Rules 1 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rules 1 to 5 deal with how a statutory auditor is chosen and appointed: the Audit Committee's or Board's assessment, the recommendation to the annual general meeting, the term, the auditor's certificate, notice to the Registrar in Form ADT-1, and the classes of company that must rotate auditors under section 139(2). This article follows the rules as amended up to G.S.R. 359(E) dated 30 May 2025 (in force 14 July 2025) per the MCA e-book. Later amendments should be checked.
The Audit Committee (or the Board, where no committee is required) must weigh the qualifications and experience of the proposed auditor against the size and requirements of the company, and have regard to any pending professional-conduct proceedings (rule 3(1)). The auditor appointed at an annual general meeting holds office from its conclusion till the conclusion of the sixth annual general meeting, counting the appointing meeting as the first (rule 3(7)). The auditor gives a certificate on four points (rule 4(1)) and the company notifies the Registrar in Form ADT-1 (rule 4(2)).
Rules 1 and 2
Rule 1 names the rules, the Companies (Audit and Auditors) Rules, 2014, and says they came into force on 1 April 2014. The notification (G.S.R. 246(E), 31 March 2014) was made under sections 139, 140, 141(3), 143 and 148(3). Rule 2 defines "Act", "Annexure", "fees" (as specified in the Registration Offices and Fees Rules), "Form" or "e-Form" and "section", and gives words the meaning in the Act or the Definitions Details Rules.
Rule 3: how the auditor is selected
| Sub-rule | Requirement |
|---|---|
| 3(1) | Where an Audit Committee is required under section 177, the committee, and otherwise the Board, considers the qualifications and experience of the individual or firm proposed and whether they are commensurate with the size and requirements of the company. Proviso: it has regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India, any competent authority or any Court |
| 3(2) | The committee or Board may call for such other information from the proposed auditor as it thinks fit |
| 3(3) | Where there is an Audit Committee, it recommends the name of an individual or firm to the Board; in other cases the Board considers and recommends an auditor to the members at the annual general meeting |
| 3(4) | If the Board agrees with the Audit Committee's recommendation, it further recommends the appointment to the members at the annual general meeting |
| 3(5) | If the Board disagrees, it refers the recommendation back to the committee for reconsideration, citing reasons |
| 3(6) | If the committee, having considered the reasons, decides not to reconsider, the Board records its reasons for disagreement and sends its own recommendation to the members; if the Board agrees with the committee, it places the matter before members |
| 3(7) | The auditor appointed at the annual general meeting holds office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting at which the appointment is made counted as the first meeting |
The Explanation and proviso that formerly required annual ratification by the members were omitted by the Second Amendment Rules of 7 May 2018, so the rule now runs on the six-meeting term without ratification. For the Act's provisions, see Section 139: Auditor Appointment. Our compliance advisory team can prepare the committee note and the recommendation papers.
Rule 4: the auditor's certificate and ADT-1
4(1). The auditor appointed under rule 3 submits a certificate that:
- (a) the individual or firm is eligible for appointment and is not disqualified under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
- (b) the proposed appointment is as per the term provided under the Act;
- (c) the proposed appointment is within the limits laid down by or under the authority of the Act; and
- (d) the list of proceedings against the auditor, the audit firm or any partner of the firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
4(2). The notice to the Registrar about the appointment under the fourth proviso to section 139(1) is in Form ADT-1. The form was substituted by the Amendment Rules of 2018. The rule itself prints no period for filing; the time limit is in section 139(1), and the fee is as provided in the Registration Offices and Fees Rules. A step-by-step guide is at How to File Form ADT-1: Appointment of Auditor, with the wider process in Statutory Auditor: Appointment, ADT-1 and Rotation.
Rule 5: classes of company that must rotate
For section 139(2), the classes of companies are the following, excluding One Person Companies and small companies:
| Clause | Class |
|---|---|
| (a) | All unlisted public companies having paid up share capital of rupees ten crore or more |
| (b) | All private limited companies having paid up share capital of rupees fifty crore or more |
| (c) | All companies having paid up share capital below the threshold limits in (a) and (b), but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more |
The word "fifty" in clause (b) was substituted for "twenty" by the Second Amendment Rules of 22 June 2017. Rule 5 sets out only the classes; listed companies are dealt with in section 139(2) itself, and the manner of counting the years is in rule 6, which has its own article: see Auditor Rotation Computation Under Rule 6: Counting the Earlier Years. The Act's rotation limits are explained in Auditor Rotation Under Section 139(2): Five Years, Ten Years, Cooling Off.
A worked example
Granth Packaging Limited (invented) is an unlisted public company with paid up share capital above ten crore rupees and is therefore within rule 5(a). Its Audit Committee assesses a firm's qualifications and experience, checks for pending conduct proceedings, and recommends the firm to the Board. The Board agrees and recommends the firm to the members at the annual general meeting. The firm is appointed at that meeting and holds office until the conclusion of the sixth annual general meeting, counting that meeting as the first. The firm gives the four-point certificate, and the company files Form ADT-1.
Practical points
- Where no Audit Committee is required, the Board does the assessment under rule 3(1) and the recommendation under rule 3(3).
- Record in the minutes the factors considered: size and requirements of the company, qualifications, experience and pending proceedings.
- Obtain the rule 4 certificate before the appointment resolution is filed.
- Check rule 5 each year, because a company that crosses a threshold falls within the rotation classes.
Need help with auditor appointment and rotation?
Appointment papers, the certificate and the ADT-1 are routine until a Board disagrees with its committee or a threshold is crossed. We can draft the committee recommendation, the Board and AGM resolutions and check the rotation position through our compliance advisory service. Removal and resignation are in Rules 7 to 9, and disqualifications in Rules 10 and 10A.
Key takeaways
- The Audit Committee (or Board) assesses qualifications and experience against the company's size and requirements.
- The Board either accepts the Audit Committee's recommendation or sends it back with reasons.
- Term: from the conclusion of the appointing AGM to the conclusion of the sixth AGM.
- Certificate on four points; Form ADT-1 to the Registrar.
- Rotation classes: unlisted public companies at ten crore rupees paid up, private companies at fifty crore rupees paid up, and heavily borrowed or deposit-taking companies at fifty crores.
Read next
- Section 139: Auditor Appointment
- Statutory Auditor: Appointment, ADT-1 and Rotation
- Auditor Rotation Computation Under Rule 6
- Rules 7 to 9: removal, resignation and partners' liability
Disclaimer: Based on the Companies Act, 2013 rules (and the Companies (Auditor's Report) Order, 2020) named above as consolidated in the MCA e-book (consulted on 3 October 2026), with the later notifications the article names. Later amendments, fees, forms and the Companies Act, 2013 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.