Audit Committee Constitution explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The same rule that puts an independent director on the board puts them on the audit committee — and in the majority.
Who must constitute one
The requirement to form an audit committee is prescribed under Section 177 of the Companies Act, 2013 read with rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014. Provisions relating to Audit Committee are also given under SEBI (LODR) Regulations, 2015.
It requires that Every Listed Public Company and the Public Companies having paid up share capital of ten crore rupees or more; or the Public Companies having 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 shall constitute an Audit Committee.
The handbook draws out a link that is easy to miss because it sits across two instruments.
The similar requirement is also provided under rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 to appoint an Independent Director. Therefore, every company which is required to appoint Independent Director is also required to constitute an Audit Committee.
The thresholds are deliberately identical — ten crore of paid-up capital, one hundred crore of turnover, fifty crore of aggregate borrowings — because the two requirements are designed to work together. There is no point mandating independent directors without a forum in which their independence is exercised, and no point mandating an audit committee without independent members to sit on it.
The composition rule completes the design: the committee shall consist of minimum of three directors with Independent Director forming the majority. Majority, not merely presence. On a three-member committee that means two independent directors, so the independents can carry a decision without executive support.
The consequence for the appointee is stated plainly: the Independent Director who is so appointed on the Board, shall have the knowledge w.r.t functions performed by the Audit Committee. Audit committee competence is not optional for an independent director of a covered company — it is where most of the substantive work will fall.
Note that the three financial thresholds are alternatives. A public company with modest capital and turnover but fifty crore of aggregate loans, debentures and deposits is caught by the third limb alone.
The thresholds
| Trigger | Threshold |
|---|---|
| Listed public company | Always |
| Paid-up share capital | Ten crore rupees or more |
| Turnover | One hundred crore rupees or more |
| Aggregate outstanding loans, debentures and deposits | Exceeding fifty crore rupees |
The third limb aggregates three different liabilities. A company testing it must add loans, debentures and deposits together, not test each separately.
Composition
- Minimum three directors.
- Independent directors forming the majority.
- Additional requirements apply under the SEBI listing regulations for listed entities.
Compare the thresholds with the woman director requirement — INR 100 crore of capital or INR 300 crore of turnover — and note that they are set considerably lower here. A public company can be inside the audit committee requirement and outside the woman director requirement, or the reverse.
What the seat demands
- Read the financial statements, not the summary presentations.
- Meet the statutory auditor without management present.
- Track internal audit findings to closure.
- Test related party transactions against section 188.
- Confirm the committee's own composition still shows an independent majority after any resignation.
Common mistakes
- Testing the three thresholds cumulatively rather than as alternatives.
- Testing loans, debentures and deposits separately instead of in aggregate.
- Allowing the audit committee constitution to lose its independent majority on a vacancy.
- Appointing an independent director with no audit committee competence.