By CS Sapna Malpani, Practising Company Secretary, Bangalore · Last updated 14 July 2026
In March 2024, an unlisted public company in Hyderabad learnt what a paperwork gap costs. It had crossed the turnover threshold years earlier but never constituted an audit committee. The Registrar of Companies read Section 177, ran the maths on the period of default, and passed an adjudication order of roughly ₹39 lakh against the company and its officers. No fraud, no loss to any investor. Only a committee that existed on the org chart but not in law. Getting your audit committee composition right is the cheapest insurance a growing company can buy, and the failure to do it is one of the most expensive oversights a board can make.
Quick Summary
Who must comply: Every listed company, plus unlisted public companies with paid-up capital ≥ ₹10 crore, turnover ≥ ₹100 crore, or aggregate borrowings/debentures/deposits > ₹50 crore.
Audit Committee (Section 177): Minimum 3 directors, independent directors in a majority. For a listed entity, two-thirds must be independent and the chair must be independent.
NRC (Section 178): Minimum 3 non-executive directors, at least one-half independent under the Act; two-thirds independent for a listed entity.
Penalty for non-compliance: ₹5 lakh on the company and ₹1 lakh on every officer in default under Section 178(8), plus SEBI fines of ₹2,000 per day per committee for listed entities.
Key action: Audit your committee composition today, before a secretarial audit, a DRHP review, or an ROC inspection does it for you.
Why board committee composition decides more than it used to
Two committees carry the weight of corporate governance in India: the audit committee under Section 177 of the Companies Act, 2013 and the nomination and remuneration committee (NRC) under Section 178. On paper they look like formalities. In practice they are the bodies that approve related party transactions, review financial statements before the board sees them, run the whistle-blower mechanism, and decide who becomes a director and what they get paid.
The composition rules are strict for a reason. A committee dominated by promoter-nominees cannot honestly review a transaction that benefits the promoter. So the law forces independent directors into a majority, and for listed companies into a two-thirds super-majority. Get the count wrong (one independent director short, an executive chairing the audit committee, a member who cannot read a balance sheet) and every approval that committee passes is exposed. That is the real risk. The penalty for a defective committee is only part of it. The bigger exposure is the cloud it puts over every decision the committee took.
For a company preparing to list, this is not academic. Merchant bankers and the secretarial auditor examine committee composition line by line during due diligence. A defective audit committee is a standard reason for a DRHP objection and a delayed issue. For a private company crossing the ₹10 crore paid-up or ₹100 crore turnover mark, the committee requirement switches on automatically the moment the last audited financials cross the line, and most founders never notice.
Composition at a glance: Companies Act vs SEBI LODR
The single most common error is assuming one rulebook. A listed company answers to two. The Companies Act sets the floor; SEBI (LODR) Regulations, 2015 sets a higher bar. Where they differ, the stricter rule wins. This table maps both committees against both rulebooks.
| Requirement | Audit Committee (Sec 177) | Audit Committee (LODR Reg 18) | NRC (Sec 178 / Reg 19) |
|---|---|---|---|
| Minimum members | 3 directors | 3 directors | 3 directors |
| Independent directors | Majority | Two-thirds | One-half (Act) / Two-thirds (LODR) |
| Chairperson | Any director | Independent director | Independent director |
| Executive directors | Permitted | Permitted (minority) | Not permitted (all non-executive) |
| Financial literacy | Majority can read accounts | All members; 1 accounting expert | Not specified |
| Company Secretary as secretary | Optional | Mandatory | Recommended |
Read the table twice if you are listed. A board that is comfortable with the Companies Act “majority independent” rule can still be non-compliant under Regulation 18, which demands two-thirds. Take a five-member audit committee: a bare majority is three independent directors, but the two-thirds rule needs four. A board that sizes its committee for the Companies Act and forgets the SEBI bar ends up one independent director short. The arithmetic trips up real boards, and the exchanges fine them for it.
What changed: decriminalised penalties, and a bigger job for the audit committee
Two shifts make committee composition a live issue in 2026 rather than a settled one.
