Comparative Analysis of Certain Vital Compliance Documents
1. INTRODUCTION
Companies have a fundamental obligation to comply with several laws. Ensuring compliance sets an atmosphere for effective corporate governance. Companies are subject to numerous laws that govern and oversee them in order to ensure that they operate within a permissible framework. Ensuring compliance with the many applicable laws is the responsibility of the company’s company secretary and compliance officer. After a number of high-profile scandals rocked India’s business community, the idea of corporate governance attracted a lot of attention.
These scandals highlighted serious deficiencies in the governance structures of many companies, leading to public outrage, a loss of investor confidence, and an erosion of trust in the corporate sector. Some of the notable corporate scandals in India include:
1. Satyam Scandal (2009)
2. Vijay Mallya and Kingfisher Airlines (2012)
3. IL&FS Crisis (2018):
4. PNB-Nirav Modi Scam (2018)
Not only in India but across the globe, one of the most notable examples is the Enron scandal in the early 2000s and, similarly, the 2008 financial crisis, triggered by the collapse of major financial institutions such as Lehman Brothers. Overall, the heightened scrutiny of corporate governance in the aftermath of corporate scandals led to widespread reforms in business practices, with the aim of restoring trust and confidence in the corporate sector.
There are various compliance certificates and compliance documents that are applicable to the company, and the authors of this article have made a comparative analysis of certain vital compliance documents that companies are required to submit.
2. BRIEF EXPLANATION
Let’s take a moment to quickly understand these documents before moving on to our comparative study.
i) CERTIFICATE BY COMPANY SECRETARY IN PRACTICE IN FORM MGT-8
According to Section 92(2) of the Companies Act, 2013 and Rule 11(2) of the Companies (Management and Administration) Rules, 2014, it applies to all listed companies or a company having a paid-up share capital of ten crore rupees or more or a turnover of fifty crore rupees or more. It outlines compliance with regard to the meetings of the board, committees, and members, approvals taken for RPT, loans and advances, borrowings, inter-corporate loans and advances, changes in the directors and auditors of the companies, filing of forms with various authorities, and so on.
ii) CORPORATE GOVERNANCE REPORT
REGULATION 27 OF SEBI (LODR) REGULATIONS, 2015
Regulation 27 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 mandates the listed entities to submit a quarterly compliance report on corporate governance within 21 days from the end of each quarter. It deals with the compliance of composition and meetings of the board of directors and committees as per the SEBI (LODR) Regulation, 2015, approvals for RPT, and such other matters.
REGULATION 34(3) AND 53(f) READ WITH SCHEDULE V OF SEBI (LODR) REGULATIONS, 2015
Regulation 34(3), read with Schedule V of the SEBI (LODR) Regulations, 2015, requires the listed entities to attach a corporate governance report as a part of their annual report. It shall include the details as specified in Schedule V of the SEBI (LODR) Regulations, 2015, which cover details of the board of directors and their meetings, committee meetings, general meetings, details of familiarization programmes imparted to independent directors, remuneration to directors, and so on.
iii) LEGAL DUE DILIGENCE
In order to engage into a contract or agreement with another party or to operate with a specific degree of care, a reasonable business or person is typically expected to conduct due diligence, which is the inquiry or exercise of care. It is one of the most important exercises in mergers, amalgamations, and corporate restructuring. As a preventative measure, it helps to uncover any red flags or potential legal risks before proceeding with the transaction and provides information about the target company’s strengths and weaknesses.
iv) SECRETARIAL AUDIT REPORT PREPARED BY COMPANY SECRETARY IN PRACTICE
The concept of secretarial audit in India has evolved over time in response to the need for greater corporate governance and regulatory compliance. While the Companies Act, 1956, did not explicitly mandate secretarial audits, it imposed various compliance requirements on companies, including maintenance of statutory registers, filing of annual returns, holding of board meetings, appointment of auditors, etc.
The Companies Act, 2013, introduced significant reforms in corporate governance and regulatory compliance, aiming to align Indian corporate laws with international best practices and strengthen investor protection. Under the Companies Act, 2013, Section 204 introduced the concept of a secretarial audit for certain classes of companies. Every listed company and a company belonging to other class of companies, as may be prescribed, shall annex with its Board’s report made in terms of sub-section (3) of Section 134, a secretarial audit report, given by a company secretary in practice. The secretarial audit report is prepared in Form MR-3, which envisages compliance with various acts, including the Companies Act, 2013, the Securities Contracts (Regulation) Act, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, Regulations and Guidelines mandated by the Securities and Exchange Board of India Act, 1992, and so on. The secretarial audit report provides an independent assessment of the company’s compliance with applicable laws, rules, regulations, and corporate governance norms.3.
