The formation and function of the Audit Committee are governed by Section 177 of the Companies Act, 2013, read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014.
The Audit Committee acts as the link between the management, the statutory auditors, and the Board of Directors, ensuring financial integrity and transparency.
I. Applicability Thresholds
| Company Type | Financial/Status Threshold (Mandatory) | Basis |
| Listed Company | Mandatory for all listed public companies, regardless of size. | Stock Exchange/SEBI requirement and Section 177. |
| Unlisted Public Company | Paid-up Capital ₹10 Crore or more OR Turnover ₹100 Crore or more OR Aggregate Outstanding Loans/Borrowings/Debentures/Deposits ₹50 Crore or more. | Section 177(1) & Rule 6 |
| Private Limited Company | Not Mandatory. Private companies are generally exempt from this requirement. | MCA Exemption Notification. |
Crucial Note on Private Companies: A private limited company is not required to form an Audit Committee, even if it crosses the high paid-up capital or turnover thresholds applicable to public companies. However, if it has borrowings/deposits exceeding ₹50 Crore, it must form the committee.
II. Composition
| Requirement | Listed Company | Unlisted Public Company |
| Minimum Directors | Minimum three Directors. | Minimum three Directors. |
| Independent Directors | Majority of members must be Independent Directors. | Majority of members must be Independent Directors (if the company is otherwise required to have them under Section 149(4)). |
| Financial Literacy | Majority of members, including the Chairperson, must be financially literate and have accounting or financial management expertise. | Majority of members must be financially literate. |
III. Key Functions and Role Differentiation
The duties of the Audit Committee remain largely the same across all companies, but its oversight intensity differs greatly.
| Function | Focus in Listed Company | Focus in Unlisted Public Company |
| Auditor Oversight | Mandatory Pre-Approval: Must recommend the appointment, remuneration, and terms of service of the statutory auditor to the Board. Deals with resignation and removal (Section 140). | Recommends the auditor's appointment and remuneration. |
| Related Party Transactions (RPTs) | Mandatory Approval: Must approve or subsequently ratify all RPTs. This is the committee's most significant and legally protected role (Section 188). | Approves or ratifies all RPTs (Section 188). |
| Internal Controls | Reviewing and evaluating the adequacy and effectiveness of the company's Internal Financial Controls and risk management systems. | Reviewing internal audit reports and discussing the weaknesses in internal control systems. |
| Financial Review | Reviewing the annual financial statements, especially before submission to the Board, focusing on compliance with accounting standards and significant adjustments. | Reviewing the financial statements, focusing particularly on areas of judgment and complex accounting estimates. |
The Governance Advantage"While most Private Limited Companies are legally exempt from the Section 177 requirements, any company that is scaling up, planning an IPO, or dealing with complex cross-border transactions should voluntarily constitute an Audit Committee. A voluntary committee, structured with financially savvy directors, adds credibility by enhancing the quality of financial reporting, improving internal controls, and ensuring better oversight of Related Party Transactions, making the company far more attractive for due diligence by institutional investors."