Secretarial Audit: Introduction
Secretarial Audit is a health check-up process of an organization whereby the Practicing Professional verifies the correctness and reliability of the compliance management system in order to ensure compliances of applicable laws by the company.
Secretarial Audit is a process to check compliance with the provisions of various laws and rules/ regulations/procedures, maintenance of books, records, etc., by an independent professional to ensure that the company has complied with the legal and procedural requirements and also followed the due process.
It is pertinent to note that the Secretarial Audit is not just concerned with the Company Law compliances but its scope is much beyond Company Law. The words used are “Compliance with Applicable Laws“. This issue has been specifically captured in detail in paragraphs to come.
Secretarial Audit is a proactive governance measure that will have a positive effect on corporate entity. Secretarial Audit is a form of Compliance Auditing that is used in carrying out auditing of compliances with all laws, rules and regulatory requirements applicable to the company. It looks into all the events, compliance and records created during the audit period to check whether the Company really complies with the applicable laws and secretarial standards as issued by ICSI.
Jurisprudence on Secretarial Audit – Position under the Companies Act, 1956
The Companies Act, 1956 (“1956 Act“) did not contain any provision with respect to Secretarial Audit. However, MCA had released Corporate Governance Voluntary Guidelines 2009 (“MCA Guidelines“) on December 21, 2009, according to which voluntary secretarial audit was introduced to ensure the effective compliance system is in place.
The MCA Guidelines read as under:
“Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its report to the shareholders.”
The said MCA Guidelines did not mandatorily provide for conducting of Secretarial Audit, rather such Guidelines gave an option to the Companies to get the Audit done by a Practicing Professional.
The Companies Bill, 2009: Paved the way for Secretarial Audit
The Standing Committee on Finance in its 21st Report said that, “Secretarial Audit gives a necessary comfort to the investors that the affairs of the company are being conducted in accordance with the legal requirements and also protects the companies from the consequences of non compliance of the provisions of the Companies Act and other important corporate laws.
It is, accordingly, felt and suggested that the Bill may provide for requirement of conduct of secretarial audit by at least bigger companies by a company secretary in practice.“
Legal Framework governing Secretarial Audit under the Companies Act, 2013
Applicability of Secretarial Audit
Section 204(1) of the Companies Act, 2013 (“2013 Act“) read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 states that-
1. Every listed company;
2. Every public company having a paid-up share capital of fifty crore rupees or more; or
3. Every public company having a turnover of two hundred fifty crore rupees or more
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, in Form MR- 3.
Applicability of Secretarial Audit on a Deemed Public Company
According to the provisions of Section 2(71) of the 2013 Act, “public company” means a company which—
(a) is not a private company and;
(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed.
However, the proviso to the aforesaid definition provides that, “a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles”.
The language used in the above proviso makes it crystal clear that Section 204 is also applicable to a private company which is a subsidiary of a public company, provided that such a company falls under the aforesaid prescribed class of companies.
The Kotak Committee on Corporate Governance
The Kotak Committee on Corporate Governance was constituted on June 02, 2017 under the Chairmanship of Shri. Uday Kotak. The Committee then released its recommendation on October 05, 2017. Thereafter, on March 28, 2018, SEBI approved the recommendations and finally implemented the same by making out suitable amendments to the SEBI LODR Regulations.
SEBI and Secretarial Audit
SEBI vide its Notification dated May 09, 2018 amended ‘SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015’ (“LODR Regulations“) which came into force w.e.f. April 1, 2019. SEBI had directed every listed entity and its material unlisted subsidiaries incorporated in India, to undertake secretarial audit starting from year ended March 31, 2019. However, SEBI had not notified the Format for annual secretarial audit report therein.
Thereafter, SEBI vide its Circular No. CIR/CFD/CMD1/27/2019 dated February 08, 2019 notified the format for annual secretarial audit and compliance report for listed entities and its material unlisted subsidiaries, effective from March 31, 2019.
