Auditor Rotation Section 139: Terms and Limits

Auditor rotation section 139 sets two different clocks. One is the ordinary term of appointment, which runs from annual general meeting to annual general meeting for every company. The other is the mandatory rotation ceiling, which applies only to listed companies and prescribed classes, and which caps an individual at five years and a firm at ten. This guide covers both, plus the cooling off period, the common partner rule that stops a cosmetic change of firm, and the appointment machinery for first auditors and casual vacancies. It is not investment advice.

How auditor rotation section 139 measures a term

Start with the ordinary term in section 139(1), which applies to every company. At the first annual general meeting the company appoints an individual or a firm as auditor, to hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting, and thereafter till the conclusion of every sixth meeting. The manner and procedure of selection by the members is left to be prescribed.

An Explanation to the sub-section settles a question that would otherwise recur throughout the chapter: "appointment" includes re-appointment.

A note on the text. The first proviso to section 139(1) was omitted by Act 1 of 2018, section 40, with effect from 7 May 2018. The India Code text renders the gap as a row of asterisks, which is why the surviving provisos begin with the words "Provided further" with nothing before them. This page does not state what the omitted proviso said, because the footnote records the omission without reproducing the text. Read the amending Act if you need the position as it stood before that date.

The provisos that remain require, before the appointment is made:

• the written consent of the auditor to the appointment
• a certificate from the auditor that the appointment, if made, shall be in accordance with such conditions as may be prescribed
• that the certificate also indicate whether the auditor satisfies the criteria provided in section 141, which is the eligibility and disqualification section
• that the company inform the auditor of the appointment and file a notice of the appointment with the Registrar within fifteen days of the meeting

The rotation ceiling, and who it binds

Section 139(2) does not apply to every company. It binds listed companies, and companies belonging to such class or classes of companies as may be prescribed. The sub-section is drafted as a prohibition on that population and opens with the words "No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint". Within it:

The second proviso is the one that does the real work, because without it the ceiling would be easy to walk around. As on the date of appointment, no audit firm having a common partner or partners to the other audit firm whose tenure has expired in a company immediately preceding the financial year shall be appointed as auditor of the same company for a period of five years. A new letterhead carrying the same partners does not reset the clock.

A further proviso, substituted by notification number S.O. 2264(E) dated 30 June 2016 with effect from 1 April 2014, sets the transition for companies that already existed. Every company existing on or before the commencement of the Act which is required to comply with the sub-section shall comply with it within a period not later than the date of the first annual general meeting of the company held, within the period specified under section 96(1), after three years from the date of commencement of the Act.

The last proviso preserves two rights against the whole sub-section: nothing in it prejudices the right of the company to remove an auditor or the right of the auditor to resign. Auditor removal under section 140 covers both.

Rotation the members can add for themselves

Section 139(3) lets members go further than the section requires. Subject to the Act, members may resolve that:

• (a) in the audit firm appointed by them, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or
• (b) the audit shall be conducted by more than one auditor

Section 139(4) then lets the Central Government prescribe by rules the manner in which companies rotate their auditors under sub-section (2).

An Explanation to the sub-section provides that for the purposes of the chapter the word "firm" includes a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009).

Who appoints, and by when

The appointment machinery differs by company type and by circumstance. The deadlines are the part worth holding.

An auditor appointed under section 139(5) holds office till the conclusion of the annual general meeting. A first auditor under 139(6) or 139(7) holds office till the conclusion of the first annual general meeting. A casual vacancy appointee under 139(8)(i) holds office till the conclusion of the next annual general meeting.

The resignation rider in 139(8)(i) is the one to notice. Where a casual vacancy in a non-CAG company is a result of the resignation of an auditor, the Board's appointment must also be approved by the company at a general meeting convened within three months of the recommendation of the Board. A vacancy caused by death or disqualification carries no such member approval step. So a resignation triggers a shareholder meeting that other vacancies do not.

Re-appointment, and the default when nothing happens

Section 139(9) allows a retiring auditor to be re-appointed at an annual general meeting if three things hold:

1. he is not disqualified for re-appointment
2. he has not given the company a notice in writing of his unwillingness to be re-appointed
3. a special resolution has not been passed at that meeting appointing some other auditor, or providing expressly that he shall not be re-appointed

Section 139(10) covers inaction: where at any annual general meeting no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

Section 139(11) adds a procedural gate for companies required to constitute an Audit Committee under section 177: all appointments, including the filling of a casual vacancy, shall be made after taking into account the recommendations of that committee.

What an outside reader can see

Most of section 139 runs inside the company. What reaches the public record is the appointment notice filed with the Registrar within fifteen days, the resolution at the general meeting, and, for a listed company, the announcement of the change to the exchanges.

• Auditor removal under section 140 covers the four statutory routes by which an auditor's tenure ends early.
• How to track auditor resignations is the practical route to finding a change of auditor in exchange and Registrar filings.
• Section 143(12) auditor fraud reporting covers the duty that sometimes sits behind an abrupt change.
• How to read a corporate governance report covers the audit committee that section 139(11) routes appointments through.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.