First, the penalty regime changed character. The Companies (Amendment) Act, 2019 moved the punishment for defective committees out of the criminal courts and into in-house adjudication. Before 2019, a Section 177 or 178 breach could carry imprisonment. Today it is a civil penalty the Registrar imposes by an order, faster to levy and no longer needing a prosecution. The ceiling under Section 178(8) is ₹5 lakh on the company and ₹1 lakh on each officer in default, and it applies to contraventions of both Section 177 and Section 178. The ₹39 lakh figure that opened this guide came from stacking the per-default amounts across a long period of non-constitution. Decriminalisation made these orders routine, not rare.
Second, SEBI expanded what the audit committee has to do. The SEBI (LODR) Fifth Amendment, notified on 19 November 2025, recast the related party transaction framework and pushed a graded, turnover-linked materiality scale into Schedule XII. It also extended the audit committee’s reach to related party transactions entered into by subsidiaries, even where the listed parent is not a party. A listed entity’s audit committee now has to pre-approve certain subsidiary RPTs above ₹1 crore that cross the prescribed materiality tests. That is a heavier gatekeeping load, and it lands on whichever independent directors happen to sit on the committee. A committee that is one member short, or stacked with non-independent directors, is now failing a bigger mandate than it was two years ago.
The enforcement mood has shifted to match. In the Manpasand Beverages matter (SEBI, April 2024), the regulator found that independent directors on the audit committee had leaned on the managing director’s explanations rather than examining the financials themselves, treating the committee as a body that operated under influence rather than at arm’s length. Composition and conduct are being read together. A committee that looks right on paper but does not function independently is drawing orders of its own.
Does your company even need these committees? The applicability test
Founders often assume committees are a “listed company thing”. They are not. Section 177 and Section 178, read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, catch a wide class of unlisted public companies too. Run your last audited figures through this flow.
Three points founders miss. The tests are disjunctive: meeting any one triggers the requirement, so a capital-light company with ₹120 crore turnover is caught even with a small paid-up capital. The figures are taken from the last audited financial statements, so the obligation can switch on quietly at the year-end audit, months before anyone updates the governance calendar. And the borrowings test aggregates loans, borrowings, debentures and deposits together, so a company that raised ₹55 crore of debt across instruments qualifies even if no single instrument crosses ₹50 crore. Section 8 companies are exempt, and government companies have a partial carve-out for parts of Section 178.
⚡ By The Numbers
A single MCA adjudication order for not constituting an audit committee
SEBI SOP fine per committee for a defective listed-company committee
Independent directors required on a listed audit committee and NRC
Maximum gap allowed between two audit committee meetings
How to constitute a compliant audit committee: the step-by-step
Whether you are fixing a defective committee or building one from scratch, the sequence is the same. A Practising Company Secretary would work through these six steps.
Step 1 — Confirm applicability from the last audited numbers. Pull the latest audited balance sheet. Test paid-up capital against ₹10 crore, turnover against ₹100 crore, and the aggregate of loans, borrowings, debentures and deposits against ₹50 crore. Document which limb is triggered and the date it was crossed, because that date fixes when your default started counting if you are late.
Step 2 — Fix the numbers and the majority. Under the Companies Act, an audit committee needs at least three directors with independent directors in a majority. If you are listed, raise the bar to two-thirds independent. Count the seats before you name people, because the moment you add one executive director too many, the ratio breaks.
Step 3 — Appoint the right chairperson. For a listed entity, the audit committee chairperson must be an independent director, and that person is expected to attend the annual general meeting to answer shareholder questions on the accounts. For the NRC, the chairperson must also be independent; the chairperson of the company may sit as an ordinary member but cannot chair the NRC.
Step 4 — Confirm financial literacy and expertise. Every audit committee member must be able to read and understand financial statements, and at least one member must bring genuine expertise in accounting or financial management. This is not a box-tick. An order can turn on whether a committee member could actually interpret the numbers they signed off.
Step 5 — Pass the board resolution and record the terms of reference. Constitute both committees by board resolution, adopt written terms of reference that track Section 177(4) and Section 178, and minute the appointments. Where a resolution attracts Section 179(3) read with the filing rules, file MGT-14. Appoint the Company Secretary as secretary to the audit committee, which the listing regulations require.
Step 6 — Set the meeting calendar and the vigil mechanism. Schedule at least four audit committee meetings across the year with no more than 120 days between two meetings. Put the vigil mechanism (whistle-blower channel) under the audit committee’s oversight as Section 177(9) requires for the same class of companies. Then keep attendance and quorum records, because a committee that never met is treated much like one that never existed.
