a mandatory sub-committee of the board of directors, constituted under Section 177 of the Companies Act, 2013 and SEBI LODR, responsible for overseeing financial reporting, internal controls, and auditor independence.
The Audit Committee is arguably the most important board committee from the perspective of financial integrity and investor protection. In India, it is mandated by Section 177 of the Companies Act, 2013 for all listed companies and certain other classes of companies. SEBI's LODR Regulations, 2015 (Regulation 18) further prescribe the composition, role, and functioning of the audit committee for listed entities.
The audit committee must consist of a minimum of three directors, with independent directors forming a majority. At least two-thirds of the members must be independent. The chairperson of the audit committee must be an independent director and must be present at the Annual General Meeting to answer shareholder queries on audit matters.
The key functions of the audit committee under the Companies Act and LODR include reviewing the company's financial statements before submission to the board, recommending the appointment and remuneration of the statutory auditor, overseeing the functioning of the internal audit department, reviewing related party transactions, scrutinising inter-corporate loans and investments, and evaluating internal financial controls and risk management systems.
The audit committee also has a specific role in the Whistle Blower or Vigil Mechanism framework — it must oversee this mechanism and be accessible to whistle blowers in exceptional circumstances. It is also the gatekeeper for related party transactions, having to grant prior approval for all RPTs.
Post the IL&FS crisis and several accounting frauds that emerged from 2018 onwards, SEBI has strengthened the role and accountability of audit committees significantly. The regulator has introduced requirements for audit committees to make detailed disclosures about their activities in the annual report and has imposed specific responsibilities related to subsidiary oversight.
For investors, the audit committee's composition, the expertise of its members, the frequency of meetings, and the quality of disclosures about its activities are important governance metrics. A strong audit committee is a frontline defence against financial statement manipulation and management malfeasance.