Category: MCA (Companies)

National Financial Reporting Authority (NFRA) under Section 132: Functions, Investigation Powers and Penalties on Auditors

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The NFRA is the audit regulator set up under section 132 of the Companies Act, 2013. It recommends accounting and auditing standards, monitors compliance with them and oversees the quality of audit services.
  • It can investigate professional or other misconduct by chartered accountants and firms, with the powers of a civil court, and once it starts an investigation no other body can proceed on the same misconduct.
  • Penalty on proof of misconduct: Rs 1 lakh up to five times the fees for an individual, and Rs 5 lakh up to ten times the fees for a firm, plus debarment from six months up to ten years.
  • An aggrieved person can appeal to the Appellate Tribunal.

Until the Companies Act, 2013, audit quality in India was supervised mainly by the profession’s own body, the Institute of Chartered Accountants of India. Section 132 brought in a statutory regulator, the National Financial Reporting Authority (NFRA), which the Central Government constitutes by notification.

What the NFRA does (section 132(2))

  1. Recommends to the Central Government accounting and auditing policies and standards for companies or classes of companies and their auditors.
  2. Monitors and enforces compliance with accounting standards and auditing standards, in the prescribed manner.
  3. Oversees the quality of service of the professions associated with ensuring compliance with those standards, and suggests measures for improvement.
  4. Performs other related functions as prescribed.

The Central Government prescribes accounting standards (section 133) and auditing standards (section 143(10)) as recommended by ICAI, in consultation with and after examination of the NFRA’s recommendations. The Government can also direct that the audit report of a class of companies include a statement on specified matters, in consultation with the NFRA (section 143(11)); the Companies (Auditor’s Report) Order is made under this power.

Composition

A chairperson who is a person of eminence with expertise in accountancy, auditing, finance or law, and not more than fifteen other members, part-time and full-time, as prescribed. The chairperson and members declare that there is no conflict of interest. Full-time members cannot be associated with any audit firm, including related consultancy firms, during their appointment and for two years after. The NFRA works through divisions, each headed by the chairperson or an authorised full-time member, and an executive body of the chairperson and full-time members. Its head office is in New Delhi.

Investigation and enforcement (section 132(4))

  • The NFRA can investigate, either on its own motion or on a reference from the Central Government, matters of professional or other misconduct by any member or firm of chartered accountants, for the class of bodies corporate or persons prescribed. “Professional or other misconduct” has the meaning given in section 22 of the Chartered Accountants Act, 1949.
  • Once the NFRA has begun an investigation, no other institute or body may start or continue proceedings on that misconduct.
  • It has the powers of a civil court for discovery and production of books and documents, summoning and examining persons on oath, inspecting books, registers and documents, and issuing commissions for examination of witnesses or documents.

Penalties and debarment

Where misconduct is proved, the NFRA can order:

Against Penalty
An individual Not less than Rs 1 lakh, up to five times the fees received
A firm Not less than Rs 5 lakh, up to ten times the fees received

It can also debar the member or firm from being appointed as an auditor or internal auditor, from undertaking any audit of financial statements or internal audit, and from performing valuation under section 247, for a minimum of six months and up to ten years.

Appeal

A person aggrieved by an NFRA order imposing a penalty or debarment can appeal to the Appellate Tribunal in the prescribed manner and on payment of the prescribed fee (section 132(5)).

Accounts and reporting

The NFRA keeps accounts as prescribed, its accounts are audited by the Comptroller and Auditor-General, and its annual report and the CAG’s audit report are laid before each House of Parliament.

What it means for companies and auditors

  • Audit firms should treat the NFRA’s standards and quality expectations as part of their working papers and engagement planning.
  • Which bodies corporate fall under the NFRA’s investigation jurisdiction is set in the Rules (the National Financial Reporting Authority Rules, 2018); these thresholds are not in the Act, so check the current Rules before concluding that your company or client is or is not covered.
  • Where the NFRA starts an investigation, ICAI’s disciplinary process on the same matter stops.

Points to check

  • This post follows section 132 of the Companies Act as published on India Code, including amendments up to the footnotes in that edition.
  • Details of the NFRA’s procedure, jurisdiction thresholds and fees are in the Rules, which were not reviewed for this post.

Frequently asked questions

What is the NFRA?

The National Financial Reporting Authority is the audit and accounting regulator constituted by the Central Government under section 132 of the Companies Act, 2013, with its head office at New Delhi.

What does the NFRA do?

It recommends accounting and auditing policies and standards to the Central Government, monitors and enforces compliance with them, and oversees the quality of service of the professions associated with ensuring compliance, suggesting improvements.

Can the NFRA investigate chartered accountants?

Yes. It can investigate, on its own or on a reference from the Central Government, professional or other misconduct by a member or firm of chartered accountants, for the class of bodies corporate or persons prescribed. Once it has started, no other institute or body can start or continue proceedings on that misconduct.

What penalties can the NFRA impose?

On proof of misconduct, a penalty of Rs 1 lakh to five times the fees received for an individual, and Rs 5 lakh to ten times the fees for a firm, and a bar on being an auditor, internal auditor or valuer for six months up to ten years.

Who can be on the NFRA?

A chairperson of eminence in accountancy, auditing, finance or law, and not more than fifteen other part-time and full-time members, who must declare no conflict of interest. Full-time members cannot be associated with an audit firm during their term and for two years after.

