Introduction
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 due processes. It is essentially a mechanism to monitor compliance with the requirements of stated laws and processes.
Timely examination of compliance reduces risks as well as potential cost of non-compliance and also builds better corporate image. Secretarial Audit establishes better compliance platform by checking the compliances with the provisions of various statutes, laws, rules & regulations, procedures by an independent professional to make necessary recommendations/ remedies. The primary objective of the Compliance Management backed Secretarial Audit is to safeguard the interest of the Directors &officers of the companies, shareholders, creditors, employees, customers etc. With the introduction of concept of ‘Secretarial Audit‘ in Companies Act, 2013, it has gained wider importance and an area of professional opportunity among Company Secretaries.
A Company Secretary in Practice has been assigned the role of Secretarial Auditor in section 2(2)(c)(v) of The Company Secretaries Act 1980, which is the only statute in the country, carving out ‘Secretarial Audit’ as an area of practice.
A practicing Company Secretary (PCS) is the competent, fit and proper professional to conduct Secretarial Audit. A significant area of competence of PCS is “Corporate laws” owing to intensive and rigorous coaching, examinations, training and continuing education programs. PCS is a highly specialized professional in matters of statutory, procedural and practical aspects involved in proper compliances under corporate laws. Strong knowledge base makes PCS a competent professional to conduct Secretarial Audit.
The Institute of Company Secretaries of India realizing the importance of this topic has already introduced “Secretarial Audit, Compliance Management and Due Diligence” as one of the subject in its Professional curriculum w.e.f. 01st September, 2013.
Background
The concept of Secretarial Audit is not new in Indian context. The Ministry of Corporate Affairs has already released CORPORATE GOVERNANCE VOLUNTARY GUIDELINES, 2009 on December 21, 2009. The preamble to Guidelines states that “These guidelines provide for a set of good practices which may be voluntarily adopted by the Public companies. Private companies, particularly the bigger ones, may also like to adopt these guidelines.”
The Guidelines, amongst other things, recommend the introduction of Secretarial Audit. Companies, which do not adopt these guidelines, either fully or partially, are expected to inform their shareholders about the reasons for not adopting these Guidelines.
The earlier Companies Act, 1956 provides for a compliance certificate to be issued by a Company Secretary in practice and annexed to Board Report by certain class of Companies. As per Section 383A of the Companies Act, 1956, every Company having a paid-up capital of not less than Rs. 10 lakhs or more but less than Rs. 5 crore shall be required to file a compliance certificate given by a practicing Company Secretary with the Registrar of Companies within 30 days from the date on which its annual general meeting was held with the requisite fees and a copy of such certificate was attached with Board’s report.
Provisions in Companies Act, 2013
The Companies Act, 2013 has now introduced the Secretarial Audit as a new class of audit in addition to Statutory Audit, Internal Audit and Cost Audit prescribed in the act. Section 204 of the Act read with The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 notified w.e.f. 01st April, 2014 deals with provisions relating to Secretarial Audit.
1. Applicability
The requirements of Secretarial Audit are not applicable on all companies. According to Sub-Section 1 of Section 204 of the Act, 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, in such form as may be prescribed.
Rule 9 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes the other class of companies as under:
(a) every public company having a paid-up share capital of 50 crore rupees or more;
- or
(b) every public company having a turnover of 250 crore rupees or more.
2. Duties, Rights and Powers of Company Secretary in Practice conducting Secretarial Audit
According to Sub-Section 2 of Section 204 of the Act, it shall be the duty of the company to give all assistance and facilities to the company secretary in practice, for auditing the secretarial and related records of the company. Further, a company secretary in practice conducting secretarial audit has been granted similar powers and rights as that granted to statutory auditor. (Section 143(14) of the Act).
The report of Board of Directors prepared under Section 134(3) of the Act shall include explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the company secretary in practice in his secretarial audit report. (Sub-Section 3 of Section 204 of the Act).
3. Punishment for Default
According to Sub-Section 4 of Section 204 of the Act, if a company or any officer of the company or the company secretary in practice, contravenes the provisions of section 204 of the Act, the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.
Further, the provision of Section 143 mutatis mutandis applying to company secretary in practice in conduct of secretarial audit, if the company secretary in practice, in the course of the performance of his duties as secretarial 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 report the matter to the Central Government within such time and in such manner as may be prescribed. If company secretary in practice conducting Secretarial Audit u/s 204 of the Act do not comply with such provisions, he shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 25 lakh rupees. (Sub-Section 15 of Section 143 of the Act).
4. Reporting Requirements
Rule 9 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that the format of the Secretarial Audit Report shall be in FormNo.MR – 3. The format of the report (MR – 3) is also available in the aforesaid Rules. The scope of reporting is very broad and the Company Secretary in practice has to ensure compliances of following statutory provisions in addition to Secretarial standards issued by The Institute of Company secretaries of India, the Listing Agreement and The Companies Act, 2013(including the rules made thereunder):
- The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;
- The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;
- 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;
- The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):
- The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
- The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;
- The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
- The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
- The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
- 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;
- The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and
- The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
5. any other laws as may be applicable specifically to the company.
Conclusion- While the Companies Act, 2013 has opened up a significant area of practice for Company Secretaries, it casts immense responsibility on Company Secretaries, and poses a great challenge to justify fully, the faith and confidence reposed in them.The reporting clause of MR-3 – “I/We hereby report that in my/our opinion, the company has, during the audit period covering the financial year ended on_____, _____ complied with the statutory provisionslistedhereunder and also that the Company has proper Board-processesand compliance-mechanism in place to the extent, in the mannerand subject to the reporting made hereinafter ………………….” cast an enormous responsibility on the part of Company Secretary in practice.It, therefore, becomes imperative for the PCS that he exercises great care and caution while issuing the Secretarial Audit report and also adheres to the highest standards of professional ethics and excellence in providing his services. Secretarial Audit is to be on the principle of “Prevention is better than cure” rather than post mortem exercise and to find faults.
