Secretarial Audit: Introduction

Secretarial Audit is a health check up process of an organization whereby the Practicing Professional verifies the correctness and reliability of 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 

  • Section 204 of the Companies Act, 2013; and
  • Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

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.

Key Takeaways

  • SEBI clarified that the listed entity and its unlisted material subsidiaries shall continue to use Form No. MR-3 as required u/s 204 of the 2013 Act, as their Annual secretarial audit report.
  • Further stated that the annual secretarial audit shall cover a broad check on compliance with all laws applicable to the listed entity.
  • Additionally, required Practicing Company Secretaries to run a check on compliance by the listed entity with all applicable SEBI Regulations and Circulars/Guidelines and submit an annual secretarial compliance report (in the stipulated format) to the entity thereafter.
  • Directed listed entities and their material subsidiaries to submit annual secretarial compliance report to stock exchanges within 60 days of financial year end.

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:

  • Reporting on Composition of a valid board with proper balance of Executive, Non-Executive Directors, Independent Directors and Women Directors and any changes thereof.
  • Reporting on Board processes such as issuance of notice to all directors to schedule the Board Meetings along with timely issue of agenda and detailed notes on agenda in advance.
  • Reporting on process followed by the company with regard to capturing of views of dissenting members while drafting minutes of the respective meetings.
  • Lastly, reporting and providing details of specific events and actions that have occurred during the reporting period, which may have major bearing on the affairs of the company in pursuance of above referred laws/ rules & regulations.

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.

DISCLAIMER:

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!

Author Bio

Qualification: CS
Company: DEEPANSHU GAWDI & ASSOCIATES
Location: FARIDABAD, Haryana, IN
Member Since: 21 Jun 2019 | Total Posts: 3
Deepanshu Gawdi heads the firm's Corporate Laws Practice at Faridabad. He is an Associate Member of the Institute of Companies Secretaries of India (ICSI). He carries with himself the practical exposure of various corporate matters while working in a reputed Law Firm. He is young and energetic Pract View Full Profile

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