The cost of getting it wrong
Penalties come from two directions, and a listed company can face both at once. The Companies Act penalty is a one-time civil amount per default under Section 178(8). The SEBI penalty is a daily fine that keeps running until you rectify. If the default drags across two consecutive quarters, the exchange can move to suspend trading in the company’s shares.
| Default | Company liability | Officer liability | Escalation |
|---|---|---|---|
| Section 177/178 contravention (Companies Act) | ₹5 lakh | ₹1 lakh each | Adjudication order by ROC |
| Defective audit committee (LODR Reg 18) | ₹2,000/day | N.A. | Trading suspension after 2 quarters |
| Defective NRC (LODR Reg 19) | ₹2,000/day | N.A. | Continues till rectified |
| Audit committee acting under influence | SEBI order | Director-level penalties | Reputational + DRHP risk |
The daily fines are the ones that quietly compound. Two thousand rupees a day per committee sounds small until a company discovers a composition gap that has been open for three quarters: roughly ₹1.1 lakh per committee before anyone noticed, plus the Companies Act order on top, plus the standing risk to the scrip. For an IPO-bound company the softer cost is worse: a composition defect surfaced in secretarial audit can push an entire issue by a quarter.
The meeting cadence that keeps the committee alive
Constituting a committee is the start, not the finish. A listed audit committee has to meet at least four times a year, with the gap between any two meetings capped at 120 days. Miss the rhythm and the committee is defective even if its membership is perfect.
Q1 meeting — Review Q4 and annual results before the board adopts them.
Within 120 days — Q1 results, RPT approvals, auditor interactions.
Within 120 days — Half-year review, internal audit reports, vigil mechanism cases.
Fourth meeting — Q3 results; confirm four meetings logged and no gap over 120 days.
The deeper implication for founders and boards
Committee composition is turning into a proxy for how seriously a board takes governance. According to CS Sapna Malpani, “the audit committee is the first place an investor, a lender or a secretarial auditor looks, because it is the one body designed to say no to the promoter. A committee that cannot say no, whether because the independents are outnumbered or because they defer to management, tells you everything about the company’s controls.”
The direction of travel is clear. With the Fifth Amendment loading subsidiary RPT oversight onto the audit committee, and SEBI reading composition and conduct together, the next wave of orders will look less at whether a committee exists and more at whether it functioned. Expect secretarial auditors to start testing attendance, dissent notes and the quality of RPT scrutiny, not just the member list. Boards that treat these committees as a governance engine rather than a filing formality will clear diligence faster and defend orders more easily.
How the committees relate to provisions you already know
These committees do not sit in isolation. The audit committee is the body that pre-approves related party transactions before they reach the board, the mechanism at the centre of our Section 188 related party transactions guide. Its independence depends on the very directors who can be struck off under Section 164, covered in our director disqualification guide. And the appointments that populate both committees run through the same board machinery that keeps directors compliant, including the annual DIR-3 KYC filing. Where founders confuse the two committees, the shorthand helps: the audit committee guards the money, the NRC guards the appointments and the pay.
📋 Key Takeaways
- ✅ Audit committee and NRC are mandatory for every listed company and for unlisted public companies crossing ₹10 crore paid-up, ₹100 crore turnover, or ₹50 crore aggregate borrowings.
- ✅ The Companies Act needs independent directors in a majority; SEBI LODR needs two-thirds; always comply with the stricter rule.
- ✅ A listed audit committee chairperson and the NRC chairperson must be independent directors.
- ✅ Non-compliance costs ₹5 lakh on the company and ₹1 lakh per officer under Section 178(8), plus ₹2,000 per day per committee under SEBI’s SOP.
- ✅ Since the SEBI Fifth Amendment (Nov 2025), the audit committee also pre-approves material subsidiary RPTs, a heavier mandate on the same seats.
- ✅ Meet at least four times a year with no gap over 120 days, and appoint the Company Secretary as secretary to the audit committee.
- ✅ Fix composition before a secretarial audit, DRHP review or ROC inspection finds it for you.