3. COMPARATIVE ANALYSIS:
Basis of distinction |
Certificate by Company Secretary in practice in Form MGT-8 |
Quarterly compliance report on corporate governance under Regulation 27 of SEBI (LODR) Regulations, 2015 |
Corporate governance report under Regulation 34(3) and 53(f) read with Schedule V of SEBI (LODR) Regulations, 2015 |
Legal Due diligence |
Secretarial audit report prepared by Company Secretary in practice |
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MEANING |
In Form MGT-8, the Practicing company secretary certifies that the annual return discloses the facts correctly and adequately and that it complies with the relevant provisions of the Companies Act, 2013. |
The quarterly compliance report on corporate governance under Regulation 27 includes the compliance of the composition and meetings of the board of directors and committees as per the SEBI (LODR) Regulation, 2015, approvals for RPT, and such other matters. |
The corporate governance report under Regulations 34(3) and 53(f) includes details as specified in Schedule V of the SEBI (LODR) Regulations, 2015, which include details of the board of directors and their meetings, committee meetings, general meetings, details of familiarization programmes imparted to independent directors, remuneration to directors, and so on. |
The process of assessing all legal risks associated with organisation structure, its assets, contracts, securities, contracts, intellectual property, etc. of the target company is considered as legal due diligence. It is a safeguarding procedure to ascertain the organization’s strengths and weaknesses using all accessible data. It ensures safe execution of transaction with least issues in future. |
A secretarial Audit is an independent process to review a company’s compliance with the law and its rules and regulations. |
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Relevant Provisions |
Section 92(2) of the Companies Act, 2013 read with rule 11(2) of Companies (Management and Administration) Rules 2014 |
Regulation 27 of LODR |
Regulation 34(3) and 53(f) read with Schedule V |
Not governed by any provision. |
Section 204 of the Companies Act, 2013 |
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Applicability |
It is applicable to listed company or a company having paid-up share capital of Rs 10 crore or more and a turnover of Rs 50 crore or above, the annual return will be certified by the company secretary in practice, and the certificate shall be in Form No MGT 8. |
It is applicable to the listed entity, which has listed its specified securities and non-convertible debt securities. (Also refer to Regulation 15 of the SEBI (LODR) Regulations, 2015, for applicability. |
It is applicable to listed entities that are required to submit an annual report under Regulations 34 and 53. |
It is voluntary |
It is applicable to the following class of companiesa) Every listed company orb) Every public company having a paid-up share capital of fifty crore rupees or more; orc) Every public company having a turnover of two hundred fifty crore rupees or more;d) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more |
|
SCOPE |
The certificate certifies that, in certain areas of compliance, the company has complied with the Act and the Rules requirements. The MGT-8 addresses the following compliance-related issues:a) Status of the company under the Actb) Maintenance of registers/ records, filing of forms and returnsc) Calling/ convening/ holding meetings of Board of Directors or its committeesd) Closure of Register Advances/ loans to its directorse) Contracts/ arrangements with related partiesf) Issue, allotment, transfer, transmission, or buyback of securities or sharesg) Signing of audited financial statementh) Approvals required to be taken from the Central Government and other local authorities |
The following details are included as per the format specified by the board established under section 3 of the SEBI Act, 1992.a) General info about the company.b) Composition of board of directors and committees.c) Meeting of board and committees.d) Details of approval taken for RPT.e) Details of cyber security incidences.f) Certain affirmations regarding compliance with SEBI (LODR), 2015.g) Details of signatory.It is submitted to BSE in XBRL format. It is advised to download the latest template from the BSE login. |
The following disclosures shall be made in the section on the corporate governance of the annual report. (For detailed version please refer Schedule V of SEBI (LODR) Regulation, 2015.a) A brief statement on the listed entity’s philosophy on code of governance.b) Details of board of directors and committees of the board.c) Remuneration of directorsd) General body meetingse) Means of communicationf) General shareholder informationg) Other Disclosures such as materially significant related party transactions, details of non-compliance by the listed entity and so on.h) Non-compliance of any requirement of corporate governance reporti) The extent to which the discretionary requirements as specified in Part E of Schedule II have been adopted. |
Legal Due Diligence evaluates the regulatory compliances that the company is subject to under several laws, including:a) Company lawb) Income Tax Lawc) Labour Lawd) RERA Acte)SEBI Act, their rules and regulationsf) Insurance Actg) RBI Acth) FEMA Acti) Intellectual Property Law etc |
