The primary section governing the compulsory rotation of auditors is Section 139(2) of the Companies Act, 2013, read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014.
This framework mandates a rotational system to ensure auditor independence and fresh scrutiny, but it is not applicable to all companies.
Here is a clear breakdown of the applicability criteria for Section 139(2):
Applicability of Mandatory Auditor Rotation (Section 139(2))
The provisions regarding the compulsory rotation of auditors apply only to certain specified classes of companies that exceed defined financial thresholds. These companies are referred to as "Applicable Companies."
1. Mandatory Applicability Classes
Section 139(2) is compulsory for the following three categories of companies:
| Category | Specific Financial/Status Threshold |
| I. Listed Companies | All Listed Companies (Public or Private) are mandatorily subject to rotation, regardless of their size. |
| II. Unlisted Public Companies | Unlisted Public Companies having a Paid-up Share Capital of ₹10 Crore or more. |
| III. Private Limited Companies | Private Limited Companies having a Paid-up Share Capital of ₹50 Crore or more. |
| IV. Other Companies (Borrowing) | All companies (including private limited companies) having Public Borrowings from financial institutions, banks, or Public Deposits of ₹50 Crore or more. |
2. Maximum Duration of Appointment
Once a company falls under any of the above thresholds, the auditor's tenure is strictly limited:
| Type of Auditor | Maximum Permitted Tenure | Mandatory Cooling-off Period |
| Individual Auditor | One term of five consecutive years. | Cannot be re-appointed for the next five years. |
| Audit Firm | Two terms of five consecutive years (total of 10 years). | Cannot be re-appointed for the next five years. |
The Private Company Threshold
Crucial Takeaway for Private Companies: "The vast majority of newly incorporated or small Private Limited Companies are exempt from the mandatory rotation rules of Section 139(2). This requirement is only triggered upon reaching a significant size, specifically ₹50 Crore or more in Paid-up Share Capital or ₹50 Crore or more in borrowings from public sources. This exemption allows small companies the flexibility to retain their trusted auditors for longer periods without facing the statutory five-year cooling-off period."