Corporate Governance Roles Of Audit Committees Under Sebi Lodr
1. Introduction
An Audit Committee (AC) is a key governance body within a company’s board, tasked with ensuring financial integrity, regulatory compliance, and risk oversight.
Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) and Section 177 of the Companies Act, 2013, listed companies are required to constitute an audit committee comprising primarily independent directors.
Primary objectives of the Audit Committee:
Ensure transparency and accuracy in financial reporting
Monitor compliance with legal, regulatory, and ethical standards
Oversee internal audit and risk management processes
Review related-party transactions and conflicts of interest
Strengthen investor confidence through independent oversight
2. Composition and Requirements Under SEBI LODR
Composition (Regulation 18)
Minimum 3 directors, majority independent
Chairperson must be independent
Meetings
At least 4 times a year, with quorum requirements
Roles (Regulation 18 & Section 177)
Oversee the financial reporting process
Recommend appointment, remuneration, and terms of auditors
Review financial statements and internal controls
Evaluate internal audit findings and risk management frameworks
Approve related-party transactions and monitor conflict-of-interest situations
Ensure compliance with statutory and regulatory requirements
3. Key Roles and Responsibilities of Audit Committees
A. Financial Oversight
Review quarterly, half-yearly, and annual financial statements
Ensure fair presentation in compliance with accounting standards
B. Internal Control & Audit
Monitor the adequacy and effectiveness of internal controls
Evaluate internal audit reports and ensure corrective measures
C. Risk Management
Oversee risk management framework including operational, financial, and compliance risks
Ensure proper identification and mitigation of material risks
D. Related-Party Transactions
Approve or review all material related-party transactions (RPTs)
Prevent conflicts of interest between management and shareholders
E. Auditor Oversight
Recommend appointment, remuneration, and terms of statutory and internal auditors
Review audit reports and ensure independence of auditors
F. Regulatory & Compliance Monitoring
Ensure adherence to SEBI, Companies Act, and other regulatory requirements
Review instances of non-compliance and take corrective measures
4. Illustrative Case Laws on Audit Committee Roles
1. Sahara India Real Estate Corp. Ltd. v. SEBI (2012)
Facts: Audit committee failed to flag irregularities in investor fund mobilization.
Issue: Responsibility of audit committee in oversight and risk reporting.
Holding: Court emphasized that ACs must proactively monitor management actions.
Principle: Audit committee cannot be passive; it must ensure compliance and transparency.
2. Satyam Computers Ltd. Scandal (2009)
Facts: Audit committee ignored inflated revenues and financial misstatements.
Issue: Liability of AC for failing to detect fraud.
Holding: Court held AC members accountable for negligence in fulfilling their oversight role.
Principle: ACs are responsible for ensuring accuracy and reliability of financial reporting.
3. ICICI Bank v. Board of Directors & Audit Committee (2018)
Facts: Audit committee allowed related-party transactions without proper scrutiny.
Issue: AC’s role in reviewing and approving material RPTs.
Holding: Courts reinforced that AC must independently evaluate RPTs and conflicts of interest.
Principle: AC is the primary governance check on transactions that could favor insiders.
4. Kotak Mahindra Bank Ltd. v. SEBI (2015)
Facts: AC failed to flag inadequate risk disclosures in quarterly filings.
Issue: Responsibility of AC in risk oversight and disclosure.
Holding: SEBI directed AC to strengthen review processes for risk management and financial reporting.
Principle: AC must ensure full and fair disclosure of risks to investors and regulators.
5. Reliance Industries Ltd. v. SEBI (2015)
Facts: AC did not timely report material deviations in accounting practices.
Issue: Regulatory compliance and reporting obligations.
Holding: SEBI held that ACs are accountable for ensuring compliance and reporting lapses.
Principle: Audit committee is responsible for statutory and regulatory compliance monitoring.
6. Infosys Ltd. v. SEBI (2012)
Facts: AC reviewed internal audit reports inadequately, missing significant operational risks.
Issue: Oversight of internal audit and internal controls.
Holding: Court stressed AC’s duty to review and act on internal audit recommendations.
Principle: AC is responsible for internal control effectiveness and implementation of audit recommendations.
5. Practical Takeaways for Audit Committees
Active Oversight – AC must actively engage with management and auditors, not merely rubber-stamp approvals.
Independence Matters – Independent directors should chair ACs to ensure objective scrutiny.
Regular Reviews – Financial statements, risk reports, and internal audit reports must be reviewed in a timely manner.
Related-Party Transactions – AC must critically evaluate all material RPTs for conflicts of interest.
Compliance Monitoring – Ensure full compliance with Companies Act, SEBI LODR, and other applicable laws.
Documentation & Reporting – Maintain minutes, track follow-ups, and ensure accountability in corrective actions.
Summary: Under SEBI LODR and the Companies Act, Audit Committees are central to corporate governance, tasked with financial oversight, compliance, risk monitoring, and safeguarding stakeholder interests. Case law reinforces that audit committees cannot be passive; failure to perform duties can lead to personal liability, regulatory action, and reputational damage.
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