Statutory Audit of Private Companies – Proposed Changes under the Corporate Laws (Amendment) Bill, 2026 and JPC Recommendations

The requirement of statutory audit has always been one of the fundamental compliance obligations under the Companies Act, 2013. Presently, every company, whether public or private, is required to appoint a statutory auditor and have its financial statements audited in accordance with the provisions of the Act.

However, the Corporate Laws (Amendment) Bill, 2026 has proposed a significant departure from this long-standing principle by empowering the Central Government to exempt certain classes of companies from the requirement of appointing auditors. The proposal has generated considerable discussion among corporates, professionals and industry bodies, particularly in relation to private companies and small companies.

This article examines the existing legal position, the proposal contained in the Bill, the recommendations of the Joint Parliamentary Committee (JPC), and the possible implications for companies and stakeholders.

Existing Position under the Companies Act, 2013

Under the current provisions of Section 139 of the Companies Act, 2013, every company is required to appoint an auditor who conducts an independent examination of the company’s financial statements.

Statutory audit serves multiple purposes:

• Enhances reliability of financial statements.
• Protects shareholders and creditors.
• Assists lenders and investors in decision-making.
• Promotes transparency and corporate governance.
• Provides an independent review of accounting records and financial reporting.

Accordingly, statutory audit is presently a mandatory requirement for all companies, including private companies and small companies.

What Does the Corporate Laws (Amendment) Bill, 2026 Propose?

The Corporate Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 23 March 2026, proposes insertion of a new provision enabling the Central Government to exempt prescribed classes of companies, subject to prescribed conditions, from the requirement of appointing auditors under Chapter X of the Companies Act.

The important point to note is that:

The Bill does not automatically exempt all private companies or all small companies from statutory audit.

Instead, it merely creates an enabling framework under which the Government may, through rules, identify eligible classes of companies and prescribe conditions for such exemption.

Until such amendment is enacted and corresponding rules are notified, the existing audit requirements continue to apply.

Proposed Expansion of the “Small Company” Concept

The Bill also proposes increasing the upper limits for classification as a small company from:

• Paid-up capital: up to ₹10 crore to ₹20 crore; and
• Turnover: up to ₹100 crore to ₹200 crore.

This proposal has led to a common misconception that all companies qualifying as small companies would become exempt from statutory audit.

That is not the case.

The concept of a “small company” and the concept of an “audit-exempt company” are separate matters. Even if the revised limits are enacted, a company qualifying as a small company may still be required to undergo statutory audit unless specifically exempted under the rules.

JPC Recommendations – A More Balanced Approach

During its examination of the Bill, the Joint Parliamentary Committee reportedly recommended a more cautious and calibrated approach towards audit exemption.

The JPC is understood to have recommended that the relaxation should be restricted to prescribed private companies and that eligibility criteria may consider factors such as:

• Total assets;
• Borrowings;
• Financial exposure; and
• Other prescribed conditions.

The underlying objective appears to be that audit relaxation should be available only to genuinely low-risk private companies and not to companies having significant stakeholder exposure.

This approach recognizes that a company’s risk profile cannot be assessed merely on the basis of turnover or paid-up capital.

Why Borrowings and Assets Matter

A private company may have limited shareholders but substantial obligations towards:

• Banks;
• Financial institutions;
• Debenture holders;
• Trade creditors; and
• Investors.

For such stakeholders, audited financial statements remain an important source of financial information.

Therefore, a company with significant borrowings or external funding may warrant continued independent audit, even if it otherwise falls within the size limits applicable to small companies.

The JPC’s emphasis on assets and borrowings therefore appears to be a sensible safeguard.

Potential Benefits of the Proposal

If implemented with appropriate safeguards, the proposal could provide several benefits:

1. Reduced Compliance Burden

Very small private companies often incur audit costs that may be disproportionate to their scale of operations.

2. Ease of Doing Business

The proposal aligns with the broader objective of simplifying compliance requirements for low-risk entities.

3. Better Regulatory Focus

Regulatory resources can be focused on companies having significant public interest, borrowings, investor participation or stakeholder exposure.

Potential Concerns

While the proposal offers compliance relief, certain concerns must also be considered.

Reduced Independent Verification

The absence of statutory audit may reduce independent scrutiny of financial statements.

Impact on Creditors and Investors

Lenders and investors often rely on audited financial statements while evaluating a company’s financial position.

Minority Shareholder Protection

Audited financial statements provide additional comfort to minority shareholders regarding the fairness and accuracy of financial reporting.

Governance Considerations

The exemption should not result in weakening of financial discipline or corporate governance standards.

Audit Exemption Does Not Mean Exemption from Accounts

Even if certain companies are ultimately exempted from statutory audit, they would still be required to:

• Maintain books of account;
• Prepare financial statements;
• Comply with tax laws;
• File statutory returns; and
• Fulfil other requirements under the Companies Act and applicable laws.

Therefore:

No audit does not mean no accounting or no compliance.

The responsibility of directors for maintaining proper books and preparing accurate financial statements would continue.

Key Takeaways

The proposed audit reform should be understood in the following context:

• Statutory audit has not been abolished.
• The Bill only creates an enabling framework for exemption.
• The proposal is not limited to all small companies.
• Audit exemption, if introduced, is likely to be available only to prescribed classes of private companies.
• Borrowings, assets and stakeholder exposure may become important eligibility criteria.
• Companies with significant external funding may continue to remain within the audit framework.
• Existing audit requirements remain fully applicable until the amendment is enacted and notified.

Way Forward

The proposal reflects a broader shift towards risk-based regulation, where compliance requirements are linked to the size, complexity and stakeholder exposure of a company rather than applying a uniform framework to all entities.

If the final legislation incorporates appropriate safeguards, audit exemption may provide meaningful relief to genuinely small and low-risk private companies while preserving transparency and accountability for companies with significant financial exposure.

The success of the reform will ultimately depend upon the eligibility conditions prescribed by the Government and the safeguards incorporated to protect the interests of shareholders, creditors and investors.

Professional Caution

The Corporate Laws (Amendment) Bill, 2026 is presently a proposed legislation and has not yet become law. The recommendations of the Joint Parliamentary Committee are also not legally binding provisions.

Accordingly, companies should continue to comply with the existing provisions relating to appointment of auditors and statutory audit until the amendment is enacted, notified and corresponding rules are issued.

This article is intended for general information purposes only and should not be construed as legal, secretarial, accounting or professional advice. Specific advice should be obtained based on the facts and circumstances of each case.