AUDIT COMMITTEE

[Mr. M. GOVINDARAJAN]

Committees

A Board can set up committees with particular terms of reference when it needs assistance or when an issue requires more resources and attention. They can be set up for a specific purpose or to deal with general issues such as ‘development’. They can be established on a short-term or temporary basis, or they can be formed as a permanent body for ongoing work.   A Board can either delegate some of its powers to the committee, enabling it to act directly, or can require the recommendations of the committee to be approved by the Board. The Board will normally depend heavily on the findings and recommendations of its committees, although final decisions to accept or reject these recommendations will be made by the Board. Committees thus have an important role to play in company governance.

The following types of committees can be formed under Companies Act, 2013-

• Audit Committee;
• Nomination and Remuneration Committee;
• Stakeholders Relationship Committee;
• Corporate Social Responsibility Committee.

Audit Committee

Applicability

The Audit Committee is to be constituted by the Board of-

• Every Listed Public Companies and Public Companies having a Paid-up share capital of 10 crore rupees or more;
• The Public companies having turnover of ₹ 100 crores or more;
• Public Companies which have in aggregate outstanding loans, debentures and deposits exceeding ₹ 50 crores.

It is clarified that, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account

Members

The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.  At least two-thirds of the members of audit committee shall be independent directors. In case a company is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.

The chairperson of the audit committee shall be an independent director.  He/She shall be present at Annual General Meeting to answer shareholder queries.

Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

The Company Secretary shall act as the secretary to the audit committee.

Qualification

There is no prescribed qualification for the members of the Audit Committee under the Companies Act, 2013 and the rules and regulations made there under.  The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.   All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.   ‘Financially literate’ shall mean the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.   A member shall be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

Functions

The following are the functions of the Audit Committee prescribed under section 177 (4) of the Companies Act, 2013-

• to recommend for appointment, remuneration and terms of appointment of auditors of the company;
• to review and monitor the auditor's independence and performance, and effectiveness of audit process;
• to examine  the financial statement and the auditors' report thereon;
• to approve or any subsequent modification of transactions of the company with related parties;
• to make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;
• scrutiny of inter-corporate loans and investments;
• to value undertakings or assets of the company, wherever it is necessary;
• to evaluate  the internal financial controls and risk management systems;
• to monitoring the end use of funds raised through public offers and related matters.

SEBI (LODR) Regulations further impose on the Audit Committee the following functions-

• oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible;
• approval of payment to statutory auditors for any other services rendered by the statutory auditors;
• reviewing, with the management, the annual financial statements and auditor's report thereon before submission to the board for approval, with particular reference to:

• matters required to be included in the director’s responsibility statement to be included in the board’s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act, 2013;
• changes, if any, in accounting policies and practices and reasons for the same;
• major accounting entries involving estimates based on the exercise of judgment by management;
• significant adjustments made in the financial statements arising out of audit findings;
•  compliance with listing and other legal requirements relating to financial statements;
• disclosure of any related party transactions;
• modified opinion(s) in the draft audit report;

• reviewing, with the management, the quarterly financial statements before submission to the board for approval;
• reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency monitoring the utilization of proceeds of a public or rights issue, and making appropriate recommendations to the board to take up steps in this matter;
• reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process;
• approval or any subsequent modification of transactions of the listed entity with related parties;
• scrutiny of inter-corporate loans and investments;
•  reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems;
• reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit;
• discussion with internal auditors of any significant findings and follow up there on;
• reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board;
• discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern;
• to look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors;
• to review the functioning of the whistle blower mechanism;
• approval of appointment of Chief Financial Officer after assessing the qualifications, experience and background, etc. of the candidate;
• reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding rupees ₹ 100 crore or 10% of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as on the date of coming into force of this provision.
• carrying out any other function as is mentioned in the terms of reference of the audit committee;
• consider and comment on rationale, cost-benefits and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.

Omnibus approval

All related party transactions shall require approval of the Audit Committee. The Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to the following conditions-

•  maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;
• the maximum value per transaction which can be allowed;
•  extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;
• review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;
• transactions which cannot be subject to the omnibus approval by the Audit Committee and
• any other conditions as the Audit Committee may deem fit.

The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval,-

• repetitiveness of the transactions (in past or in future);
• justification for the need of omnibus approval.

The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.

The omnibus approval shall contain the following-

• name of the related parties;
• nature and duration of the transaction;
• maximum amount of transaction that can be entered into;
• the indicative base price or current contracted price and the formula for variation in the price, if any; and
• any other information relevant or important for the Audit Committee to take a decision on the proposed transaction.

Where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding ₹ 1 crore per transaction.

Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.   Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

Audit Report

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.

Meeting

The audit committee shall meet at least four times in a year and not more than one hundred and twenty days shall elapse between two meetings.   The quorum for audit committee meeting shall either be two members or one third of the members of the audit committee, whichever is greater, with at least two independent directors.

The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee.

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.

Investigations

The Audit Committee shall have authority to investigate into any matter in relation to the items specified in section 177 (4)  or referred to it by the Board. For this purpose the Audit Committee shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.

Vigil mechanism

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

• the Companies which accept deposits from the public;
• the Companies which have borrowed money from banks and public financial institutions in excess of ₹ 50 crores.

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.   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.

        The vigil mechanism shall provide for adequate safeguards against victimization 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.

 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.

Review by Audit Committee

The audit committee shall mandatorily review the following information-

• management discussion and analysis of financial condition and results of operations;
• statement of significant related party transactions (as defined by the audit committee), submitted by management;
• management letters / letters of internal control weaknesses issued by the statutory auditors;
•  internal audit reports relating to internal control weaknesses; and
• the appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.
• statement of deviations:

• quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted to stock exchange(s);
• annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice.

Disclosure in Board’s report

The Board's report under shall disclose the composition of an Audit Committee. Where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons there for.

The details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board's report.