Can an NFRA order be appealed?

Yes, to the Appellate Tribunal in the prescribed manner and on payment of the prescribed fee.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Powers and Duties of a Statutory Auditor (Sections 143 to 147): Audit Report, Fraud Reporting, Prohibited Services and Penalties

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • An auditor has a right of access at all times to the books and vouchers and may ask officers for any information needed. The audit report must say whether the accounts give a true and fair view and whether the company has adequate internal financial controls with reference to financial statements.
  • The auditor must report suspected fraud by officers or employees: to the Central Government above the prescribed amount, otherwise to the audit committee or the Board.
  • An auditor cannot provide services such as bookkeeping, internal audit, financial information system design, actuarial, investment advisory, investment banking, outsourced financial services or management services.
  • For contravening sections 139, 143, 144 or 145 the fine is Rs 25,000 to Rs 5 lakh or four times the remuneration, whichever is less. Wilful deception can mean up to one year in prison and a fine of up to Rs 25 lakh.

The statutory auditor is appointed by the members to protect them, so the Companies Act, 2013 gives the auditor wide powers, a long list of things that the audit report must say, and strong penalties when those duties are not performed.

Powers (section 143(1))

  • A right of access at all times to the books of account and vouchers of the company, wherever they are kept.
  • The right to require from officers of the company any information and explanation needed for the audit.
  • A duty to inquire, among other matters, whether: loans and advances made against security are properly secured and not prejudicial to the company or its members; transactions represented only by book entries are prejudicial; shares, debentures or other securities (other than by an investment or banking company) were sold below their purchase price; loans and advances are shown as deposits; personal expenses are charged to revenue account; and, where shares are said to have been allotted for cash, cash was actually received.
  • The auditor of a holding company has access to the records of its subsidiaries and associate companies as far as consolidation requires.
  • The accounts of a branch office are audited either by the company’s auditor or by another qualified person appointed under section 139 (or, for a branch outside India, by a local qualified person).

What the audit report must contain (section 143(2) to (4))

The auditor reports to the members on the accounts and every financial statement laid before the company in general meeting, taking account of the Act, accounting and auditing standards and the matters required by rules or by an order under section 143(11) (such as CARO). The report states whether, to the best of the auditor’s information and knowledge, the accounts give a true and fair view of the state of affairs, profit or loss and cash flow for the year.

It must also state:

  1. whether all information and explanations needed were obtained, and if not, the details and effect;
  2. whether proper books of account have been kept, and proper returns received from branches not visited;
  3. how a separate branch auditor’s report was dealt with;
  4. whether the balance sheet and profit and loss account agree with the books and returns;
  5. whether the financial statements comply with the accounting standards;
  6. observations on financial transactions or matters with an adverse effect on the company’s functioning;
  7. whether any director is disqualified under section 164(2);
  8. any qualification, reservation or adverse remark on the maintenance of accounts;
  9. whether the company has adequate internal financial controls with reference to financial statements and the operating effectiveness of those controls; and
  10. such other matters as are prescribed.

Where any item is answered in the negative or with a qualification, the report must give the reasons.

Every auditor must comply with the auditing standards (section 143(9)); until the Central Government notifies standards on the recommendation of ICAI, the standards specified by ICAI are deemed to be the standards.

Reporting fraud (section 143(12) and (15))

If, in the course of duties, the auditor has reason to believe that an offence of fraud involving the prescribed amount is being or has been committed in the company by its officers or employees, the auditor reports it to the Central Government within the prescribed time and manner. For a fraud below the prescribed amount, the report goes to the audit committee (or to the Board, where there is no audit committee). The company must disclose such frauds, reported to the committee or Board but not to the Government, in the Board’s report. A report made in good faith is not a breach of any other duty (section 143(13)). The same section applies to cost accountants doing cost audit and company secretaries doing secretarial audit.

Penalty for failing to report: Rs 5 lakh in a listed company, and Rs 1 lakh in any other company. The prescribed amount, time and form are in the Companies (Audit and Auditors) Rules, 2014, so check the current figures there.

Services an auditor cannot render (section 144)

An auditor may provide other services only if the Board or audit committee approves them, and never these, directly or indirectly, to the company, its holding company or its subsidiary: accounting and bookkeeping; internal audit; design and implementation of any financial information system; actuarial services; investment advisory services; investment banking services; outsourced financial services; management services; and any other prescribed service. “Directly or indirectly” includes services through relatives, partners, a parent, subsidiary or associate entity, or any entity in which the auditor or a partner has significant influence or control, or whose name or brand is used. An auditor who renders any such service is also disqualified under section 141(3)(i).

Signing the report (section 145)

The auditor signs the report, and signs or certifies any other document of the company, in accordance with section 141(2) (only partners who are chartered accountants sign for a firm). Qualifications, observations or adverse comments on financial transactions in the report are read before the company in general meeting and open to inspection by any member.

