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Appointment of the Statutory auditor still requires ratification at annual general meeting?


Pursuant to the notification of Section 40 of the Companies Amendment Act, 2017 (CAA17), which has omitted first provision to the Section 139(1) of the Companies Act, 2013 (CA13), the question that  arises, whether the appointment of a Statutory Auditor still required ratification by the members at Annual General Meeting (AGM)?

Provisions of the Act:

Section 139 of the Companies Act, 2013 reads as follows:

“(1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall 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 and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed:

Provided that Company shall place the matter relating to such appointment for ratification by members at every Annual General Meeting.

Further provided that before such appointment Company should obtain the written consent from the Auditor and certificate which shall indicate the criteria as mentioned in Section 141.”

Section 40 of the Companies Amendment Act, 2017 is notified w.e.f. May 07, 2018. Which means that the first proviso of Section 139(1) stands omitted. Which makes it clear that ratification of the appointment of the Statutory Auditor at every AGM is now not required anymore.

Since the implementation of Companies Act, 2013, most of the Companies have appointed their auditors for a period of 5 years, subject to ratification by every year by the members in AGM which was in line with the Section 139 of the Companies Act, 2013, however, with the omission of first proviso to the Section 139, Do the shareholders still need to ratify the appointment of the Statutory Auditor or now it is not required? or

Does Companies Amendment Act, 2017 will prevail or the resolution passed by the shareholders at the last AGM?

There are many people who believe that since the appointment of the Statutory Auditor through the resolution in Annual General Meeting was subject to ratification, the Statutory Auditor’s appointment shall be ratified at the Annual General Meeting of the Company to be held in 2018 and thereafter. However, looking at the provisions of the Act, specifically since the notification of Section 40 of Companies Amendment Act, 2017, shareholder’s right to ratify the appointment is done away with. The very intention of the Companies Amendment Act, 2017 is to ensure that Auditors are appointment is for a period of 5 years and that appointment shall not be impacted by management and shareholders. Hence, in my opinion, giving an option to the Companies/shareholders of the Companies to ratify the appointment of the Statutory Auditor would amount to an ultra-virus act.

Therefore, irrespective of the earlier resolution passed by the Companies, the Companies which has sent notice of the AGM on or after May 07, 2018 shall not require to ratify the appointment of the Statutory Auditors at their Annual General Meetings.

Industry Scenario:

Companies Like Reliance Industries Limited, IDFC Limited, Goa Carbon Limited have issued their Annual Report and have also excluded the Ratification of Auditors Appointment as an Agenda Item considering the amended section does not allow Companies to ratify the auditors’ appointment annually. Further, Annual Report of Reliance Industries Limited has included following note in the Annual Report:

“The requirement to place the matter relating to appointment of Auditors for ratification by members at every Annual General Meeting is done away by Companies Amendment Act, 2017 vide notification dated May 7, 2018 issued by the Ministry of Corporate Affairs, New Delhi. Accordingly, no resolution is proposed for ratification of the appointment of Auditors, who were appointed in the Annual General Meeting held on.

The author is the Founder and Partner at JMJA & Associates LLP. With over 10 years of work experience in various listed companies and conglomerates, CS Jigar Shah has a rich and varied experience in his portfolio.

Disclaimer:

The opinion expressed above is based on the interpretation of a particular section of the Companies Act; by the team and not a rule of law. The Actual interpretation can be different by the court or other authorities, in such case the interpretation by any such authority shall be final and binding.

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CS Jigar Shah 
on 10 October 2018
Published in Corporate Law
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