CS Kanika Kumar
Kanika Kumar

Concept of Secretarial Audit

Earlier Under Companies Act, 1956, Secretarial Audit was not mandatory for the Companies, but with the enactment of Companies Act, 2013, Secretarial Audit is mandatory for certain companies under Section 204 of Companies Act, 2013.

Now, Requirement of Compliance Certificate has been withdrawn and a new and wider Concept of Secretarial Audit Report has been inserted in the above named section of the said act.

Meaning of Secretarial Audit

Although Companies Act, 2013 does not defined the exact meaning of Secretarial Audit, but hereunder is a short attempt that what Secretarial Audit is?

Secretarial Audit is an audit to check compliance of various laws including the Companies Act and other corporate and economic laws applicable to the company.

It is therefore an assurance that helps to improve the legal operations of the Company. It is a disciplined approach helps to achieve company’s objectives.

Every Company is required to comply with all the hundreds of laws, Rules and Regulations applicable to Company. So, it is necessary to periodically visualize that the company has complied with laws applicable to or not in order to minimize the major Risk to the Company.

Moreover, it provides necessary comfort to the management regulators and the stakeholders and hence, leads to statutory compliance, good governance and proper risk management.

Benefits of Secretarial Audit

Hereunder are the benefits of conducting Secretarial Audit;

  • Helps the regulator, generate confidence amongst the shareholders, the creditors and other stakeholders in companies
  • It acts like a tool of risk mitigation and will allow companies to effectively address compliance risk issues.
  • Helps the companies to build their corporate image.
  • It helps the Promoters that management of the company are conducting its affairs in accordance with the requirements of laws
  • Provides comfort to the Non-executive/Independent Directors that proper mechanism is being followed in the company which ensures that proper compliance of laws are complied with in the company.
  • Helps in reducing the burden of the regulators by ensuring proper compliances by the company and they can take timely actions against the offenders.
  • Helps the investors in taking informed investment decision, by clearly defining that company is complying with the both compliance and governance norms.

Companies to which Secretarial Audit is mandatory

In accordance to Section 204 of the Companies Act, 2013, read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, following are the companies to which Secretarial Audit is required:

a) Every listed company and

b) Every public company having a paid-up share capital of Fifty Crore rupees or more; or

c) Every public company having a turnover of Two Hundred Fifty Crore rupees or more.

The abovementioned word “Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during financial years per Section 2(91) of the Companies Act, 2013.

The abovementioned word “Paid up Share Capital” is defined under Section 2 (64) of the Companies Act, 2013, which means such aggregate amount of money credited as paid-up which is equal to the amount received as paid-up in respect of shares issued and 

It includes:

  • any amount credited as paid-up in respect of shares of the company,

But not includes

  • any other amount received in respect of such shares, by whatever name called.

Note: The above section is not applicable to Private Companies.

Appointment and Qualification of Secretarial Auditor

In accordance with Section 179(3) of the Companies Act, 2013 read with Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, Secretarial Auditor is required to be appointed by means of resolution passed at a duly convened Board meeting and by filing the same in E-Form MGT-14 in accordance with Section 117 read with Rule 24 of the Companies (Management and Administration) Rules, 2014.

Only a member of the Institute of Company Secretaries of India holding certificate of practice (Company Secretary in Practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the Company which is further to be annexed to Board Report.

Format of Secretarial Audit Report

Secretarial Audit Report is required to be provided in the format prescribed in Form MR-3 as mentioned in Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Periodicity of Secretarial Audit

Secretarial Audit is an ongoing process. Continuous basis would help the company in initiating corrective measures and strengthening its compliance mechanism and processes hence it is recommendatory that the Secretarial Audit is carried out periodically (quarterly/half-year/annually) and adverse finding if any, be reported on interim basis to the Board immediately. However, it is to mention that before the preparation of Board’s report, the secretarial audit report should be finalized so as to annex it with Board’s report.