It includes the examination of compliance of the following Acts and Regulations:a) The Companies Act, 2013 (the Act) and the rules made there underb) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made there under;c) The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;d) 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;e) Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’) as listed in the form MR-3.f) Secretarial Standards issued by The Institute of Company Secretaries of India.g) The Listing Agreements entered into by the Company with Stock Exchange(s), if applicable; |
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LEGAL PURPOSE |
Section 92(2) of the Companies Act, 2013 read with rule 11(2) of Companies (Management and Administration) Rules 2014 it is mandatory for certain classes of companies to ensure that the companies adhere to legal requirements diligently. |
As required by Regulations 27, 34(3), and 53(f) in conjunction with Schedule V of the SEBI (LODR) Regulation, 2015, it aids stock exchanges and other authorities monitor a company’s corporate governance requirements. |
Legal due diligence is carried for the various activities including the following:a) Merger & Amalgamationb) Takeoversc) Issue of securitiesd) Joint Venturese) Corporate Restructuringe) Private Equity |
It is mandatory under Section 204 of Companies Act, 2013. The periodical Secretarial Audit helps to identify the instances of non-compliances and facilitates taking corrective-measures well in time to avoid any further risk and penalties. |
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Consequences of Non-Compliance |
There is a penalty for a practicing company secretary for providing a false certificate that does not comply with the requirements mentioned in Section 92. The fine charged on the company secretary shall not be less than Rs. 50,000 and might extend to Rs. 5 Lakh.A practicing company secretary will be liable for disciplinary actions by the Disciplinary Committee of the ICSI under the provisions of Company Secretaries Act, 1980.Further, Section 448 of Companies Act, 2013 also imposes a penalty if any return, report, certificate, financial statement, prospectus, statement or any other document makes a false statement or omits any material fact.Finally, section 447 of Companies Act 2013 imposes a serious punishment of imprisonment if any person is found to be guilty of fraud. It shall be for a minimum of six months and can extend to ten years. In addition, a fine will be imposed, which shall not be less than the amount involved in the fraud and may extend to three times the amount involved in the fraud. If the case is more serious, involving public interest, the imprisonment would be for a minimum of three years. |
In case of non-submission or improper submission of a quarterly compliance report on corporate under the Regulations 27, 34(3) and 53(f) read with Schedule V of SEBI (LODR) Regulation, 2015, SEBI and the respective stock exchanges shall impose penalties or in some cases intimate the company by way of exchange communication to make good the wrong. |
Voluntary basis |
The penalty for non-compliance is as follows:The company, every officer of the company or the company secretary in practice, who is in default, shall be liable to a penalty of two lakh rupees. |
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Benefits |
The company secretary initially confirms in this certificate that she has reviewed the registers, records, and books and papers of the company The company cannot later dispute this fact, and the self-certificate of examination is admissible in any proceedings involving fraud and mis-representation, including class action lawsuits. These are major reasons for its inclusion. |
Principal advantages of quarterly compliance report on corporate include the following:a) The corporate governance report ensures the compliance of corporate governance norms.b) It promotes transparency by disclosing key aspects such as RPT, details and composition of board, remuneration of directors, detailed reasons for the resignation of an independent director, provides a confirmation that in the opinion of the board, the independent directors fulfill the conditions specified in these regulations and are independent of the management and so on.c) It also provides a statement of non-compliance of any requirement of corporate governance report with the reasons for non compliance which in turn helps the stakeholders to make an informed decision. |
Advantages of conducting legal due diligence:a) It facilitates an informed decision on the proposed transaction and to arrive at a proper valuation;b) The process of Due diligence identifies the risks and liabilities and uncovers the threats and weaknesses.c) To determine where non-compliances exist and correct them. |
Key advantages of secretarial audit include the following:a) Businesses that take great care in their compliance programs create the foundations for effective corporate governance.b) Businesses that implement an efficient compliance management approach can reduce their risk of facing monetary penalties and impri-sonment, as well as enhance their reputation.c) Performing Secretarial Audits on a voluntary basis helps many businesses reduce the likelihood of different problems that may hinder their development. |
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Time period |
It has to be a part of annual return (Form MGT 7) which is submitted within 60 days of conducting AGM. |
It has to be submitted within 21 days from the end of each quarter. |
It has to be a part of annual report. |
