Regulation 18: The Audit Committee of a Listed Entity

Regulation 18 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 audit committee is the only committee whose approval a transaction can actually fail. That makes its composition and quorum rules operational rather than ceremonial — a meeting that is not properly constituted does not merely have a procedural defect, it has not approved anything.

At least three directors, with two-thirds independent. All members financially literate, and at least one with accounting or related financial management expertise. The chairperson is an independent director and must attend the AGM to answer shareholder queries. The committee meets at least four times a year with no gap above 120 days, and quorum is two members or one-third, whichever is greater, with at least two independent directors present.

Composition

Financially literate means the ability to read and understand basic financial statements — the balance sheet, the statement of profit and loss, and the cash flow statement. It is a real threshold and it applies to every member, not merely to the expert.

The chairperson's AGM attendance is mandatory, not customary. The reason is specific: shareholders are entitled to question the person who chaired the body that reviewed the accounts. An audit committee chairperson who does not attend leaves that accountability unanswered, and the absence gets recorded in the governance report.

Meetings and quorum

At least four meetings a year, with a gap of no more than 120 days between two consecutive meetings — the same double test that applies to the board.

Quorum is two members or one-third of the members, whichever is greater, with a minimum of two independent directors present.

The independent-director floor is where meetings fall over. A three-member committee with two independents needs both of them present; if one cannot attend, the meeting is not quorate no matter who else is there. Committees planning approvals at short notice should treat independent director availability as the binding constraint, not the diary of the executive members.

What the committee actually does

Its role runs wider than the accounts. The main strands:

Financial reporting. Oversight of the financial reporting process and disclosures; review of the annual and quarterly results before submission to the board, with attention to the directors' responsibility statement, changes in accounting policies, major accounting estimates, significant adjustments arising from the audit, compliance with listing and legal requirements, and disclosure of related party transactions.

The auditors. Recommending appointment, remuneration and terms of the statutory auditor; approving payment for any other services rendered by them; reviewing the independence and performance of the statutory and internal auditors, and the effectiveness of the audit process; discussion with the statutory auditors before the audit begins on the nature and scope, and afterwards on any area of concern.

Related party transactions. Prior approval of every RPT, with only the independent directors on the committee voting. This is the point at which the composition rules become substantive. Related party transactions →

Internal control and internal audit. Evaluation of internal financial controls and the risk management systems; review of the adequacy of the internal audit function, its structure, staffing, reporting line and scope; discussion with internal auditors on significant findings.

Investigations and irregularities. Reviewing findings of internal investigations into matters of suspected fraud or irregularity or a material failure of internal controls, and reporting to the board.

Money raised and lent. Monitoring the end use of funds raised through a public offer; scrutiny of inter-corporate loans and investments; valuation of undertakings or assets where necessary.

People. Reviewing the functioning of the whistle-blower mechanism, and approving the appointment of the chief financial officer after assessing qualifications, experience and background. Vigil mechanism →

The mandatory review list

Separately from its role, the committee is required to review a specific list of information. It is short, and it is the list an inspection tends to test against the minutes:

• management discussion and analysis of financial condition and results of operations;
• management letters or letters of internal control weaknesses issued by the statutory auditors;
• internal audit reports relating to internal control weaknesses;
• the appointment, removal and terms of remuneration of the chief internal auditor;
• statements of deviations — the quarterly statement of deviation in the use of issue proceeds, and the annual statement of funds utilised for purposes other than those stated in the offer document. Financial results and deviation statements →

The deviation statements are the item most often absent from committee minutes, because they are prepared by the finance team for filing and go to the board without the committee's review being recorded.

Powers

The committee may investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or professional advice, and secure attendance of outsiders with relevant expertise if it considers it necessary.

Those powers are what distinguish a committee from an advisory body. A committee that has never used them in a company with recurring audit qualifications is not obviously discharging its function.

Key takeaways

• Two-thirds independent, minimum three directors, all financially literate.
• The chairperson is independent and must attend the AGM.
• Four meetings and a 120-day cap — both tests.
• Quorum needs two independent directors present.
• Only independent members vote on related party transactions.
• Approving the CFO's appointment is the committee's call, not just the board's.
• Review the deviation statements and minute that you did.

Read next

• Regulation 17: Board of Directors of a Listed Entity
• Regulation 23: Related Party Transactions and the Materiality Test
• Regulation 22: Vigil Mechanism and Whistle-Blower Protection
• Regulation 33: Financial Results and Their Deadlines

Disclaimer: Positions stated as on 5 September 2026. Verify the current text of the Listing Regulations and Schedule II on sebi.gov.in before relying on any requirement here.