Penalties (section 147)

Who and what Consequence
Company contravening sections 139 to 146 Fine of Rs 25,000 to Rs 5 lakh; every officer in default, Rs 10,000 to Rs 1 lakh
Auditor contravening section 139, 143, 144 or 145 Fine of Rs 25,000 to Rs 5 lakh, or four times the remuneration, whichever is less
Auditor acting knowingly or wilfully to deceive the company, shareholders, creditors or tax authorities Imprisonment up to one year and fine of Rs 50,000 to Rs 25 lakh, or eight times the remuneration, whichever is less
Auditor convicted under section 147(2) Refund of remuneration and damages for loss caused by incorrect or misleading statements in the audit report (to the company, statutory bodies, members or creditors)
Audit firm, where partners acted fraudulently The partners and the firm are jointly and severally liable; for criminal liability other than fine, only the partners concerned

The Tribunal can also direct a change of auditor where the auditor has acted fraudulently or colluded in fraud, and the auditor is barred from appointment for five years under section 140(5).

Points to check

  • The amount above which fraud goes to the Central Government, and the time and form of reporting, are set by the Rules and can change.
  • Listed companies and other classes face further reporting duties from the Companies (Auditor’s Report) Order and SEBI rules, which this post does not cover.
  • The text above follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition.

Frequently asked questions

What are the main powers of a company auditor?

A right of access at all times to the books of account and vouchers, wherever kept, the right to require information and explanations from officers, and, for a holding company’s auditor, access to the records of subsidiaries and associates for consolidation.

What must the audit report state?

Whether the accounts give a true and fair view, whether all information was obtained, whether proper books were kept, whether the balance sheet and profit and loss account agree with the books, whether the financial statements comply with accounting standards, adverse observations, director disqualification, qualifications on accounts and adequacy and operating effectiveness of internal financial controls.

Does the auditor have to report fraud?

Yes. If the auditor has reason to believe that an offence of fraud involving the prescribed amount is being or has been committed by officers or employees, it is reported to the Central Government. Smaller frauds are reported to the audit committee or the Board, and the company must disclose them in the Board’s report.

Which services is an auditor barred from providing?

Accounting and bookkeeping, internal audit, design and implementation of financial information systems, actuarial services, investment advisory, investment banking, outsourced financial services, management services and any other service prescribed, whether direct or indirect, to the company, its holding or its subsidiary.

What is the penalty if an auditor fails to report fraud?

A penalty of Rs 5 lakh for a listed company and Rs 1 lakh for any other company.

Can an auditor be held liable to refund fees?

Yes. On conviction under section 147(2) the auditor must refund the remuneration received and pay damages for loss caused by incorrect or misleading statements in the audit report.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Dividend under the Companies Act, 2013: Sources, Interim Dividend, Payment, Unpaid Dividend Account and IEPF (Sections 123, 124, 127)

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A company can pay dividend only out of profits of the year (after depreciation under Schedule II), undistributed profits of earlier years, both, or money provided by a Government under a guarantee. Unrealised and notional gains are excluded, and past losses and unprovided depreciation must be set off first.
  • The Board can declare an interim dividend. The dividend amount must be deposited in a separate scheduled bank account within five days of declaration, and paid within 30 days.
  • Dividend unpaid or unclaimed for 30 days goes to the Unpaid Dividend Account within seven days; after seven years it goes to the Investor Education and Protection Fund, along with shares on which no dividend was claimed for seven consecutive years.
  • Failure to pay within 30 days attracts 18% simple interest on the company and imprisonment up to two years for a director who knowingly is party to the default.

A dividend is a share of the profits paid to members, so the Companies Act, 2013 allows it only from specific sources, requires the money to be put aside promptly, and protects shareholders who have not collected it.

Where dividend can come from (section 123(1))

A company can declare or pay dividend for a financial year only:

  • (a) out of the profits of that year after providing for depreciation under Schedule II, or out of undistributed profits of previous years after providing for depreciation, or out of both; or
  • (b) out of money provided by the Central or a State Government for the payment of dividend under a guarantee given by that Government.

In computing profits, any amount representing unrealised gains, notional gains or revaluation of assets, and any change in the carrying amount of an asset or liability on fair value measurement, is excluded.

Other conditions

  • Before declaring dividend for a year, the company may transfer such percentage of the year’s profits to its reserves as it considers appropriate.
  • Where profits are inadequate or absent and the company proposes to pay from accumulated profits earlier transferred to free reserves, it must follow the prescribed rules.
  • No dividend may be declared or paid from reserves other than free reserves.
  • No dividend can be declared unless previous losses carried over and depreciation not provided in earlier years are set off against the current year’s profit.
  • A company that fails to comply with sections 73 and 74 (deposits) cannot declare dividend on its equity shares while the failure continues.

Interim dividend (section 123(3))

The Board can declare an interim dividend during any financial year, or at any time from the closing of the year until the AGM, out of the surplus in the profit and loss account, or out of the profits of the year for which it is declared, or out of profits generated up to the quarter before the date of declaration. If the company has incurred a loss in the current year up to that quarter, the interim dividend cannot be at a rate higher than the average dividends declared in the preceding three financial years.

Payment (section 123(4) and (5))

  • The amount of the dividend, including interim dividend, must be deposited in a separate account in a scheduled bank within five days from the date of declaration.
  • Dividend is paid only to the registered shareholder, or to his order or his banker, and not otherwise than in cash. It may be paid by cheque, warrant or in any electronic mode. Issuing fully paid bonus shares by capitalising profits or reserves is not prohibited.

