Audit Committee: Section 177 Explained

The audit committee required by section 177 of the Companies Act, 2013 is the board committee that stands between the auditors and the Board. Every listed public company must constitute one. The section fixes its size and independence, hands it a written mandate that the Board cannot narrow below a statutory list, and gives it powers of its own over related party transactions.

Which companies must constitute an audit committee?

Section 177(1) puts the duty on the Board of Directors of every listed public company and such other class or classes of companies as may be prescribed. The phrase in the sub-section was "every listed company" as enacted, and was substituted with "every listed public company" by Act 1 of 2018, section 57, with effect from 7 May 2018.

The prescribed classes come from rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014. As originally notified, that rule extended the obligation to constitute an Audit Committee and a Nomination and Remuneration Committee to public companies meeting any one of three tests:

The Explanation to that rule fixes the measurement date: the figures are taken as existing on the date of the last audited financial statements.

The third test is quoted above with a wording problem that is in the rule rather than in this page. Clause (iii) as notified reads "outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more", and those two phrases disagree at exactly fifty crore. "Exceeding" excludes the boundary and "or more" includes it. Nothing in the notification resolves it, so this page reproduces both words rather than silently picking a side.

On the rules cited here. The rule text on this page comes from the copy of the Companies (Meetings of Board and its Powers) Rules, 2014 that thc.nic.in serves, and it is a notification text rather than a consolidation. Its body is the principal notification, G.S.R. 240(E) dated 31 March 2014, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), and made under sections 173, 175, 177, 178, 179, 184 to 189 and 191 read with section 469 of the Act. Bundled after it is a separate, later notification, G.S.R. 811(E) dated 3 November 2025, the Companies (Meetings of Board and its Powers) Amendment Rules, 2025, which substitutes sub-rule (2) of rule 11 and nothing else. The footer note on that 2025 notification records the principal rules as last amended by G.S.R. 409(E) dated 15 June 2021. So the rule text in the body is the 2014 text as originally notified, the amendments made between 2014 and June 2021 are not incorporated in it, and a rule quoted from it is not by itself evidence of the rule in force today. Check the amending notifications before relying on any rule text here for a filing. The section text on this page is the Companies Act, 2013 as consolidated on India Code, with each amendment footnote resolved on its own page.

How is an audit committee composed?

Section 177(2) sets two requirements in one sentence. The committee shall consist of a minimum of three directors, with independent directors forming a majority. Its proviso adds a competence test: a majority of the members of the Audit Committee, including its Chairperson, shall be persons with the ability to read and understand the financial statement.

The independence majority is why section 149 and section 177 are read together: the one-third board floor in section 149(4) and the committee majority in section 177(2) are separate tests, and a board can satisfy the first and still be short for the second. Section 177(3) required every Audit Committee existing immediately before the Act commenced to be reconstituted in line with section 177(2) within one year of commencement.

What is in an audit committee's terms of reference?

Section 177(4) says the committee shall act in accordance with terms of reference specified in writing by the Board, and then lists eight items the terms shall "inter alia" include. In the words of the sub-section, condensed:

1. recommendation for appointment, remuneration and terms of appointment of auditors;
2. review and monitor the auditor's independence and performance, and the effectiveness of the audit process;
3. examination of the financial statement and the auditors' report on it;
4. approval or any subsequent modification of transactions with related parties;
5. scrutiny of inter-corporate loans and investments;
6. valuation of undertakings or assets of the company, wherever necessary;
7. evaluation of internal financial controls and risk management systems;
8. monitoring the end use of funds raised through public offers and related matters.

Because the list is prefaced by "inter alia", the Board may add to it. What the Board cannot do is write terms of reference that leave any of the eight out.

Item 4 carries four provisos, and they are the substantive part of the committee's power:

• Omnibus approval. The first proviso, inserted by Act 21 of 2015, section 14, with effect from 14 December 2015, lets the Audit Committee make omnibus approval for related party transactions proposed to be entered into, subject to prescribed conditions. Omnibus approval for related party transactions covers that mechanism.
• Escalation. The second proviso, inserted by Act 1 of 2018, section 57, with effect from 7 May 2018, provides that for a transaction other than one referred to in section 188, where the Audit Committee does not approve it, the committee shall make its recommendations to the Board.
• The one crore ratification window. Where a transaction not exceeding one crore rupees is entered into by a director or officer without Audit Committee approval and is not ratified within three months of the date of the transaction, it becomes voidable at the option of the Audit Committee. If the transaction is with a related party to any director, or is authorised by any other director, that director shall indemnify the company against any loss incurred.
• The wholly owned subsidiary carve-out. The clause does not apply to a transaction, other than one referred to in section 188, between a holding company and its wholly owned subsidiary company.

What is a related party transaction covers the section 188 regime those provisos keep referring out to.

What powers does the committee have of its own?

Section 177(5) lets the Audit Committee call for the comments of the auditors about internal control systems and the scope of audit, including the auditors' observations, and review the financial statement before its submission to the Board, and discuss any related issues with the internal and statutory auditors and with management.

Section 177(6) is the investigation power. The committee shall have authority to investigate into any matter in relation to the items specified in section 177(4) or referred to it by the Board, and for that purpose has the power to obtain professional advice from external sources and full access to information contained in the records of the company.

Section 177(7) settles who may speak. The auditors and the key managerial personnel have a right to be heard in the meetings of the Audit Committee when it considers the auditor's report, but shall not have the right to vote. Key managerial personnel under section 203 covers who falls in that second category.

Where the audit committee shows up in a filing

Section 177(8) is the disclosure hook. The Board's report under section 134(3) shall disclose the composition of an Audit Committee, and where the Board has not accepted any recommendation of the committee, that fact shall be disclosed in the report along with the reasons. The second limb is the more informative one: a disagreement between the Board and its audit committee is a reportable event, not an internal matter.

For a listed company, committee details are also reported in the corporate governance report. How to read a corporate governance report covers what that filing sets out.

Section 177(9) and section 177(10) add a separate obligation to the same section, the vigil mechanism, which the audit committee oversees where one is required. What is a vigil mechanism covers it.

Where this sits in the disclosure picture

• Nomination and remuneration committee covers the other committee section 178 requires of the same companies.
• What is a vigil mechanism covers section 177(9) and (10).
• Independent director under section 149 covers the category that must form the committee's majority.
• Omnibus approval for related party transactions covers the first proviso to section 177(4)(iv).
• Auditor rotation under section 139 covers the appointment regime the committee's first term of reference feeds into.
• How to read a corporate governance report covers where committee composition is reported for a listed company.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.