Chapter XII - Meetings of Board and Its Powers
Section 177
Section 177: Audit Committee and vigil mechanism
Every listed public company, and prescribed classes of companies, must constitute an Audit Committee of at least three directors with independent directors forming a majority.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) The Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
(2) The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority:
Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
(3) Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with sub-section (2).
(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,— (i) the recommendation for appointment, remuneration and terms of appointment of auditors of the company; (ii) review and monitor the auditor’s independence and performance, and effectiveness of audit process; (iii) examination of the financial statement and the auditors’ report thereon; (iv) approval or any subsequent modification of transactions of the company with related parties:
Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;
Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board:
Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company. (v) scrutiny of inter-corporate loans and investments; (vi) valuation of undertakings or assets of the company, wherever it is necessary; (vii) evaluation of internal financial controls and risk management systems; (viii) monitoring the end use of funds raised through public offers and related matters.
(5) The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.
(6) The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.
(7) The auditors of a company and the key managerial personnel shall 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.
(8) The Board’s report under sub-section (3) of section 134 shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons therefor.
(9) Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.
(10) The vigil mechanism under sub-section (9) shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases:
Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.
Introduction
Section 177 sets the Audit Committee’s composition, its minimum written terms of reference, its powers and the Board’s duty to disclose rejected recommendations. It also requires listed companies and prescribed classes to set up a vigil mechanism for directors and employees.
The current text reflects the Companies (Amendment) Act, 2015, which added omnibus approval of related party transactions from 14 December 2015, and the Companies (Amendment) Act, 2017, in force for these changes from 7 May 2018.
Key takeaways
Who must constitute it
Every listed public company and prescribed classes of companies.
Composition
At least three directors, a majority independent; most members, including the Chairperson, able to read and understand the financial statement.
Related party oversight
Approval or later modification of related party transactions, with omnibus approval and a three-month ratification rule for transactions up to one crore rupees.
Check whether the company needs an Audit Committee
Sub-section (1) applies to every listed public company and to classes of companies prescribed by rule. Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes those classes by paid-up capital, turnover and outstanding borrowings. The rule text cited here is the version first notified in 2014; MCA has amended these Rules since, so confirm the current consolidated rule before relying on any figure or form.
- India Code — consolidated Companies Act, 2013, section 177
- eGazette — Companies (Amendment) Act, 2015 (21 of 2015)
- eGazette — MCA notification S.O. 3388(E), 14 December 2015 (sections 13 and 14 of Act 21 of 2015)
- eGazette — Companies (Amendment) Act, 2017 (1 of 2018)
- eGazette — MCA notification S.O. 1833(E), 7 May 2018 (commencement of parts of Act 1 of 2018)
- eGazette — MCA notification S.O. 902(E), 26 March 2014 (commencement from 1 April 2014)
- MCA — Companies (Meetings of Board and its Powers) Rules, 2014, as notified by G.S.R. 240(E)
Constitute it correctly
Appoint at least three directors with independent directors forming a majority. A majority of the members, including the Chairperson, must be able to read and understand the financial statement. The Board must specify the terms of reference in writing.
Minimum terms of reference
The written terms must include: recommending the appointment, remuneration and terms of the auditors; reviewing auditor independence, performance and the audit process; examining the financial statement and auditors’ report; approving or modifying related party transactions; scrutinising inter-corporate loans and investments; valuing undertakings or assets where necessary; evaluating internal financial controls and risk management; and monitoring the end use of public-offer funds.
Related party transactions
The Committee may give omnibus approval subject to prescribed conditions. For a transaction outside section 188 that it does not approve, it makes recommendations to the Board. A transaction of up to one crore rupees entered into by a director or officer without approval, and not ratified within three months, is voidable at the Committee’s option. If it is with a related party of a director, or another director authorised it, the director concerned must indemnify the company. The clause does not apply to transactions, other than section 188 transactions, between a holding company and its wholly owned subsidiary.
Powers, hearing rights and disclosure
The Committee may call for auditors’ comments, discuss issues with internal and statutory auditors and management, investigate matters within its remit, obtain external professional advice and access company records. Auditors and key managerial personnel may be heard when the auditor’s report is considered but cannot vote. The Board’s report must disclose the Committee’s composition and any recommendation the Board did not accept, with reasons.
Vigil mechanism
Every listed company and prescribed classes must establish a vigil mechanism for directors and employees to report genuine concerns. It must protect users against victimisation and give direct access to the Audit Committee chairperson in appropriate or exceptional cases. Its establishment is disclosed on the website, if any, and in the Board’s report. Rule 7 of the 2014 Rules, as first notified, extends the mechanism to companies accepting deposits from the public and companies with bank and public financial institution borrowings above fifty crore rupees, and has the Audit Committee (or a director nominated by the Board) oversee it. The rule text cited here is the version first notified in 2014; MCA has amended these Rules since, so confirm the current consolidated rule before relying on any figure or form.
Consequences
Section 178(8) applies to a contravention of section 177: the company is liable to a penalty of five lakh rupees and every officer in default to a penalty of one lakh rupees.
Practical checklist
Do
- Adopt written terms of reference covering at least clauses (i) to (viii) of sub-section (4).
- Track transactions entered into without prior approval so ratification is considered within three months.
- Disclose rejected Committee recommendations, with reasons, in the Board’s report.
Avoid
- Do not let non-independent directors form the majority.
- Do not assume holding–subsidiary transactions are exempt where section 188 applies.
Illustrative example
Hypothetical: an unapproved service contract
A listed public company’s officer signs a service contract worth eighty lakh rupees with a firm related to a director, without Audit Committee approval.
Identify
The amount does not exceed one crore rupees, so the third proviso to clause (iv) applies.
Ratify or not
The Committee considers ratification within three months of the transaction date.
Consequence
If it is not ratified, the transaction is voidable at the Committee’s option and the director concerned must indemnify the company against any loss.
Outcome
- The company needs a tracking process so unapproved transactions reach the Committee well within the three months.
Glossary
- Omnibus approval
- An advance approval by the Audit Committee for related party transactions proposed to be entered into, subject to prescribed conditions.
- Vigil mechanism
- The channel through which directors and employees report genuine concerns, with safeguards against victimisation.
Frequently asked questions
Does every listed company need an Audit Committee?
Sub-section (1) refers to every listed public company and prescribed classes. The 2017 amendment replaced “every listed company” with “every listed public company”.
What happens if a small related party transaction is done without approval?
If it involves up to one crore rupees and is not ratified within three months, it is voidable at the Audit Committee’s option, and an indemnity may arise against the director concerned.
Can auditors vote at Audit Committee meetings?
No. Auditors and key managerial personnel have a right to be heard when the auditor’s report is considered, but no right to vote.
Need help applying this provision to your situation?
Contact BizeneedLast updated 11 October 2026