Unpaid or unclaimed dividend (section 124)

  1. A dividend that is not paid or claimed within 30 days of declaration is transferred, within seven days after those 30 days, to a special account called the Unpaid Dividend Account in a scheduled bank.
  2. Within 90 days of the transfer, the company prepares and places on its website (and a website approved by the Central Government) a statement of names, last known addresses and amounts.
  3. If the company defaults in the transfer, it pays interest at 12% a year on the amount not transferred, for the benefit of the members in proportion.
  4. A person entitled can apply to the company for payment of the money.
  5. Money that remains unpaid or unclaimed for seven years from the date of transfer goes, with accrued interest, to the Investor Education and Protection Fund (section 125).
  6. Shares on which dividend has not been paid or claimed for seven consecutive years or more are transferred to the IEPF. A claimant can claim them back from the IEPF by the prescribed procedure. If a dividend is paid or claimed in any year within the seven years, the shares are not transferred.
  7. Penalty (section 124(7)): the company is liable to a penalty of Rs 1 lakh and a further Rs 500 a day (maximum Rs 10 lakh), and every officer in default to Rs 25,000 and a further Rs 100 a day (maximum Rs 2 lakh).

Failure to pay a declared dividend (section 127)

If a declared dividend is not paid, or the warrant is not posted, within 30 days of declaration to a shareholder entitled to it:

  • every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine of not less than Rs 1,000 for every day the default continues; and
  • the company is liable to pay simple interest at 18% a year during the default.

No offence is committed where the dividend could not be paid by reason of the operation of any law; where a shareholder’s directions cannot be complied with and this has been communicated to him; where there is a dispute about the right to receive it; where it has been lawfully adjusted against a sum the shareholder owes the company; or where for any other reason the failure was not due to the company’s default.

A short dividend checklist

  1. Compute distributable profits: current year profit after Schedule II depreciation, less past losses and unprovided depreciation, excluding unrealised and notional gains.
  2. Board recommends (or declares an interim) dividend; members approve the final dividend at the AGM.
  3. Deposit the amount in a separate scheduled bank account within five days of declaration.
  4. Pay within 30 days, electronically where possible, to registered holders.
  5. Move unclaimed amounts to the Unpaid Dividend Account on time, publish the statement within 90 days, and track the seven year clock for IEPF transfer of money and shares.

Points to check

  • This post follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition. The Rules on dividend out of accumulated profits (the conditions for paying when profits are inadequate), the form of the unpaid dividend statement, and the IEPF Rules for transfer and claim were not reviewed.
  • Tax on dividend in the hands of the shareholder and TDS on dividend are governed by the Income-tax law and are not covered here.
  • Listed companies also follow SEBI’s listing regulations on dividend policy and record dates.

Frequently asked questions

Out of what can a company pay dividend?

Out of the profits of the current year after providing for depreciation as per Schedule II, out of undistributed profits of previous years after depreciation, out of both, or out of money provided by the Central or a State Government under a guarantee. Unrealised gains, notional gains and revaluation gains are excluded when computing profits.

Can dividend be paid out of reserves?

Not from reserves other than free reserves. Where profits are inadequate or absent and the company proposes to pay from accumulated profits transferred to free reserves, it must follow the prescribed rules. No dividend can be declared unless carried over previous losses and unprovided depreciation have been set off against the current year’s profit.

What is an interim dividend?

A dividend the Board declares during the financial year, or between the year end and the AGM, out of the surplus in the profit and loss account, the profits of that year, or profits up to the quarter before the declaration. If the company has a loss up to the previous quarter, the interim dividend rate cannot exceed the average of the dividends in the preceding three financial years.

When must the dividend be paid?

The amount must be deposited in a separate account in a scheduled bank within five days of declaration, and paid, or the warrant posted, within 30 days from the date of declaration. It is paid only to the registered shareholder or to his order or banker, in cash, by cheque or warrant, or electronically.

What happens to dividend not claimed?

Within seven days after the 30 day period, the unpaid or unclaimed amount is transferred to the Unpaid Dividend Account. Within 90 days a statement of names, addresses and amounts is placed on the company’s website. After seven years the amount goes to the Investor Education and Protection Fund, and shares on which dividend has not been paid or claimed for seven consecutive years are transferred to the IEPF as well.

What if the company cannot pay dividend because of a deposit default?

A company that fails to comply with sections 73 and 74 on deposits cannot declare any dividend on its equity shares while the failure continues.

What is the penalty for not paying a declared dividend?

Under section 127, every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine of not less than Rs 1,000 for each day of default, and the company pays simple interest at 18% a year during the default. Exceptions apply, for example where payment is prevented by law, there is a dispute about the right to the dividend or the shareholder’s directions cannot be complied with.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Corporate Social Responsibility under Section 135 of the Companies Act, 2013: Applicability, CSR Committee, 2% Spend, Unspent Amount and Penalty

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • CSR applies to a company with a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more in the immediately preceding financial year.
  • Such a company has a CSR Committee of three or more directors (at least one independent, or two or more directors where no independent director is required), unless its CSR obligation is up to Rs 50 lakh, in which case the Board does the committee’s work.
  • The Board must ensure that at least 2% of the average net profits of the three preceding financial years is spent under the CSR policy, with preference to the local area.
  • Unspent amounts go to a Schedule VII fund within six months, or, for an ongoing project, to the Unspent CSR Account within 30 days of year end and be spent within three years. Penalty is twice the amount or Rs 1 crore (company) and one-tenth or Rs 2 lakh (officer), whichever is less.

