Rules 10 and 10A 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.
Section 141(3) of the Companies Act, 2013 lists the persons who cannot be appointed as auditor. Rule 10 puts figures and a definition behind four of those grounds: a relative's holding of securities, indebtedness, guarantees and security for a third person's debt, and business relationships. Rule 10A requires the auditor's report to state whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness. 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.
A relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh; a person who, or whose relative or partner, is indebted to the company or its group in excess of rupees five lakh is not eligible; and a person who, or whose relative or partner, has given a guarantee or security for a third person's indebtedness to the company or its group in excess of one lakh rupees is not eligible (rule 10). "Business relationship" means any transaction for a commercial purpose, with two exceptions. The auditor's report must state about internal financial controls with reference to financial statements (rule 10A).
Rule 10(1): securities held by a relative
For the proviso to section 141(3)(d)(i), a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh. There are two provisos:
- the condition applies, wherever relevant, to a company not having share capital or other securities; and
- if a relative acquires any security or interest above the threshold, the corrective action to keep within the limits must be taken by the auditor within sixty days of the acquisition or interest.
So the test is face value, not market value, and the auditor has a sixty-day window to put things right if a relative's holding crosses the line.
Rule 10(2): indebtedness
For section 141(3)(d)(ii), a person who, or whose relative or partner, is indebted to the company, its subsidiary, its holding or associate company, or a subsidiary of such holding company, in excess of rupees five lakh is not eligible for appointment.
Rule 10(3): guarantee or security
For section 141(3)(d)(iii), a person who, or whose relative or partner, has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its subsidiary, its holding or associate company, or a subsidiary of such holding company, in excess of one lakh rupees is not eligible for appointment.
Rule 10(4): business relationship
For section 141(3)(e), "business relationship" means any transaction entered into for a commercial purpose, except:
- (i) commercial transactions that are professional services an auditor or audit firm is permitted to render under the Act and the Chartered Accountants Act, 1949 and the rules or regulations under them; and
- (ii) commercial transactions in the ordinary course of business of the company at arm's length price, such as sale of products or services to the auditor as a customer in the ordinary course by companies in businesses such as telecommunications, airlines, hospitals, hotels and similar businesses.
The four tests side by side
| Ground | Provision | Figure or test in the rule | Group covered |
|---|---|---|---|
| Relative's securities | Rule 10(1) | Face value not exceeding rupees one lakh; corrective action within sixty days of an excess | The company |
| Indebtedness | Rule 10(2) | In excess of rupees five lakh | Company, subsidiary, holding or associate company, or a subsidiary of the holding company |
| Guarantee or security for a third person | Rule 10(3) | In excess of one lakh rupees | Same group |
| Business relationship | Rule 10(4) | Any transaction for a commercial purpose, with two exceptions | As section 141(3)(e) provides |
Note that the indebtedness and guarantee tests reach the person, the person's relative and the person's partner, and are measured against the company and its wider group. An auditor who is part of a firm should check the position of every partner. The wider eligibility provisions, including other disqualifications, are explained in Section 141: Eligibility of Auditor. Our financial and legal due diligence service can test a proposed auditor's independence position against these figures before the Board's recommendation.
Rule 10A: internal financial controls
For section 143(3)(i), for financial years commencing on or after 1 April 2015, the auditor's report states about the existence of internal financial controls with reference to financial statements and its operating effectiveness. A proviso allowed the auditor to include the statement voluntarily for the financial year commencing on or after 1 April 2014 and ending on or before 31 March 2015. The words "internal financial controls with reference to financial statements" replaced an earlier phrase on "adequate internal financial controls system" in 2018. The matters an auditor's report covers are in Section 143: Auditor Powers and Duties, and the other matters in the report are in Rules 11 and 12.
A worked example
Whitestone Industries Limited (invented) proposes to appoint Lakshmi & Co., chartered accountants. Before the Board recommends the firm, the company checks: whether any relative of the proposed auditor holds securities of face value above rupees one lakh; whether any partner is indebted to Whitestone or a group company in excess of rupees five lakh; and whether any partner has stood guarantee for a third person's debt to the group above one lakh rupees. It finds that one partner's relative holds securities above the limit. The corrective action must be taken within sixty days of the acquisition. The firm completes the correction, and the company then proceeds with the appointment. Whitestone also confirms that a supply of its products to the firm as an ordinary customer, at arm's length, falls within exception (ii) to "business relationship".
Practical points
- Ask the proposed auditor for a written declaration covering relatives and partners before the Audit Committee meets; it also supports the certificate under Rule 4.
- Measure securities at face value.
- Diarise the sixty-day correction period if an excess arises after appointment.
- Review business dealings with the audit firm at each year-end for anything beyond permitted professional services and ordinary-course customer transactions.
Need help with auditor independence checks?
A disqualification found after appointment is expensive to unwind. We can run a pre-appointment independence review, document the declarations, and prepare the committee note through our financial and legal due diligence service. The appointment procedure itself is in Rules 1 to 5.
Key takeaways
- Relative's securities: face value not above rupees one lakh; sixty days for corrective action.
- Indebtedness above rupees five lakh disqualifies; guarantee or security above one lakh rupees disqualifies.
- Both tests extend to relatives and partners and to the company's group.
- "Business relationship" is any commercial transaction, except permitted professional services and ordinary-course arm's length customer sales.
- The auditor's report states on internal financial controls and their operating effectiveness for financial years from 1 April 2015.
Read next
- Section 141: Eligibility of Auditor
- Section 143: Auditor Powers and Duties
- Rules 11 and 12: other matters in the auditor's report and branch audit
- Rules 1 to 5: auditor appointment and ADT-1
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.