Also, there is no cap proposed on maximum number of secretarial audits which a practicing company secretary could conduct. A cap of reasonable number of secretarial audits would be desirable for equity, quality and efficiency.
ICSI suggestions to Ministry
The regulator of profession of Company Secretary believes that the legislative intention of this section 204 of the Act is that every listed company, big or small, and every big company needs secretarial audit. It does not envisage distinction between private and public companies. The need for a company to have secretarial audit company can be linked to scale of operations or presence which can be determined in terms of paid up capital, turnover, number of employees, number of shareholders, outstanding borrowings, kinds of business etc. and has no link whether a company is public or private. In fact, we had moved to a regime where the law endeavors to provide level playing field to all kinds of market participants. In fact Companies Act, 2013 has done away with most of the exemptions/relaxations available to private companies under the earlier law. This is found on the profound realization that serious misdemeanor have been noticed in many private companies. The exclusion of private companies, irrespective of their size, from secretarial audit gives a message that the matters covered under such audit such as compliance with applicable laws is not important. It is at least as important as the financial audit which is compulsory for every company. That is why it is part of the Corporate Governance Voluntary Guidelines, 2009 of Ministry of Corporate Affairs which is applicable to all companies.
The Institute of Company Secretaries of India has made a representation (dated 02nd April, 2014) to the Ministry of Corporate Affairs for amending the rules relating to Secretarial Audit and making it applicable to all those companies which are at least subject to ‘Internal Audit’ u/s 138 of the Act.Now, the new Government of 16thLokSabhawill be tested, how it comes up with this representation/suggestion of ICSI.
Note :-
Reference to Act means Companies Act, 2013 unless stated otherwise.
Views are personal and may not be relied as an opinion on any statutory act, section or rule.
-CA. Amit G. Chandani, ACA, ACMA, Lic. ICSI, B.Com- (@) amitgchandani@icai.org
Add-on (to share more thoughts):
The requested clarification has not been forthcoming so far. However, according to info., since gathered, Sec 204 is one of the new provisions already notified to take effect from April 1, 2014, hence the requirement of PCS Audit report calls for compliance for and from the current financial year ending March 31, 2015.
Now turning to the form of the report (see gist given in the write-up), as viewed, the wording specially require to be focussed on are, – “… report that in my/our opinion, the company has, DURING THE AUDIT PERIOD COVERING THE FINANCIAL YEAR ended on_____, _____ complied with the statutory provisions listed hereunder and also that…”
The referred statutory provisions, besides those specified, are, as envisaged, inclusive of, – “5. any other laws as may be applicable specifically to the company.” This is a residuary item, couched in a very broad language. As such, the PCS, as the first and foremost essential step, would be obliged and have to embark on a diligently thorough inquiry and prepare a complete list of all such ‘other laws’ (and/or anyone or more of them) which is of relevance to and calling for compliance by the client-company even in the normal course of its carrying on business. For instance, a company engaged in the business of construction and sale of flats/apartments in a building complex, the special enactment(s) in force in the respective State would be of every relevance. Likewise, if it be banking company, then the host of, besides the Banking Companies Act and the Rules, the applicable code of ethics /conduct in the Rules Book of RBI.
Another crucial point of concern arises from the fact that, even without the new law of 2013 (or the now mandated PCS Audit Report), indisputably, it is the person (s) functioning as the ‘company secretary’ (in-house and or/external) who has always been responsible for overseeing and ensuring strict compliance with the ‘laws’ (Central or State) in force. That, in turn, unavoidably entails and gives rise to questions and problems galore. For, PCS has to, well in advance, suitably examine ab initio and decide upon the scope of audit / coverage in the report expected of him.
ICSI, being the self-regulatory authority, may be taken to have done sufficient home work, that too from a multidimensional angle, so as to provide eminent guidance in the normal course; or if and when approached by PCS (s) with peculiar problems.
DISCLAIMER: This is a feedback, albeit from a non-expert (nay, a self-professed novice), but mainly founded on a common sense approach, for serving the common good of one and all concerned, professionally or otherwise.The primary aim is to inspire and provoke more thoughts, and valuable contribution, from the competent experts active in the field.
Mr Amit
The article summing up the new provision makes for a useful reading. So far as could be seen, however, the effective date i.e. the financial year , for and from which the added requirement of the PCS report needs to be complied with finds no specific mention. Will you please clarify !
OFFHAND
Subject to an in-depth study of the new provision and its implications / ramifications, no denying, it has a commendable/laudable objective; in that, the mandated requirement has very rightly underlined the most crucial and predominant role of a company secretary in the field of corporate good governance. As is imagined, if implemented and complied with, DILIGENTLY and in all seriousness, the Secretarial Audit, – NOW GIVEN, though long overdue, THE SHAPE AND FORM OF A FORMAL LEGAL REQUIREMENT, -might be expected to usher a new era, and most of the vexing ‘irregularities’ and ‘illegalities’ galore coming to surface in recent times almost perennially, to the chagrin and discomfort of the stakeholders in its comprehensive sense, controlled / eradicated, to the end of bringing about a radical change, for better, in the functioning of ‘companies’. In fact, in one’s independent perception and longstanding conviction, there could be, if rightly viewed, no valid reason for not making the subject formal requirement applicable to all such entities being accorded the status of a ‘company’ within its extended meaning under the new company law.