Scope of Secretarial Audit Report – Key Areas to be monitored
The Secretarial Audit takes into its ambit compliance with the provisions of the below mentioned statutes:
1. Companies Act, 2013, and rules made thereunder;
2. SEBI Act, 1992 along with SEBI Rules and Regulations;
3. Securities Contract (Regulation) Act, 1956 and the rules made thereunder;
4. Foreign Exchange Management Act, 1999 along with the rules and regulations made thereunder;
5. Depositories Act, 1996 and Regulations made thereunder; and
‘Other laws as may be applicable specifically to a company‘
The phrase other laws as may be applicable specifically to a company was neither defined under the 2013 Act nor any clarification was provided with respect to the same until the Council of ICSI clarified the same after its 226th meeting held on November 21, 2014.
Accordingly, the decision of the Council of ICSI on the Scope of Secretarial Audit as regards ‘other laws as may be applicable specifically to the company’ is produced here as under:
Reporting on compliance of “Other laws as may be applicable specifically to the company‟ which shall include all the laws which are applicable to specific industry for example for Banks- all laws applicable to Banking Industry; for insurance company-all laws applicable to insurance industry; likewise for a company in petroleum sector- all laws applicable to petroleum industry; similarly for companies in pharmaceutical sector, cement industry etc.
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.
Therefore, the scope of Secretarial Audit is not limited to verification of compliance arising out of Company Law Obligations but also akin to all the laws that are applicable to the company.
Furthermore, the Auditor is required to conduct detailed examination and report on the compliances with the applicable clauses of the following:
(i) Secretarial Standards as issued by ICSI; and
(ii) Listing Agreements entered into by the company with the Stock Exchange(s), if applicable/ Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time.
Stressing upon the key areas which are required to be monitored by PCS while conducting the Audit, there are certain other important areas too which require great consideration in order to ensure that a company’s internal reporting and internal controlling checks are in place or not. These include:
Thus, if we look into entirety, the inherent idea behind the Secretarial Audit is not just to from the perspective of Company Law but to have a thorough check done by an Expert from the angle of every applicable law on the company and especially reporting on non-compliances, if any, found during the process.
Extended Role/ Importance of Secretarial Audit
The Secretarial Audit conducted by the PCS generates a confidence in the management as it provides a piece of mind to the directors and KMPs that the legal and secretarial compliances are being taken care of by a Professional.
Secondly, Audit is performed by a member of the Recognised Body, which ensures that high levels of Professional Standards and Ethics are being followed, which further adds up to the responsibility of the Professional who issues such report under his hand.
Thirdly, the Secretarial Audit helps to identify risk areas that require serious attention of the management, which could have been overlooked or not looked at all, had the Audit been not undertaken.
Lastly, the Audit exercise helps the companies to stand out in the market as it gears up the reputation/ brand value of the company. Regulators do keep a watch on such compliant companies.
ICSI’s Auditing Standard on Secretarial Audit: A step towards standardizing diverse audit practices
Recently, on May 07, 2019 the Council of ICSI issued 4 Auditing Standards out of which CSAS-4 has been issued with respect to Secretarial Audits. ICSI has clarified the applicability of these standards as recommendatory on Audit Engagements accepted on or after July 01, 2019 and mandatory on engagements accepted on or after April 01, 2020.
Being a premier organization, ICSI has been on the front side whenever it comes to promote Good Corporate Governance practices amongst its members who are responsible for ensuring the same at the corporate and global level.
Upon these Auditing Standards becoming effective, it will harmonise, and standardise diverse Auditing practices followed by Auditors so as to promote uniformity and consistency.
Company Secretary and Audit – Road Ahead
Audit be it Statutory or Secretarial,. Secretarial Audit has proved to be a tool for ensuring effective compliance management by the companies. The contemporary corporate culture is more concerned with audit and assurance as non-compliance with laws and their reporting can land the big corporates into serious trouble. Company Secretaries, as a corporate savior, are being looked at as an expert when it comes to compliance with the laws. Therefore, be it CS in employment or Practice, both are concerned with adherence to the words of statute in true letters and spirit.
This write-up is only for academic purposes. Please do not consider it as a professional advice and the same shall not be relied upon for real life facts. We hope that our readers will find this write-up useful in having a better understanding of the background, core aspects, changing dynamics of Secretarial Audit. Happy Reading!