Auditor Appointment: Section 139 of Companies Act 2013

The Companies Act, 2013 is a cornerstone of corporate governance in India, replacing the outdated Companies Act of 1956 with modern provisions to enhance transparency and accountability. Among its many sections, Section 139 of Companies Act 2013 stands out as a critical regulation governing the appointment of auditors. For businesses, compliance officers, and legal enthusiasts alike, understanding this section is essential to navigating the complexities of corporate audits. This comprehensive guide will break down everything you need to know about Section 139—its provisions, applicability, compliance requirements, and implications—presented in an easy-to-digest, informational tone.

What is Section 139 of Companies Act 2013?

Section 139 of Companies Act 2013 deals with the appointment of auditors for companies registered in India. It outlines the rules for selecting, rotating, and reappointing auditors to ensure financial statements are independently verified, fostering trust among stakeholders. Enacted as part of the Companies Act, 2013, which came into force on April 1, 2014, this section aims to strengthen audit integrity by mandating structured processes and imposing term limits on auditors.

The section applies to all companies incorporated under the Act—public, private, small, or listed—though specific rules vary based on company type. It replaced Section 224 of the Companies Act, 1956, introducing stricter norms like auditor rotation and eligibility criteria to prevent conflicts of interest and enhance audit quality.

Key Highlights of Section 139

• Purpose: Regulate the appointment and tenure of auditors
• Applicability: All companies under the Companies Act, 2013
• Enforcement: Effective from April 1, 2014
• Authority: Overseen by the Ministry of Corporate Affairs (MCA)
• Focus: Transparency, independence, and accountability in audits

Why is Section 139 Important?

Auditors play a pivotal role in corporate governance by providing an unbiased assessment of a company’s financial health. Section 139 ensures this process remains robust and credible. Here’s why it matters:

1. Ensures Independence: By limiting auditor tenure and mandating rotation, it prevents undue influence or familiarity between companies and auditors.
2. Boosts Transparency: Regular audits under Section 139 assure stakeholders—shareholders, creditors, and regulators—of accurate financial reporting.
3. Prevents Fraud: Independent audits help detect financial irregularities, protecting the company and its investors.
4. Compliance: Non-adherence to Section 139 can result in penalties, making it a legal necessity for companies.
5. Global Alignment: The provisions align with international standards like those of the International Federation of Accountants (IFAC), enhancing India’s corporate reputation.

For instance, high-profile corporate scandals like Satyam (2009) underscored the need for stringent audit regulations, prompting the inclusion of rotation rules in Section 139 to mitigate such risks.

Provisions of Section 139 of Companies Act 2013

Section 139 is divided into several subsections, each addressing a specific aspect of auditor appointment. Let’s explore them in detail:

Section 139(1): Mandatory Appointment of Auditors

• Requirement: Every company must appoint an auditor (individual or firm) at its first Annual General Meeting (AGM) within 30 days of incorporation or at subsequent AGMs.
• Tenure: The auditor holds office from the conclusion of the appointing AGM until the conclusion of the sixth AGM (5-year term), subject to annual ratification by shareholders (if applicable pre-2017 amendment).
• Process: Appointment is proposed by the Board of Directors, approved by shareholders via an ordinary resolution.

Section 139(2): Rotation of Auditors

• Applicability: Applies to:
  • Listed companies
  • Unlisted public companies with paid-up share capital ≥ ₹10 crore
  • Private companies with paid-up share capital ≥ ₹20 crore
  • Companies with public borrowings/deposits ≥ ₹50 crore
• Tenure Limits:
  • Individual Auditor: Maximum 1 term of 5 consecutive years
  • Audit Firm: Maximum 2 terms of 5 consecutive years (10 years total)
• Cooling-Off Period: After the maximum tenure, the auditor must wait 5 years before reappointment.
• Transition Period: Companies had until April 1, 2017, to comply with rotation norms from the Act’s enforcement.

