The Companies Amendment Act, 2017 related to the audit committee.

The Companies Amendment Act, 2017 read with Notification S.O. 1833(E) dated 7th May 2018 amended law related to the audit committee. Certain transactions shall be voidable unless ratified by the audit committee. In this post, we see changes in updated law related to Audit committee.

REQUIREMENT

According to Section 177(1) as amended, The Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.[1]

Rule 6 of the Companies (Meeting of the Board and its Powers) Rules, 2014 as amended prescribes, The Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’.[2]

Which means companies prescribed to have audit committee are –

• the Public Companies having paid up share capital of ten crore rupees or more; or
• the Public Companies having a turnover of one hundred crore rupees or more; or
• the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.

COMPOSITION

According to Section 177(2) as amended, The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. The majority of members of Audit Committee including its Chairperson shall be persons with the ability to read and understand the financial statement.

In case of Section 8 companies subject to their compliance with exemption notification dated 5th June 2015, there is no requirement of independent director forming the majority in the audit committee.

TERMS OF REFERENCE

According to sub-section (4) of Section 177, the term of reference of the audit committee shall be specified by the Board of Directors of the company constituting the audit committee. These terms of reference shall include –

• the recommendation for appointment, remuneration and terms of appointment of auditors of the company;
• review and monitor the auditor’s independence and performance, and effectiveness of audit process;
• examination of the financial statement and the auditors’ report thereon;
• approval or any subsequent modification of transactions of the company with related parties;
• scrutiny of inter-corporate loans and investments;
• valuation of undertakings or assets of the company, wherever it is necessary;
• evaluation of internal financial controls and risk management systems; and
• monitoring the end use of funds raised through public offers and related matters.

According to section 177(6), the Audit Committee may investigate any matter in relation to these items, seek external professional advice and have full access to records of the company. This is its statutory power without any such formal term of reference by the Board of Directors.

The term of reference suggested under clause (iv) of Section 177(4) – approval or any subsequent modification of transactions of the company with related parties – will discussion in a future post here in detailed.

DUTIES REGARDING AUDITORS

According to Section 177(5), The Audit Committee may call for the comments of the auditors about:

• internal control systems,
• the scope of the audit, including the observations of the auditors,
• 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.

According to Section 177(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.

REPORTING IN BOARD REPORT

According to Section 177(8), the Board’s report under sub-section (3) of Section 134 shall disclose

1. the composition of an Audit Committee, and
2. where the Board had not accepted any recommendation of the Audit Committee, along with the reasons therefor.

VIGIL MECHANISM

Section 177 of the Companies Act, 2013 introduces vigil mechanism to Indian corporate law.

Every listed company or such other companies shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. [Section 177(9)]

The vigil mechanism 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 proper or exceptional cases. The details of establishment of such mechanism shall be disclosed by the company on its website and in the Board’s report. [Section 177(10)]

Even if the provision of vigil mechanism is part of section related to audit committee, this is completely independent of requirement of audit committee. Even in the companies where audit committee is not mandatory, vigil mechanism may be prescribed by the Government.

Rule 7 of the Companies (Meeting of Boards and its powers) Rules 2014 explain provisions for establishment of vigil mechanism.

Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances-

1. the Companies which accept deposits from the public;
2. the Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees. [Rule 7(1)]

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. [Rule 7(2)]

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. [Rule 7(3)] As this Director is entrusted with particular duty, Form GNL – 3 should be filed.

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. [Rule 7(4)]

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. [Rule 7(5)]

[1] From 1st April 2014 to 6th Amy 2018 – The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

[2] The Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’