Audit committee is a mandatory committee of the board of directors that oversees the financial reporting process, internal controls, auditor independence, and compliance with accounting standards. Under Indian law, it is constituted under Section 177 of the Companies Act, 2013, and is a cornerstone of corporate governance for listed and prescribed classes of companies.
Legal definition
Section 177(1) of the Companies Act, 2013 provides:
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.
The Companies (Meetings of Board and its Powers) Rules, 2014, Rule 6 prescribes additional classes: (i) all public companies with paid-up capital of Rs. 10 crore or more; (ii) all public companies with turnover of Rs. 100 crore or more; (iii) all public companies having outstanding loans, borrowings, debentures, or deposits exceeding Rs. 50 crore.
Section 177(2) specifies the composition:
The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority:
Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
Section 177(4) enumerates the committee's statutory functions, including: recommendation for appointment and remuneration of auditors; review of the auditor's independence and performance; examination of the financial statement and auditor's report; approval or subsequent modification of transactions with related parties; scrutiny of inter-corporate loans and investments; valuation of undertakings or assets; evaluation of internal financial controls and risk management systems; and monitoring the end use of funds raised through public offers.
How courts have interpreted this term
Securities and Exchange Board of India — Satyam Computer Services proceedings
The Satyam fraud case (2009) demonstrated the critical importance of an effective audit committee. The massive accounting fraud at Satyam Computer Services Ltd., where the chairman admitted to inflating profits and cash balances by over Rs. 7,000 crore, exposed failures in audit committee oversight. The subsequent regulatory reforms strengthened the audit committee's role under both the Companies Act, 2013 and SEBI regulations, mandating financial literacy of members and imposing greater accountability for oversight failures.
Usha Martin Ltd. v. SEBI (SAT Appeal)
The Securities Appellate Tribunal examined the audit committee's role in reviewing related party transactions and held that the committee has an obligation to independently scrutinise transactions rather than merely rubber-stamp management proposals. The Tribunal emphasised that the audit committee serves as a check on management and must exercise independent judgment.
Why this matters
The audit committee is widely regarded as the most important committee of the board of directors for ensuring financial integrity and corporate governance. Post-Satyam, the regulatory framework in India has progressively expanded the committee's mandate and strengthened its independence requirements, making it a critical institution for investor protection.
For practitioners and directors, understanding the scope of the audit committee's functions under Section 177 is essential. The committee not only oversees external and internal audit but also serves as the first line of review for related party transactions under Section 177(4)(iv), evaluates internal controls and risk management, and operates the vigil mechanism (whistle-blower mechanism) under Section 177(9)-(10). The requirement that independent directors form a majority ensures that the committee can operate free of management influence.
A significant development is the establishment of the vigil mechanism. Section 177(9) requires every listed company and prescribed classes of companies to establish a mechanism for directors and employees to report genuine concerns. Section 177(10) mandates that the vigil mechanism provide adequate safeguards against victimisation and provide direct access to the chairperson of the audit committee in appropriate or exceptional cases.
Related terms
Broader concepts:
Key members:
Related functions:
Frequently asked questions
Which companies must constitute an audit committee?
All listed companies must constitute an audit committee. Additionally, all public companies with paid-up capital of Rs. 10 crore or more, turnover of Rs. 100 crore or more, or outstanding loans, borrowings, debentures or deposits exceeding Rs. 50 crore must also constitute an audit committee.
Can the audit committee override the board's decision?
No. The audit committee recommends and advises, but the ultimate decision-making authority rests with the board. However, under Section 177(4)(i), the board must consider and act on the audit committee's recommendations regarding auditor appointment, and if the board disagrees, it must record its reasons and report to the shareholders.
What is the vigil mechanism under the audit committee?
The vigil mechanism, also known as the whistle-blower mechanism, is established under Section 177(9)-(10) to enable directors and employees to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct. The mechanism must provide safeguards against victimisation and direct access to the audit committee chairperson.
Do all audit committee members need to be financially literate?
A majority of members, including the chairperson, must be persons with the ability to read and understand financial statements, including balance sheet, profit and loss account, and auditor's report. At least one member must have accounting or related financial management expertise.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.