Section 135 of the Companies Act, 2013 makes corporate social responsibility (CSR) a legal obligation for larger companies. It tells you who is covered, who in the company must decide, how much must be spent, and what happens to money that is not spent.

Who is covered (section 135(1))

Every company having, during the immediately preceding financial year:

  • a net worth of Rs 500 crore or more, or
  • a turnover of Rs 1,000 crore or more, or
  • a net profit of Rs 5 crore or more.

Meeting any one of the three tests is enough.

CSR Committee (section 135(1), (2), (9))

  • A CSR Committee of the Board of three or more directors, of whom at least one is an independent director. A company that is not required to appoint an independent director under section 149(4) has two or more directors on it.
  • The Board’s report discloses the composition of the Committee.
  • If the amount the company must spend does not exceed Rs 50 lakh, the company need not constitute the Committee, and the Board of Directors performs its functions.

What the Committee and the Board do (section 135(3) and (4))

The Committee formulates and recommends to the Board a CSR Policy indicating the activities to be undertaken in the areas or subjects specified in Schedule VII, recommends the amount of expenditure, and monitors the policy from time to time.

The Board, after considering the Committee’s recommendations, approves the CSR Policy, discloses its contents in its report and places it on the company’s website, and ensures that the activities in the policy are undertaken.

How much must be spent (section 135(5))

The Board ensures that the company spends in every financial year at least 2% of the average net profits made during the three immediately preceding financial years (or, if the company has not completed three years since incorporation, during the immediately preceding years), in pursuance of its CSR Policy.

  • “Net profit” is calculated as per section 198, and does not include such sums as are prescribed.
  • Preference is given to the local area and areas around it where the company operates.
  • Set-off: if a company spends more than required, it can set off the excess against the requirement for succeeding financial years, in the prescribed number of years and manner.

Unspent amount

Situation What the company must do
Amount not spent and not related to an ongoing project State the reasons in the Board’s report, and transfer the unspent amount to a Fund specified in Schedule VII within six months of the end of the financial year
Amount unspent for an ongoing project meeting the prescribed conditions Transfer it within 30 days from the end of the financial year to a special account called the Unspent Corporate Social Responsibility Account in a scheduled bank, and spend it within three financial years from the date of the transfer
Ongoing project amount still unspent after three financial years Transfer it to a Schedule VII Fund within 30 days from the completion of the third financial year

Penalty (section 135(7))

If the company defaults in complying with section 135(5) or (6):

  • the company is liable to a penalty of twice the amount required to be transferred to the Fund or the Unspent CSR Account, or Rs 1 crore, whichever is less; and
  • every officer in default is liable to a penalty of one-tenth of that amount, or Rs 2 lakh, whichever is less.

The Central Government may give general or special directions to a company or class of companies to ensure compliance (section 135(8)).

A short checklist

  1. Test the three thresholds on the previous year’s financials every year.
  2. Constitute the CSR Committee (or let the Board act if the obligation is Rs 50 lakh or less), and approve the CSR Policy.
  3. Work out the obligation: 2% of the average net profit of the last three years, with net profit computed under section 198.
  4. Plan projects under Schedule VII areas, with preference for the local area, and decide which are ongoing projects.
  5. Before year end, estimate unspent amounts. Transfer to the Unspent CSR Account (30 days) or the Schedule VII Fund (six months) on time.
  6. Report the policy, the composition of the Committee, the amount spent, and the reasons for any shortfall in the Board’s report.

Points to check

  • This post follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition. The Companies (Corporate Social Responsibility Policy) Rules, 2014 as amended contain the definition of “ongoing project”, the sums excluded from net profit, the set-off period, impact assessment requirements for larger spenders, the CSR-1 registration and annual action plan, and Schedule VII lists the permitted activities. These were not reviewed for this post.
  • The statutory auditor reports on CSR transfers under clause (xx) of the Companies (Auditor’s Report) Order, 2020.
  • The tax treatment of CSR expenditure and of dividend under the Income-tax law is not covered in this post.

Frequently asked questions

Which companies must do CSR?

Every company having, during the immediately preceding financial year, a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more.

How much must be spent?

At least 2% of the average net profits of the company made during the three immediately preceding financial years (or the immediately preceding years, if the company is younger than three years), in pursuance of its CSR Policy. Net profit is calculated as per section 198, excluding the sums prescribed.

Is a CSR Committee compulsory?

A company covered by section 135(1) constitutes a CSR Committee of three or more directors, with at least one independent director (a company not required to have an independent director has two or more directors on it). Where the amount to be spent does not exceed Rs 50 lakh, the committee is not required and the Board of Directors performs its functions.

What are the Committee and Board responsible for?

The Committee formulates the CSR Policy (activities in the areas in Schedule VII), recommends the expenditure and monitors the policy. The Board approves the policy, discloses its contents in its report and on the website, and ensures the activities are undertaken.

What if the amount is not fully spent?

