Which companies must form an audit committee?

What does section 177 require?

Section 177 of the Companies Act, 2013 requires certain companies to constitute an audit committee of the board and to establish a vigil mechanism. Section 177 sets who must have the committee, how it is composed, what it oversees, and the whistle- blower channel it must run for directors and employees.

The committee is a board committee, not an outside body. It is made of directors, weighted towards independent directors, and it reports to the board while giving the statutory auditor and internal auditor a direct line that management cannot filter.

Which companies must form an audit committee?

Every listed public company must constitute an audit committee under section 177(1). Beyond that, rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 brings in three classes of public company by size.

The rule 6 figures are tested on the paid-up share capital, turnover, or outstanding amounts as they stand, so a growing public company can cross into the requirement mid-life and must then constitute the committee.

How is the audit committee composed?

The committee needs a minimum of three directors under section 177(2), with independent directors forming a majority. So a three-member committee has at least two independent directors. This links to section 149, which sets who counts as an independent director.

Section 177(3) adds a competence test: a majority of members, including the chairperson, must be able to read and understand the financial statements. The rule targets substance, so a committee stacked with members who cannot read the accounts does not meet the section even if the headcount is right.

What does the audit committee do?

Section 177(4) lists the committee's terms of reference. In practice the core functions are recommending the appointment and remuneration of the auditor, reviewing the financial statements and the auditor's report, approving or modifying related party transactions, scrutinising inter-corporate loans and investments, and evaluating internal financial controls and risk management.

The committee also has the power to call for and investigate any matter within its terms of reference and to obtain professional advice from outside. The auditor and key management have a right to be heard, but they do not vote on the committee.

What is the vigil mechanism?

The vigil mechanism is the whistle-blower channel section 177(9) requires. Every listed company, and the companies that accept deposits from the public or have borrowed from banks and public financial institutions over ₹50 crore, must establish it for directors and employees to report genuine concerns.

Section 177(10) requires the mechanism to provide adequate safeguards against victimisation of the people who use it and to allow direct access to the chairperson of the audit committee in appropriate or exceptional cases. Where a company has an audit committee, the vigil mechanism operates through it.

How do I confirm section 177 applies?

1. Check whether the company is a listed public company; if it is, section 177 applies at once.
2. For an unlisted public company, test paid-up capital, turnover, and aggregate borrowings and deposits against the rule 6 lines.
3. Confirm the committee has at least three directors with independent directors in the majority, per section 177(2).
4. Check the chairperson and a majority of members can read financial statements, per section 177(3).
5. Confirm a vigil mechanism is in place with anti-victimisation safeguards, per section 177(9) and (10).

Where do audit committee rules go wrong?

• Testing the rule 6 thresholds on a private company, which section 177 does not cover on its own.
• Falling short of an independent-director majority on a three-member committee.
• Ignoring the financial-literacy test in section 177(3) for the chairperson and members.
• Running related party approvals outside the committee where section 177(4) puts them inside it.
• Treating the vigil mechanism as optional after crossing the section 177(9) triggers.

Where are section 177 changes published?

Changes to the audit committee framework come as MCA amendments to the Companies Act and to the Companies (Meetings of Board and its Powers) Rules, and, for listed entities, as SEBI LODR governance amendments. For the auditor side of the same board work, read our section 139 auditor appointment guide. Complied AI keeps MCA updates in one feed so you can open the notification behind a rule change and read section 177 next to it.