Section 139(3): Members’ Power to Appoint

• Shareholders can resolve to:
  • Rotate the audit firm’s partners annually within the firm.
  • Appoint multiple auditors to conduct joint audits.

Section 139(4): Casual Vacancy

• Cause: Resignation, death, or disqualification of an auditor.
• Process:
  • Board fills the vacancy within 30 days (subject to shareholder approval within 3 months via AGM/EGM).
  • For government companies, the Comptroller and Auditor General (CAG) fills the vacancy within 30 days.

Section 139(5): Government Companies

• Authority: CAG appoints the auditor within 180 days from the financial year’s start.
• Tenure: Holds office until the next AGM.

Section 139(6): First Auditor

• Appointment: The Board appoints the first auditor within 30 days of incorporation.
• Tenure: Until the first AGM, where a regular auditor is appointed under Section 139(1).
• Vacancy: If the Board fails, shareholders appoint within 90 days via an Extraordinary General Meeting (EGM).

Section 139(7): Government Companies’ First Auditor

• CAG appoints within 60 days of incorporation; if delayed, the Board steps in within 30 days, followed by shareholders within 60 days if needed.

Section 139(8): Filling Casual Vacancy in Government Companies

• CAG fills within 30 days; if not, the Board does so within 30 days.

Section 139(9): Reappointment

• Auditors can be reappointed after their 5-year term, subject to rotation rules and eligibility under Section 141 (eligibility criteria).

Section 139(10): Default Appointment

• If no auditor is appointed at the AGM, the existing auditor continues unless disqualified.

Section 139(11): Exemptions

• Rules for rotation and tenure under Section 139(2) do not apply to:
  • One Person Companies (OPCs)
  • Small companies (paid-up capital < ₹50 lakh, turnover < ₹2 crore)

Applicability of Section 139

Section 139 applies to all companies incorporated under the Companies Act, 2013, but with variations:

• Listed Companies: Must comply with rotation and stricter norms.
• Unlisted Public Companies: Rotation applies if thresholds (capital ≥ ₹10 crore, borrowings ≥ ₹50 crore) are met.
• Private Companies: Rotation applies if capital ≥ ₹20 crore or borrowings ≥ ₹50 crore; otherwise, simpler rules apply.
• Small Companies/OPCs: Exempt from rotation but must appoint auditors.
• Government Companies: CAG oversees appointments.

For example, a private company with ₹15 crore paid-up capital isn’t subject to rotation, but one with ₹25 crore is.

Eligibility and Disqualification of Auditors

Section 139 works in tandem with Section 141, which defines who can be an auditor:

• Eligible: Chartered Accountants (CAs) or CA firms registered with the Institute of Chartered Accountants of India (ICAI).
• Disqualified:
  • Company employees or officers
  • Partners/relatives of company directors
  • Auditors holding company securities
  • Those convicted of fraud (disqualified for 10 years)

Process of Appointing an Auditor Under Section 139

Here’s how companies comply with Section 139:

Step 1: Board Recommendation

• The Board (or Audit Committee, if applicable) identifies an eligible auditor and proposes their appointment.

Step 2: Auditor Consent

• Obtain written consent from the auditor and a certificate confirming eligibility under Section 141.

Step 3: Shareholder Approval

• At the AGM, shareholders pass an ordinary resolution to appoint the auditor for 5 years (ratification was required annually pre-2017 amendment).

Step 4: Intimation to ROC

• File Form ADT-1 with the Registrar of Companies (ROC) within 15 days of appointment, detailing the auditor’s name, address, and tenure.

Step 5: Rotation Compliance

• For applicable companies, ensure rotation after 5/10 years, followed by a 5-year cooling-off period.

2017 Amendment: Key Changes to Section 139

The Companies (Amendment) Act, 2017, effective May 7, 2018, simplified Section 139:

• Removed Annual Ratification: Auditors no longer need yearly shareholder approval within their 5-year term, reducing administrative burden.
• Clarified Rotation: Transition period for rotation compliance extended to April 1, 2017, giving companies time to adapt.