If it does not relate to an ongoing project, the unspent amount is transferred to a Fund specified in Schedule VII within six months of the end of the financial year, and the Board’s report gives the reasons for not spending. If it relates to an ongoing project, it is transferred within 30 days from the year end to the Unspent CSR Account and must be spent within three financial years, failing which it goes to a Schedule VII fund within 30 days after the third year.

Can excess spending be carried forward?

Yes. If a company spends more than required, it may set off the excess against the requirement for the succeeding financial years in the prescribed manner and number of years.

What is the penalty for default?

The company is liable to a penalty of twice the amount required to be transferred to the Fund or the Unspent CSR Account, or Rs 1 crore, whichever is less. Every officer in default is liable to one-tenth of that amount or Rs 2 lakh, whichever is less.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Appointment of Auditor under Section 139 of the Companies Act, 2013: Term, Rotation, First Auditor, Casual Vacancy and Removal

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A company appoints an auditor at its first AGM, to hold office till the sixth AGM, and then for each further block of five years (until the conclusion of every sixth AGM).
  • The first auditor is appointed by the Board within 30 days of registration, or by members at an EGM within 90 days if the Board fails. For a Government company, the CAG appoints within 60 days.
  • Listed companies and prescribed classes must rotate: an individual for one term of five years, a firm for two terms, then a five year cooling off.
  • Removal before the term ends needs a special resolution and the previous approval of the Central Government. A resigning auditor files a statement within 30 days.

Every company must have a statutory auditor. Section 139 of the Companies Act, 2013 says how the auditor is appointed, how long the appointment lasts, who steps in when the post falls vacant, and when a change is compulsory. Sections 140 and 141 deal with removal, resignation, and who may be an auditor.

Who can be an auditor (section 141)

  • A chartered accountant, or a firm in which the majority of partners practising in India are chartered accountants (an LLP counts as a firm). Only the partners who are chartered accountants may sign.
  • Not eligible: a body corporate other than an LLP; an officer or employee of the company; a person whose relative is a director or key managerial personnel; a person (or relative or partner) holding securities of the company above the permitted limit, or indebted to it above the prescribed amount; a person with a prescribed business relationship; a person holding more than 20 company audits; a person convicted of fraud in the last ten years; and a person who provides the prohibited non-audit services under section 144.
  • If an auditor becomes disqualified after appointment, the office is vacated and treated as a casual vacancy.

First auditor

Type of company Who appoints By when Holds office till
Company other than a Government company Board of Directors Within 30 days of registration Conclusion of the first AGM
Same, if the Board fails Members at an extraordinary general meeting Within 90 days (the Board informs the members) Conclusion of the first AGM
Government company Comptroller and Auditor-General of India Within 60 days of registration; if CAG does not, the Board within next 30 days; if the Board fails, members within 60 days at an EGM Conclusion of the first AGM

At the first AGM and after

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. Before the appointment, the company must obtain the auditor’s written consent and a certificate that the appointment is within the prescribed conditions, including that the auditor meets section 141. The company must inform the auditor of the appointment and file a notice with the Registrar within 15 days of the meeting (this is done in Form ADT-1).

“Appointment” includes re-appointment. A retiring auditor can be re-appointed if not disqualified, has not given written notice of unwillingness, and no special resolution has been passed to appoint someone else or to say that he shall not be re-appointed. If no auditor is appointed at an AGM, the existing auditor continues.

If the company must have an Audit Committee, appointments and the filling of a casual vacancy are made after taking its recommendations into account.

Rotation (section 139(2))

No listed company, and no company in a class prescribed by rules, may appoint or re-appoint:

  • an individual auditor for more than one term of five consecutive years, or
  • an audit firm for more than two terms of five consecutive years.

After completing its term, the individual (or the firm) is not eligible for re-appointment in the same company for five years. A firm that has a common partner with an outgoing firm, whose tenure has just expired, cannot be appointed for five years. Members may also resolve that the auditing partner and team be rotated, or that the audit be done by more than one auditor (section 139(3)). The companies in the prescribed classes are set out in the Companies (Audit and Auditors) Rules, 2014: please check the paid-up capital and borrowing thresholds in the current rules before concluding that your company is outside rotation.

Government companies

The Comptroller and Auditor-General appoints the auditor within 180 days of the start of each financial year, and the auditor holds office till the AGM.

Casual vacancy (section 139(8))

  • Company not audited by a CAG-appointed auditor: the Board fills the vacancy within 30 days. If the vacancy arose from the auditor’s resignation, the company must approve the appointment at a general meeting convened within three months of the Board’s recommendation. The new auditor holds office till the next AGM.
  • Company audited by a CAG-appointed auditor: the CAG fills the vacancy within 30 days; if it does not, the Board fills it within the next 30 days.

Special notice and removal (section 140)

  • Special notice is required for a resolution at an AGM appointing a person other than the retiring auditor, or saying that the retiring auditor shall not be re-appointed. It is not needed where the retiring auditor has completed the maximum term of five or ten years under section 139(2). The company sends a copy of the notice to the retiring auditor, and if the auditor makes a reasonable written representation, the company states this in the notice to members and sends the representation to members. If it is received too late, the auditor can ask that it be read out at the meeting. The Tribunal can stop this if the right is being abused.
  • Removal before the term ends: only by a special resolution of the company, after getting the previous approval of the Central Government in the prescribed manner, and after the auditor has been given a reasonable chance to be heard.
  • Resignation: the auditor files a statement in the prescribed form with the company and the Registrar within 30 days of the resignation, giving reasons. For a failure to do so the auditor is liable to a penalty of Rs 50,000 or the amount of the remuneration, whichever is less, and Rs 500 for each day of continuing failure, up to Rs 2 lakh.
  • Fraud: the Tribunal can direct a company to change its auditor if the auditor has acted fraudulently or colluded in fraud. An auditor against whom a final order is passed is not eligible for appointment in any company for five years.

