Section 139 of the Companies Act, 2013

When it comes to running a company, transparency and accountability are key. One of the pillars supporting these values is the role of auditors. In India, Section 139 of the Companies Act, 2013 lays out the framework for appointing auditors—a process essential for ensuring that a company’s financial statements are accurate and reliable. Let’s break down this section in easy-to-understand language.

Appointment of Auditors under Section 139

a. Mandatory Appointment

Section 139 requires that almost every company must appoint an auditor at its very first Annual General Meeting(AGM) following incorporation. Once appointed, the auditor holds office until the end of the 6^th AGM—meaning they serve a term of 5 years. If no new appointment or reappointment occurs at any AGM, the current auditor remains in office to prevent the position from being vacant.

b. Exceptions to Mandatory Appointment

Not all companies must appoint an auditor under Section 139. The main exceptions are:

Companies Covered by Other Statutes:

Companies audited under a separate, specific law—such as banks, insurance companies, or other entities governed by distinct financial regulations—fulfill the auditor appointment requirement under Section 139.

Special Statutory Provisions:

Companies established under specialized legislation may follow customized audit protocols. If these companies are already subject to a dedicated audit framework, they are exempt from following the general auditor appointment process outlined in Section 139.

The Appointment Process :

a. Initial Appointment

Board Meeting & Shortlisting:

The board of directors evaluates eligible auditors—either an individual Chartered Accountant or an audit firm—and shortlists candidates based on their qualifications, independence, and any potential conflicts of interest.

Written Consent & Documentation:

Before making an appointment, it is mandatory to obtain the auditor’s written consent. This consent must affirm that:

• The candidate is not disqualified from being an auditor.
• There are no pending proceedings against them.
• The proposed appointment complies with the statutory limits.

The company must file a notice, along with the auditor’s consent and certificate, with the Registrar of Companies (RoC) within 15 days of the appointment.

AGM Ratification:

At the first AGM (or a subsequent general meeting if the initial appointment was delayed), shareholders vote to approve the auditor’s appointment. If no new auditor is appointed, the existing auditor continues in office.

b. Appointment for Government Companies

For companies owned or controlled by the government, the Comptroller and Auditor General (CAG) is the designated authority to appoint the auditor.

• New Government Companies: The CAG must appoint the first auditor within 60 days of registration.
• If CAG Fails: Should the CAG not act within the stipulated time, the company’s Board is empowered to appoint an auditor within the next 30 days. If the Board also fails to do so, the members will appoint one at an extraordinary general meeting (EGM).

Reappointment of Auditors

Section 139(2) also governs the reappointment of auditors. The rules vary for individual auditors versus audit firms, and certain rotation requirements apply especially for listed companies and other prescribed categories.

a. For Individual Auditors

Reappointment Restrictions:

An individual auditor, upon completing a five-year term, is generally ineligible for reappointment for the next 5 years. This safeguard—primarily applicable to listed companies and companies meeting prescribed thresholds—ensures fresh oversight and helps maintain auditor independence.

b. For Audit Firms

Reappointment Limit:

An audit firm can be appointed for a five-year term and reappointed for one additional consecutive five-year term, totaling two consecutive terms. After serving for two consecutive terms (each of 5 years), the audit firm becomes ineligible for further consecutive reappointment under the prescribed rules.

c. Regulatory Thresholds for Rotation

Section 139(2) and the Companies (Audit and Auditors) Rules, 2014, specify that rotation rules apply to:

• All listed companies.
• Unlisted companies with a paid-up share capital of Rs. 10 crores or more.
• Private companies with a paid-up share capital of Rs. 20 crores or more.
• Companies that have borrowed Rs. 50 crores or more from banks or financial institutions.
• Companies that have accepted public deposits amounting to Rs. 50 crores or more.

Vacancies and Casual Vacancies

If an auditor’s position becomes empty—whether due to resignation, death, or disqualification—Section 139(8) outlines what should happen. The process is slightly different depending on who appoints the auditor.

For Companies Without a CAG-Appointed Auditor:

The Board of Directors must fill the vacancy within 30 days. If an auditor resigns, the Board must appoint a replacement, and the shareholders must approve the appointment at a general meeting within three months. The new auditor serves until the next Annual General Meeting.

For Companies With a CAG-Appointed Auditor:

The Comptroller and Auditor-General of India (CAG) should fill the vacancy within 30 days. If the CAG doesn’t act within that time, the Board of Directors can step in and fill the vacancy within the next 30 days.

This process ensures that there is no long gap without an auditor, keeping the company’s financial oversight continuous and effective.

Punishment for Non-Compliance

Non-compliance with Section 139 can result in penalties under Section 147(1) of the Act:

• For the Company: A fine of up to Rs. 5 lakhs may be imposed, with a minimum fine of Rs. 25,000.
• For Defaulting Officers: Officers responsible for the default can be fined up to Rs. 1 lakh, with a minimum of Rs. 10,000.

Section 139 of the Companies Act, 2013 is a cornerstone provision in India’s corporate governance framework. It not only mandates the appointment of auditors but also sets clear rules for reappointment, rotation, and removal—ensuring that companies maintain financial transparency and accountability.

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