It depends on case to case basis ( usually it takes 2 – 3 months) |
It has to be completed before a reasonable time so that it can be sent to shareholders along with the notice of AGM. |
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Conducted By |
It shall be conducted only by a Company Secretary in practice. |
It shall be prepared by any director or managing director or CS or CFO or CEO of the company. |
It is prepared by the management of the company and has to be a part of annual report. |
It is usually conducted by the legal team or the professionals. |
It shall be conducted only by a Company Secretary in practice. |
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Authority to whom it is submitted |
It is submitted to ROC along with Form MGT 7 (Annual Return) |
It is submitted to the Recognised stock exchange(s). |
It is sent along with the annual report, submitted to the Recognised stock exchange(s) and published on the website of the company. |
It is conducted for the concern party.For example: The potential buyer undertakes due diligence to understand the various legal aspects of the target company |
It is a part of board’s report which is addressed to the members of the company and subsequently filed with ROC pursuant to Section 137 of the Companies Act, 2013. |
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4. CASE STUDIES
a) Etisalat, a UAE-based company, paid $900 million in September 2008 to acquire a 45% share in Swan Telecom, an Indian telecom operator that later changed its name to Etisalat DB. Due to improper procedures in obtaining the licenses, Swan Telecom’s 2G licenses were canceled by the Supreme Court of India a year later. Etisalat’s due diligence procedure turned up no evidence of improper behavior in the telecom license acquisition process. With potential losses of up to $827 million, Etisalat had to make a decision to leave the company due to severe financial setbacks. On the basis of fraud and deceit, Etisalat then filed lawsuits against the founders of Swan Telecom, who had changed its name to Etisalat DB.
b) BYJU’S is one of India’s leading educational technology companies, Corporate governance standards emphasize the importance of having a diverse and independent board of directors to ensure effective oversight and decision-making. Questions have been raised about the composition and independence of BYJU’S board, especially considering the significant influence of the founder and key stakeholders. Some investors have raised concerns about transparency, disclosure norms, and board independence.
c) PhonePe initiated discussions to acquire ZestMoney to strengthen its lending service in India, but this deal was called off because of due diligence concerns. The due diligence that PhonePe carried out for acquisition of ZestMoney did not meet its bar. If this deal was successful, it would have become the biggest consolidation deal in the fintech’s lending segment.
d) The hurdle of Zee and Sony’s merger-In order to become one of the largest entertainment companies in India, ZEE Entertainment and Sony’s Indian planned to merge. However, because certain conditions weren’t met, Sony called off the transaction. One of the main causes of the deal’s cancellation was the appointment’s problems. Both the companies disagreed about who should lead the merged entity. It emphasizes how important it is for all parties to have open lines of communication and carry out due diligence when engaging in such transactions.
While corporate governance failures in the Indian startup ecosystem have occurred, instances of significant backlash from foreign investors due to such failures are relatively less common. However, there have been cases where corporate governance issues have led to concerns among foreign investors, impacting their perception of investing in Indian startups. Enhancing corporate governance practices is crucial for attracting foreign investors to a country’s business environment. Foreign investors typically seek stable, transparent, and well-regulated markets where they can deploy their capital with confidence.
5. CONCLUSION:
Every employee, officer, and director of the company is required to abide by all laws, rules, and regulations that are relevant to the entity wherever it conducts business. The compliance documents ensure compliance with the respective laws and provide an insight into the status of compliance. Corporate governance in majority of the cases positively affects the business performance and in turn nations’ economic growth.’
*****
“The Tata philosophy of management has always been, and is today more than ever, that corporate enterprises must be managed not merely in the interests of their owners, but equally in those of their employees, of the consumers of their products, of the local community and finally the country as a whole.” – JAMSETJI N. TATA
The authors have tried their level best to cover all the relevant aspects related to the topic and in case of any suggestion or improvement; the authors can be reached through mail id: learnlaw16@gmail.com
DISCLAIMER: This article is based on the relevant provisions and to the best of my knowledge at the time of preparation of this article and in no event, the author shall be liable for any direct and indirect result from this article and this is only a knowledge sharing initiative provided solely for information, this article is not a piece of professional advice or recommendation.
Authors: Roopali Agarwal & Jananisri S
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