Audit Committee 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.
Ask where corporate governance actually happens in an Indian company and the honest answer is the audit committee.
Financial reporting, auditor independence, internal controls, related party transactions and the whistleblower channel all converge here. So does an independent director's exposure — this is the committee whose minutes get read first when something goes wrong.
Required for every listed public company and public companies crossing ₹10 crore capital, ₹100 crore turnover or ₹50 crore borrowings. Minimum three directors; the Companies Act wants a majority independent, SEBI wants two-thirds and an independent chairperson. All members must be financially literate, with at least one having accounting or financial management expertise. Four meetings a year, maximum 120-day gap. Quorum needs two independent directors. All related party transactions need its prior approval.
Who has to constitute one
Section 177(1) requires an audit committee for every listed public company and such other classes of companies as prescribed. The rules extend it to public companies with:
| Trigger | Threshold |
|---|---|
| Paid-up share capital | ₹10 crore or more |
| Turnover | ₹100 crore or more |
| Aggregate outstanding loans, borrowings, debentures and deposits | more than ₹50 crore |
Any one trigger is enough — the same threshold structure used for the independent director requirement itself, which is deliberate. A company that needs independent directors generally needs an audit committee to put them on.
Private companies are outside this.
Composition: two different standards
This is where the Companies Act and SEBI diverge, and applying the wrong one is a common defect.
| Companies Act, Section 177 | SEBI LODR, Regulation 18 | |
|---|---|---|
| Minimum members | 3 directors | 3 directors |
| Independent directors | Majority | Two-thirds |
| Chairperson | Not specified as independent | Must be an independent director |
| Financial ability | Majority, including the chairperson, able to read and understand financial statements | All members financially literate; at least one with accounting or related financial management expertise |
| Secretary | — | The company secretary acts as secretary to the committee |
| AGM attendance | — | The chairperson must attend the AGM to answer shareholder queries |
For a listed entity, SEBI's standard governs. The two tests often produce the same number — a committee of three or four needs two and three independent directors respectively under either. They diverge on committees of five and seven:
| Committee size | Majority (Act) | Two-thirds (SEBI) |
|---|---|---|
| 3 | 2 | 2 |
| 4 | 3 | 3 |
| 5 | 3 | 4 |
| 6 | 4 | 4 |
| 7 | 4 | 5 |
So a five-member audit committee built to the Companies Act standard is one independent director short for a listed entity. That's the composition defect to look for.
The other two SEBI requirements have no Companies Act equivalent at all: the chairperson must be independent, and every member must be financially literate.
Meetings. At least four a year, with a maximum gap of 120 days between two meetings.
Quorum. Two members or one-third of the members, whichever is greater, with at least two independent directors present. A meeting without two independent directors is inquorate — which, as with the board quorum rule, hands independent directors real structural weight.
What the committee actually does
Section 177(4) sets the statutory terms of reference:
- Recommend the appointment, remuneration and terms of appointment of the auditors.
- Review and monitor the auditor's independence and performance, and the effectiveness of the audit process.
- Examine the financial statement and the auditors' report.
- Approve — or subsequently modify — transactions with related parties.
- Scrutinise inter-corporate loans and investments.
- Value the undertakings or assets of the company, wherever necessary.
- Evaluate internal financial controls and risk management systems.
- Monitor the end use of funds raised through public offers.
For listed entities, Part C of Schedule II expands this considerably — reviewing the quarterly and annual financial results before submission to the board, management discussion and analysis, related party transaction statements, internal audit findings, whistleblower reports, the appointment and removal of the internal auditor, and the utilisation of funds advanced to subsidiaries.
The powers that make it work
Three provisions give the committee genuine authority, and independent directors should know all three.
Section 177(5) — the committee may call for the comments of the auditors about internal control systems, the scope of audit and their observations, and may discuss any related issues with the internal and statutory auditors and with management.
Section 177(6) — the committee has the authority to investigate any matter within its terms of reference or referred by the board, with power to obtain professional advice from external sources and full access to the company's records.
That is a strong power and it's used far too rarely. An audit committee that suspects something and doesn't understand it can commission its own external investigation without asking management's permission.
Section 177(7) — the auditors and KMP have a right to be heard at committee meetings when the auditor's report is considered, but no right to vote.
Section 177(8) — the Board's report discloses the committee's composition, and where the board has not accepted a recommendation of the audit committee, that must be disclosed with reasons.
That last one is a quiet but powerful accountability device. A board can overrule its audit committee — but it has to say so in public, and explain itself.
Related party transactions
All related party transactions require the prior approval of the audit committee. For listed entities, only the independent directors on the committee may approve them.
Omnibus approval is permitted for repetitive transactions, subject to prescribed conditions — the committee lays down criteria, specifies value limits, and reviews the transactions actually entered into on a periodic basis. Omnibus approval is not permitted for transactions not foreseeable, beyond specified limits.
The ₹1 crore voidability rule. Where a transaction with a related party — other than one covered by Section 188 — is entered into without the audit committee's approval and the value doesn't exceed ₹1 crore, it must be ratified within three months. If it isn't, the transaction is voidable at the option of the audit committee. And where the transaction is with a related party of a director, or authorised by a director, that director must indemnify the company against any loss.
Schedule IV separately makes it an independent director's duty to "pay sufficient attention and ensure that adequate deliberations are held" before approving related party transactions. Read that alongside the voidability rule and it's clear the committee's RPT function isn't a rubber stamp.
The vigil mechanism
Section 177(9) requires certain companies to establish a vigil mechanism for directors and employees to report genuine concerns:
- every listed company;
- companies that accept deposits from the public;
- companies that have borrowed from banks and public financial institutions in excess of ₹50 crore.
The mechanism must provide adequate safeguards against victimisation and direct access to the chairperson of the audit committee in appropriate or exceptional cases.
Schedule IV makes it an independent director's duty to ascertain that the mechanism exists, functions, and doesn't prejudice the people who use it. That's a verification duty — you're supposed to check, not be told.
Key takeaways
- ₹10 crore / ₹100 crore / ₹50 crore thresholds for public companies, plus every listed public company.
- The Act says majority independent; SEBI says two-thirds and an independent chairperson.
- All members financially literate under SEBI, with one having accounting expertise.
- Quorum requires two independent directors — no quorum, no valid meeting.
- Section 177(6) lets the committee investigate and hire outside experts on its own authority.
- A board that rejects an audit committee recommendation must disclose it with reasons.
- All RPTs need prior approval, and unapproved sub-₹1 crore ones are voidable if not ratified in three months.
Read next
- Duties of an Independent Director: Schedule IV Explained
- Related Party Transactions: Audit Committee and Independent Director Approval
- Nomination and Remuneration Committee (Section 178 / Reg 19)
- SEBI LODR Corporate Governance Requirements for Listed Companies
Law stated as on 5 September 2026. Where the Companies Act and the LODR both apply, the stricter requirement governs — build the committee to SEBI's standard if you're listed.
Key Facts About Audit Committee
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
Does a private company need an audit committee?
No. Section 177 applies to listed public companies and to public companies crossing the prescribed thresholds.
How many independent directors does an audit committee need?
A majority under the Companies Act; two-thirds for a listed entity under Regulation 18, with an independent chairperson.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Audit Committee: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.