Sources & References
- Section 177, Companies Act 2013 (Audit Committee) — CAIRR Ready Reckoner
- Section 178, Companies Act 2013 (NRC & SRC) — CAIRR Ready Reckoner and Indian Kanoon
- SEBI (LODR) Regulation 18 (Audit Committee) — CAIRR
- SEBI (LODR) Regulation 19 (NRC) — CAIRR
- SEBI SOP for non-compliance & fines (circular dated 22 January 2020) — SEBI
- MCA adjudication order — audit committee non-constitution penalty — TaxGuru report
- SEBI (LODR) Fifth Amendment, 2025 — RPT recast & audit committee subsidiary jurisdiction — Mondaq
- SEBI enforcement on independent directors & audit committees — Cyril Amarchand Mangaldas
Is your audit committee actually compliant?
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Frequently Asked Questions
What is the minimum audit committee composition under Section 177?
Under Section 177 of the Companies Act, 2013, the audit committee must have a minimum of three directors, with independent directors forming a majority. A majority of members, including the chairperson, must be able to read and understand financial statements. For a listed company, SEBI LODR Regulation 18 raises the bar: at least two-thirds of the members must be independent directors, every member must be financially literate, at least one must have accounting or financial management expertise, and the chairperson must be an independent director. Where the two rulebooks differ, a listed entity follows the stricter SEBI standard.
Which companies must constitute an audit committee and NRC?
Every listed company must constitute both an audit committee and a nomination and remuneration committee. Beyond that, Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 extends the requirement to unlisted public companies that meet any one of three tests on their last audited figures: paid-up capital of ₹10 crore or more, turnover of ₹100 crore or more, or aggregate outstanding loans, borrowings, debentures and deposits above ₹50 crore. The tests are disjunctive, so meeting a single limb triggers the obligation. Section 8 companies are exempt, and government companies have a partial carve-out.
What is the penalty for a defective or missing audit committee?
Section 178(8) imposes a civil penalty of ₹5 lakh on the company and ₹1 lakh on every officer in default for contravening Section 177 or Section 178, levied by an adjudication order rather than a court, since the Companies (Amendment) Act, 2019 decriminalised the offence. Real MCA orders have run into tens of lakhs where a company failed to constitute the committee for a long period, and one reported order reached about ₹39 lakh. A listed company faces an additional SEBI fine of ₹2,000 per day per committee under the Standard Operating Procedure, and trading can be suspended if the default continues for two consecutive quarters.
How is the NRC composition different from the audit committee?
The nomination and remuneration committee under Section 178 must have three or more directors, and here the rule is stricter on one point: all members must be non-executive directors, whereas the audit committee may include a minority of executive directors. Under the Companies Act, at least one-half of the NRC must be independent; for a listed entity, Regulation 19 requires at least two-thirds independent directors with effect from 1 January 2022. The chairperson of the company may sit on the NRC as an ordinary member but cannot chair it. The audit committee guards financial reporting and related party transactions; the NRC guards director appointments and remuneration policy.
How did the SEBI LODR Fifth Amendment 2025 affect the audit committee?
The SEBI (LODR) Fifth Amendment, notified on 19 November 2025, recast the related party transaction framework with a graded, turnover-linked materiality scale under Schedule XII and extended the audit committee’s remit to certain related party transactions entered into by subsidiaries, even when the listed parent is not a party. Material subsidiary RPTs above the prescribed thresholds now require prior approval of the listed entity’s audit committee. The practical effect is a heavier gatekeeping load on the same committee seats, which makes correct composition (enough independent directors, an independent chair, genuine financial literacy) matter more than it did before the amendment.
How often must the audit committee meet, and who acts as its secretary?
A listed company’s audit committee must meet at least four times in a financial year, and no more than 120 days may elapse between two meetings. Missing this cadence makes the committee non-compliant even if its membership is perfect, and the gap is a common secretarial-audit finding. Under SEBI LODR Regulation 18, the Company Secretary acts as the secretary to the audit committee, maintaining the agenda, minutes and attendance records. Keeping clean quorum and attendance records matters, because in an enforcement review a committee that did not actually meet is treated much like a committee that was never constituted.
Disclaimer: This guide is for general information and does not constitute legal or professional advice. Verify current provisions and thresholds against the bare Act, SEBI circulars and your specific facts, or consult a Practising Company Secretary before acting.