Background of Rule 5 of Companies (Audit and Auditor) Rules, 2014
1. Rule 5 seeks to determine the scope of the words ‘the class of companies’ used in Section 139 (2), to constitute: all unlisted companies having paid up share capital of Rs. 10 crores or more; all private limited companies having paid up share capital of Rs. 20 crores or more and all companies below the aforementioned threshold limits, but who have public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.
2. Section 139 (2) puts a bar on reappointment of an auditor for more than one term of five consecutive years and an audit firm as auditor for more than two terms of five consecutive years, with a bar on consecutive appointment of an individual auditor already appointed by the said company for a term. It also puts a restriction on the reappointment of an audit firm having common partners to any other audit firm, whose tenure has expired in a company immediately preceding the financial year of such reappointment.
3. Rule 5 seeks to classify the companies to whom the said provisions shall apply and seeks to define brackets on the basis of the paid up share capital investments in them (i.e. minimum of Rs.10 crores for all unlisted companies) and for private limited companies Rs. 20 crores . However, it wasn’t extended to the companies with less than Rs.10 crores of paid up share capital or public borrowings. Rule 5 therefore, is found limited in its scope.
Points to remember after Notification as per the notification dated 22nd June, 2017
1. One of the categories for class of companies is “all private companies having paid up share capital of Rs. 20 crore or more”, now this limit has been increased to 50 crores.
2. The word “twenty” mentioned in rule 5(b) has been substituted by word “fifty”.
Effect of the Change
Exemption to Every Private Limited Company which has a share capital upto Rs 50 crore– Therefore now the statutory auditor rotation requirement of changing the auditor every 5 years and audit firm for 10 years for every company is exempted for a private limited company which does not touch paid up share capital of Rs. 50 crore.
June 28th, 2017