AUDIT COMMITTEE UNDER NEW COMPANY LAW

[Dr. Sanjiv Agarwal]

Audit Committee (Section 177)

Sub-section 1 of section 177 of the Companies Act, 2013 read with the relevant rules, states that the Board of Directors of every listed company and every other public company -

1. having paid up capital of one hundred crore rupees or more; or
2. 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 i.e they should be financially literate.

The erstwhile Companies Act, 1956 did not defined 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 Clause 49 of the listing agreement lists down the role of the Audit Committee in detail. The Companies Act, 2013, though provides for the same as was in the Companies Act, 1956, it also includes certain specific functions to be discharged by the Audit Committee. The role of the Audit Committee, inter alia, includes the following activities : 

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

The Audit Committee shall have the authority to investigate into any matter in relation to the items specified above or any such other 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. 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 thereof. The role of the Audit committee had been made recommendatory in nature.

Over sight on related party transactions

Section 177 of Companies Act, 2013 provides for the duties of Audit Committee and  requires approval of every related party transactions by the Audit Committee regardless of its value, whether or not it on arm’s length basis. Such approval shall be required for every transaction, whereas Section 188 requires approval of related party transactions from the Board only for transactions outlined in items (a) to (g) in section 188(1) except where such transactions are on arms length basis and in ordinary course of business.

Therefore, if any transaction has been entered into with related party which is not in ordinary course of business but is on “arms length basis”, approval of both Audit Committee and prior approval of Board shall be required.

Entries shall be entered by the company in the registers of contracts or arrangements maintained under section 189 in respect of all related party transactions. Entries shall be made irrespective of whether the transactions are on arms length basis or not or whether incurred in ordinary course of business or not.

Thus, so far as related party transactions are concerned, Audit Committee functions shall include both:

1. approval of transactions, and / or
2. subsequent modification of transactions

between the company and related parties.

* Practicing Chartered Accountant and also member of Secretarial Standards Board of ICSI, New Delhi