Remuneration (section 142)

Fixed by the members in general meeting or in the manner they decide. The Board can fix the first auditor’s remuneration. Expenses incurred for the audit are included, but not remuneration for other services requested by the company.

Points to check

  • Auditor rotation applies only to listed companies and the prescribed classes, so a small private company can keep the same auditor for any number of terms.
  • Forms (ADT-1 and the resignation forms), thresholds and fees come from the Rules and can change; use the current Companies (Audit and Auditors) Rules, 2014 and the MCA portal.
  • The text above follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition.

Frequently asked questions

When is the first auditor appointed?

By the Board of Directors within 30 days of the date of registration of the company. If the Board fails, it informs the members, who appoint within 90 days at an extraordinary general meeting. The first auditor holds office till the conclusion of the first AGM.

What is the term of an auditor?

At the first AGM the company appoints an auditor to hold office till the conclusion of its sixth AGM, and thereafter till the conclusion of every sixth meeting. This is the usual five year term.

Is auditor rotation compulsory for every company?

No. Section 139(2) applies to listed companies and the classes of companies prescribed by rules. An individual can serve one term of five consecutive years and an audit firm two terms, with a five year cooling off after that.

How is a casual vacancy filled?

The Board fills it within 30 days. If the vacancy is due to the auditor’s resignation, the company must also approve the appointment at a general meeting held within three months of the Board’s recommendation, and the appointee holds office till the next AGM.

Who appoints the auditor of a Government company?

The Comptroller and Auditor-General of India, within 180 days from the start of the financial year. The first auditor is appointed by the CAG within 60 days of registration.

Can an auditor be removed in the middle of the term?

Only by a special resolution of the company, after obtaining the previous approval of the Central Government, and after giving the auditor a reasonable opportunity of being heard.

What if no auditor is appointed at an AGM?

The existing auditor continues to be the auditor.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

MCA Compliance Relief Scheme (CCFS-2026): Complete Guide for Companies

Posted on by CA Meet Dhrangadhariya

Missed Your MCA Filings? Your Step-by-Step Recovery Plan Under CCTS-2026

The Ministry of Corporate Affairs (MCA) has introduced the Companies Compliance Facilitation Scheme, 2026 (CCFS-2026) to provide a one-time opportunity for companies to regularize pending compliances at reduced cost.

This scheme is especially beneficial for companies struggling with delayed filings and high additional fees.

Scheme Period

  • Start Date: 15 April 2026

  • End Date: 15 July 2026

Companies must act within this limited window to avail benefits.

Objective of CCFS-2026

The scheme aims to:

  • Reduce compliance burden on companies

  • Allow filing of pending annual returns and financial statements

  • Provide an opportunity to inactive companies to:

    • Become dormant

    • Close operations (strike-off)

     

  • Improve accuracy of MCA records

As per MCA, this initiative is introduced to support businesses facing financial burden due to heavy additional fees on delayed filings 

Key Benefits Under the Scheme

1. 90% Late Fee Waiver

  • Applicable on:

    • Annual Return (MGT-7 / MGT-7A)

    • Financial Statements (AOC-4 series)

     

  • Companies need to pay only 10% of additional fees

Major relief considering ₹100 per day penalty with no upper limit 

2. 75% Saving on Strike-Off

  • File Form STK-2

  • Pay only 25% of normal filing fees

Suitable for companies that want to exit business.

3. 50% Fee for Dormant Status

  • Apply via Form MSC-1

  • Pay only 50% of normal fees

Helps inactive companies maintain legal status with minimal compliance.

Forms Covered Under the Scheme

The scheme allows filing of multiple pending forms, including:

  • MGT-7 / MGT-7A

  • AOC-4 (all variants including XBRL, NBFC, CFS)

  • ADT-1

  • FC-3, FC-4

  • Old Act forms (like 23AC, 23ACA, etc.)

Immunity from Penalty (Important)

Immunity is conditional:

Available if:

  • Filing is done before notice, or

  • Within 30 days of notice

Not available if:

  • Penalty order already passed

  • 30-day window after notice has expired

In such cases, penalties remain payable even if filings are completed 

Who Cannot Avail CCFS-2026

The scheme is not applicable to:

  • Companies with final strike-off notice issued (u/s 248)

  • Companies already applied for strike-off

  • Companies already applied for dormant status

  • Companies dissolved under amalgamation

  • Vanishing companies

Important Post-Scheme Warning

After 15 July 2026:

  • ROC will initiate strict action

  • Non-compliant companies may face:

    • Penalties

    • Legal consequences

     

 Practical Insights

  • Ideal for clearing backlog at minimal cost

  • MSMEs and small companies benefit the most

  • Evaluate whether:

    • Continue business → File returns

    • Pause operations → Dormant

    • Exit → Strike-off

     

Conclusion

The CCFS-2026 is a valuable opportunity for companies to become compliant at significantly reduced cost. Missing this window may result in heavy penalties and regulatory action.

