Identify the holder and issuer before testing a limit
Section 141(3)(d)(i) of the Companies Act, 2013 covers relevant securities or interests held by the auditor, a relative or partner in the company, its subsidiary, its holding or associate company, or a subsidiary of that holding company. Rule 10(1) permits a relative to hold securities in the company up to ₹1 lakh in face value. It does not give the auditor or partner that allowance. Identify the exact issuer and relationship; do not extend the relative’s allowance to another group entity without establishing the legal basis.
Read the applicable text: MCA: Companies Act, 2013, section 141 MCA: Companies (Audit and Auditors) Rules, Rule 10.
Measure face value and monitor acquisitions
Use the number of securities multiplied by face value for each class and reconcile to the depository statement and issuer records. Do not substitute market value, broker purchase cost or paid-up amount for face value. Retain an appointment-date assessment and a continuing event log, including allotments or acquisitions that can change the holding.
Use the corrective period only on its stated facts
Rule 10(1) requires the auditor to take corrective action within 60 days of an acquisition of a security or interest by a relative above the prescribed threshold. Preserve the actual acquisition date, corrective evidence and post-correction holdings. Do not use that period as a general waiver for an existing breach at appointment, the auditor’s or partner’s own holding, or a different disqualification.
Escalate the statutory consequence promptly
If a disqualification under section 141(3) is incurred after appointment, section 141(4) provides for vacation of office and treats it as a casual vacancy. Evaluate the corrective rule and actual dates before concluding whether disqualification was incurred. Review other independence requirements and vacancy processes separately; an internal declaration or trade instruction does not substitute for supported facts.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Face value versus market value
A relative owns 8,000 shares of the audited company, each with ₹10 face value and ₹180 market price. Face value is ₹80,000, below ₹1 lakh. Market value of ₹14.40 lakh does not control this test.
Illustrative example 2: Exact limit
A relative holds 20,000 shares of ₹5 face value. The aggregate is ₹1 lakh, within the stated ceiling, subject to other independence requirements.
Illustrative example 3: Mixed denominations
A relative holds 6,000 securities of ₹10 face value and 7,000 of ₹5. Their total face value is ₹95,000, leaving ₹5,000 of headroom on these facts.
Illustrative example 4: Post-appointment acquisition
A relative with ₹90,000 face value adds 2,000 shares of ₹10 each on 7 November 2026. The balance is ₹1.10 lakh. A reduction of 1,000 such shares removes ₹10,000 of face value. The corrected face value would be exactly ₹1 lakh. Counting the acquisition date as day zero, the 60th day is 6 January 2027; plan and verify completed correction within the applicable period.
Illustrative example 5: Holding by the auditor
The auditor personally holds 100 shares of ₹10 face value. Assuming these are shares of the audited company, the ₹1,000 holding falls within the restriction in section 141(3)(d)(i). The relative’s allowance does not apply.
Illustrative example 6: Market rally alone
A relative has 5,000 shares of ₹10 face value. The price rises from ₹100 to ₹140, changing market value from ₹5 lakh to ₹7 lakh. Face value remains ₹50,000; that price move alone is not a threshold acquisition.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify auditor, partners and statutory relatives | Declarations and relationship support |
| 2 | Map the issuer and relevant group entities | Issuer and corporate structure records |
| 3 | Obtain holdings at appointment and after events | Depository and issuer statements |
| 4 | Validate face value by class | Terms and issuer capital records |
| 5 | Calculate the holdings against the applicable rule | Face-value worksheet |
| 6 | Separate disqualification tests | Security, indebtedness and guarantee review |
| 7 | Record the date of any excess acquisition | Acquisition and settlement evidence |
| 8 | Track timely corrective action where available | Deadline and completed correction records |
| 9 | Escalate unresolved disqualification | Legal review and section 141(4) assessment |
| 10 | Preserve the updated independence file | Signed conclusion and evidence trail |
Sixteen practitioner FAQs
1. Does Rule 10 permit the auditor to own ₹1 lakh of shares?
No. The stated allowance is for a relative.
2. Is market value the threshold measure?
No. The rule refers to face value.
3. Is exactly ₹1 lakh over the limit?
No. The wording is not exceeding ₹1 lakh.
4. Does a market price increase start the 60 days?
A price move alone is not acquisition of a new security or interest.
5. Can all group-entity holdings use the audited-company allowance?
Review issuer and statutory scope before relying on the allowance.
6. What if one class has a different face value?
Compute each class separately and reconcile the combined relevant balance.
7. Does an unpaid or partly paid share use the market price?
Use the applicable face value and verify the security terms.
8. Does an instruction to sell prove a correction?
Confirm the completed action and resulting holding.
9. Can an initial appointment breach always be cured within 60 days?
Do not assume the post-acquisition corrective rule covers a pre-existing defect.
10. Does the period apply to the partner’s own holding?
No. Review the separate restriction without relying on the relative provision.
11. Can the security threshold be used for indebtedness?
No. Rule 10 treats the tests separately.
12. Should the company monitor only on reappointment?
Maintain event-driven review throughout the engagement.
13. What if a corporate action changes the holdings?
Record the event and assess its actual effect and timing.
14. Does a broker valuation replace issuer evidence of face value?
Check the terms and issuer records for the denomination.
15. What happens if a disqualification is incurred after appointment?
Review section 141(4) on vacation and the resulting casual vacancy.
16. What should be in the final review file?
Issuer, holder, face value, acquisition date and completed corrective action, where applicable.
Official sources
MCA: Companies Act, 2013, section 141 MCA: Companies (Audit and Auditors) Rules, Rule 10