This amendment reflects feedback from businesses seeking streamlined compliance without compromising audit integrity.

Penalties for Non-Compliance with Section 139

Failing to adhere to Section 139 invites penalties under Section 147:

• Company: Fine of ₹25,000 to ₹5 lakh.
• Officers: Fine of ₹10,000 to ₹1 lakh, imprisonment up to 1 year, or both.
• Auditor: Refund of remuneration, damages for losses, and fines of ₹25,000 to ₹5 lakh.

For example, if a company misses filing Form ADT-1, it risks a ₹25,000 fine, escalating with delays.

Role of Audit Committee and Board

For listed companies and certain public companies (capital ≥ ₹10 crore, borrowings ≥ ₹50 crore), an Audit Committee oversees auditor appointments:

• Recommends auditors to the Board.
• Ensures independence and eligibility.
• Monitors rotation compliance.

If no Audit Committee exists, the Board assumes these responsibilities.

Comparison with Companies Act, 1956 (Section 224)

Section 139 introduces significant upgrades over Section 224:

• Rotation: Absent in 1956; mandatory in 2013 for specified companies.
• Tenure: 1956 allowed indefinite tenure; 2013 caps at 5/10 years.
• Government Companies: CAG role formalized in 2013.
• Flexibility: 2017 amendment removed ratification, absent in 1956.

These changes reflect a shift toward global best practices.

Practical Implications of Section 139

Section 139 impacts companies in various ways:

• Cost: Rotation may increase audit fees due to new firm onboarding.
• Continuity: Loss of long-term auditor relationships can disrupt knowledge transfer.
• Compliance Burden: Small companies face simpler rules, while larger ones navigate rotation complexities.
• Audit Quality: Fresh perspectives from new auditors enhance scrutiny.

For instance, a listed company rotating its auditor after 10 years might incur higher initial costs but benefit from improved financial oversight.

Exemptions and Exceptions

Certain companies enjoy relaxed rules:

• Small Companies/OPCs: No rotation, simpler appointment process.
• Government Companies: CAG-driven appointments override standard norms.
• Dormant Companies: May be exempt if inactive, per MCA notifications.

Check MCA circulars for the latest exemptions.

Filing Requirements Under Section 139

Post-appointment, companies must:

• Form ADT-1: File with ROC within 15 days (penalty for delay: ₹25,000+).
• Auditor Consent: Attach consent letter and eligibility certificate.

Non-filing risks legal action and financial penalties.

Case Studies and Examples

1. Tata Sons (2017): Transitioned auditors post-rotation deadline, showcasing compliance with Section 139(2).
2. Satyam Scandal Fallout: Section 139’s rotation rules were partly inspired by such cases, ensuring no single auditor dominates long-term.

These examples highlight real-world applications of the law.

Challenges in Implementing Section 139

Companies face hurdles:

• Rotation Logistics: Finding new auditors with industry expertise.
• Cost Concerns: Small firms struggle with audit fee hikes.
• Awareness: Some private companies overlook filing deadlines.

The MCA addresses these through clarifications and support.

Recent Updates (As of March 22, 2025)

As of 2025, no major amendments to Section 139 have emerged since 2017, but:

• Digital Filing: Enhanced MCA portal streamlines ADT-1 submissions.
• NFRA Oversight: The National Financial Reporting Authority monitors audit quality, complementing Section 139.

Stay tuned to MCA notifications for evolving norms.

Conclusion

Section 139 of Companies Act 2013 is a vital cog in India’s corporate governance framework, ensuring auditors remain independent and accountable while safeguarding stakeholder interests. From mandatory appointments to rotation rules, it balances compliance with practicality, adapting to modern business needs. Whether you’re a company director, shareholder, or student of corporate law, understanding Section 139 equips you to navigate India’s regulatory landscape with confidence.