SCOPE FOR SECRETARIAL AUDIT

Reporting on Compliance of five laws in terms of Form MR-3:

i. The Companies Act, 2013 (the Act) and the rules made there under;

ii. The Securities Contracts (Regulation) Act, 1956 (SCRA) and the rules made there under;

iii. The Depositories Act, 1996 and the Regulations and Bye-laws framed there under;

iv. Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings;

v. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (SEBI Act):-

a) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

b) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;

c) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements),2009

d) The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;

e) The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

f) The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with client;

g) The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and

h) The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;

vi. Any other law as may be applicable specifically to the Company which shall include all the laws applicable to specific industry which shall include:

  • Banking Industry
  • Insurance Industry
  • Petroleum Industry
  • Pharmaceutical Sector
  • Cement Industry

vii.Examining and reporting whether the adequate systems and processes are in place to monitor and ensure compliance with General laws like labour laws, competition law, environmental laws etc.

viii. In case of financial laws like tax laws etc Secretarial Auditor may rely on the Reports given by statutory auditors or other designated professionals

ix.  Reporting on compliance of Secretarial Standards issued by ICSI, the listing Agreement etc and other requirements as per MR-3.

Format of Secretarial Audit Report

 Secretarial Audit Report is required following reporting on whether:-

  • The Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non-Executive Directors and Independent Directors.
  • The changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of the Act.
  • Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days in advance, and a system exists for seeking and obtaining further information and clarifications on the agenda items before the meeting and for meaningful participation at the meeting.
  • Majority decision is carried through while the dissenting members‟ views are captured and recorded as part of the minutes.
  • There are adequate systems and processes in the company that corresponds with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.
  • During the audit Period Company has given details of specific events like Public/ Right or Preferential Issue, Buy Back, any Merger or Amalgamation, any Technical Collaborations etc.

Sector Wise Indicative List Of Laws For Secretarial Audit

  • Pharmaceutical Industry
  • Gas Industry
  • Computer Programming, Consultancy Related Services
  • Oil and Petroleum Industry
  • Power Industry
  • Sugar Industry
  • Tobacco Industry

Powers and Duties of Secretarial Auditor under the Companies Act, 2013

Following are the powers of Secretarial Auditor under the said Act:

Right of access to the books of account and vouchers whether kept at registered office of company or at any other place.

Seek information and explanation from company and its officers, whenever required to fulfill its own duty

Power to enquire, inter alia, into the matters like:

  • Securities for loans and advances made on security have been secured and whether the terms made are detrimental to the interest of company.
  • Whether transactions which are represented by book entries are unfavorable to the interest of the Company.
  • Whether loan and advances made have been shown as deposits
  • Whether personal expenses have been charged to Revenue Account.
  • To look-over into the details of share allotted for cash

Note: The abovementioned powers are defined under Section 143(1) of the Companies Act, 2013 which is applicable to Secretarial Auditor (Company Secretary in Practice) as per Section 143(14) (b) of the Companies Act, 2013.

Duties of Secretarial Auditor

  • To Report Frauds to Central Government : In accordance with Section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, which specifies that if a Secretarial Auditor as defined under Section 143(14)(b) in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately but not later than sixty days of his knowledge report the matter to the Central Government in the form of a statement as specified in Form ADT-4.

Note: Failure to abide with the above named section, fine of not be less than One Lakh Rupees but which may extend to Twenty Five Lakh Rupees will be imposed as defined under Section – 143(15) of the Companies Act, 2013

  • To scrutinize and verify the records maintained by the Company
  • To report the non-compliances or any kind of irregularities.
  • To follow good governance practices and to ensure systems for various compliance processes.

PENAL PROVISIONS UNDER VARIOUS SECTIONS OF THE COMPANIES ACT, 2013

In accordance with Section – 204(4) – Punishment For Contravention

If a company or any officer of the company or the company secretary in practice contravenes the provisions of Section 204, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

In accordance with Section – 447 – Punishment for fraud

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

PROVIDED that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

In accordance with Section – 448 – Punishment for false statement

if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of Companies Act, 2013 or the rules made there under, any person makes a statement

(a) which is false in any material particulars, knowing it to be false

                                           OR

(b) which omits any material fact, knowing it to be material,

Shall be liable under section 447.

Conclusion:

Secretarial Audit is a Welcome Step for the companies to follow Corporate Governance Practice. It is a Pre-emptive check on the company that company is abiding all its compliances which is required to be carried out.

Moreover, Secretarial Audit should not be treated merely as the compliance audit, rather it is an audit of the examination and verification of the ethical standards, observance of the transparency and disclosure, observance of integrity and honesty of the key managerial persons, efforts for environmental protection for sustainable growth and corporate social reasonability for the benefit of the society at large.

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