Timely decision-making is crucial.

Click here to download MCA Official Circular

Disclaimer:

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Audit Trail in Accounting Software: Companies Rule 3(1), Auditor Reporting under Rule 11(g), Retention and Penalty

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Every company that keeps its books in accounting software must use software that records an audit trail of each transaction, keeps an edit log of every change with its date, and cannot have the audit trail switched off.
  • The rule applies from the financial year beginning on or after 01/04/2023 (FY 2023-24), after two deferments.
  • The statutory auditor must report on it in the audit report under Rule 11(g): whether the feature existed, operated all year for all transactions, was not tampered with, and was preserved as the law requires.
  • Books of account are kept for eight financial years under section 128, and the audit trail has to be preserved for the same statutory period.

An audit trail is a time-stamped record that shows who entered or changed a transaction and when. For companies, having it in the accounting software is no longer a best practice but a legal requirement, and the statutory auditor must say in the audit report whether the company complied.

The rule for companies

The proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 says that, for a financial year beginning on or after 01/04/2023, every company which uses accounting software for maintaining its books of account shall use only such software which:

  1. has a feature of recording an audit trail of each and every transaction,
  2. creates an edit log of each change made in the books of account along with the date when the change was made, and
  3. ensures that the audit trail cannot be disabled.

The date was first 01/04/2021 and was deferred twice, finally to 01/04/2023 by the Companies (Accounts) Second Amendment Rules, 2022. For a company with a March year-end, the first year covered was FY 2023-24.

Who is covered

Every company that uses accounting software, which includes private limited companies, OPCs, Section 8 companies, and Government companies. If the books are kept entirely on paper, the rule has nothing to operate on. Accounting software can be on-premise, on the cloud, a SaaS product, hosted in India or abroad, or run by a service provider for the company. Where a separate system (say a billing or payroll tool) generates entries that become part of the books, that system needs the feature too, because its records form part of the books of account.

What the auditor reports: Rule 11(g)

Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014, read with section 143(3), requires the audit report to state in the section on other legal and regulatory requirements whether the company has used accounting software which:

  • has a feature of recording audit trail (edit log), and that feature has been operated throughout the year for all transactions recorded in the software, and
  • the audit trail has not been tampered with, and
  • the audit trail has been preserved by the company as per the statutory requirements for record retention.

The ICAI Implementation Guide expects the auditor to check whether the feature can be configured or switched off, whether it was enabled for the whole year, whether every transaction is covered, and whether the records have been kept for the statutory period. Where the books are entirely manual, the auditor states that as a fact.

How long to keep it

Section 128(5) requires books of account and the related vouchers to be kept for not less than eight financial years immediately preceding the current year (or all years, if the company is younger than eight years). The audit trail is preserved for that period, which means log storage, backup and the ability to produce the data on request.

Penalty

Section 128(6) provides that the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person the Board has charged with complying with section 128, is liable to a fine of at least Rs 50,000 and up to Rs 5 lakh if the section is contravened. The imprisonment limb that earlier appeared in that section was omitted by an amendment effective 21/12/2020.

What a company should do

  • Ask the software vendor in writing whether the audit trail is on by default, whether any user, including an administrator, can disable it, and how long logs are kept.
  • Check the settings once a year and note the date of the check.
  • Do not delete, trim or overwrite log data to save space before the retention period ends.
  • Keep a single list of every system that feeds the books, with its audit trail status.
  • Discuss any gap with the auditor before the year closes, because a gap is reported in the audit report.

Points to check

  • This post is based on the text of the Rules as described in ICAI material, and on section 128 as reported by legal databases. Check the current text on the MCA website and in the latest ICAI guidance before you rely on it for a particular case.
  • The 2024 ICAI guide deals with detailed audit queries, such as database-level logging; follow it for your own audit file.

Frequently asked questions

Who must use accounting software with an audit trail?

Every company, including a private limited company, OPC and Section 8 company, that maintains its books of account in accounting software. Where books are kept entirely manually, the rule has nothing to apply to and the auditor reports that fact.

From when does it apply?

From the financial year beginning on or after 01/04/2023, which is FY 2023-24. The original 2021 date was deferred twice.

What must the software do?

Record an audit trail of each and every transaction, create an edit log of each change made in the books with the date of the change, and ensure that the audit trail cannot be disabled.

What does the auditor report?

Under Rule 11(g), in the report on other legal and regulatory requirements, whether the company used software with an audit trail feature, whether it operated throughout the year for all transactions, whether it was tampered with, and whether the audit trail was preserved as per statutory requirements.

How long should the audit trail be kept?

The books of account and the vouchers must be kept for at least eight financial years under section 128(5), and the audit trail is to be preserved in line with that statutory period.

Does it apply to a partnership firm or LLP?

The rule is made under the Companies Act, 2013 and applies to companies. A firm or LLP is not covered by it.

What is the penalty?

Section 128(6) provides a fine of Rs 50,000 to Rs 5 lakh on the managing director, whole-time director in charge of finance, the CFO or the person the Board has charged with complying with section 128. The words providing imprisonment were omitted in December 2020.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.