Corporate Compliance Management- Secretarial Audit

SECRETARIAL AUDIT

A Secretarial Audit is a mechanism to check the compliance of an organization to the laws, rules, regulations, notifications etc prevalent at the time of the audit. In this case, it is to check if a company has been complying with the provisions of the Companies Act 2013 and all of its rule therein.

The rules and regulations around companies are very complex and ever increasing. The responsibilities of the directors, promoters and other managerial positions are also very complicated and crucial. So it is important that a Practicing Company Secretary (PCS) be hired to conduct a secretarial audit.

Secretarial Audit is a process

1. To check compliance with the provisions of various laws and rules/ regulations/procedures, maintenance of books, records etc.,

2. By an independent professional

3. To make sure that the legal and procedural requirements are complied with

4. Also followed the due process.

5. It is essentially a mechanism to monitor compliance with the requirements of stated laws.

PCS will ensure that all proper compliance mechanism and systems are in order. He ensures that all the legal and procedural requirements of the law and regulations are being met with. If he finds any fault he can point out to the management and they can rectify their mistakes. So as you can imagine, secretarial audit is a continuous process.

Secretarial Audit as per Companies Act

Section 2014 (1) of the Act deals with the provisions regarding Secretarial Audit. As per the act, the audit is compulsory for the following companies,

1. Every listed company

2. Public company with paid-up capital greater than 50 crores

• Public company with turnover greater than 250 crores

1. Any private company who is a subsidiary of a public company which falls under the above two categories

The act also states that only a practicing Company Secretary who is a member of the Institute of  Company Secretaries of India (ICSI) has authorization to carry out

a statutory secretarial audit of these companies.

Scope of the Secretarial Audit

So a Company Secretary (member of the ICSI) is appointed as a secretarial auditor usually at the beginning of the financial year. This appointment is by the board members via a board resolution.

He will then submit a report of his audit to the same board. It is preferable to submit a report quarterly, so the company can stay on top of the compliance requirements.

Now when the auditor submits his report, he has to review the compliance of five specific laws. This is the scope of his audit. The five laws are as follows,

1. Companies Act 2013

2. Securities Contracts (Regulation) Act, 1956

• Depositories Act 1956

1. FEMA 1999

2. Rules and Regulations under the SEBI Act

Other than this the auditor will also check the company’s compliance with,

1. The Secretarial Standards which the ICSI issues from time to time

2. The Listing Agreement of the company with the appropriate stock exchange.

Secretarial Audit Report

Every company to which secretarial report applies –

1. It shall be prepared by a Company Secretary in Practice.

2. It shall be prepared in Form MR-3

Annexed with Board’s Report, considering the increasing importance of Corporate Governance.

Scope of Secretarial Audit

Reporting on the compliance of five laws as mentioned in form MR-3:

1. Companies Act, 2013 and the rules made there under;

2. Securities Contracts (Regulation) Act, 1956 (‘SCRA’), and the rules made there under;

3. Depositories Act, 1996, and the rules made there under;

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

5. Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’)

6. Reporting on the compliance of secretarial standards issued by the Institute of Company Secretaries of India;

7. Reporting on Compliances with the Listing Agreement;

8. 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.

9. Examines and reports regarding the adequacy and efficiency of the systems and processes with other laws.

Monitor and ensure compliance with general laws like labour laws, competition law, environmental laws.

10. Examines and reports on the specific observations or qualification, reservation or adverse remarks in respect of the Board Structures/system and processes relating to the Audit period.

11. Secretarial Auditor may rely on reports given by statutory auditors or other designated professionals to check compliance with other laws like Income Tax, Customs, GST.

 Appointment of Secretarial Auditor

1. Obtain the consent of secretarial Auditor.

2. File certified a true copy of a resolution passed in Board Meeting with the Registrar of Companies as an attachment in E-Form MGT-14

3. Appoint the Secretarial Audit in Board Meeting.

4. Fix the remuneration in Board Meeting.

Process of Secretarial Audit

Documents Required/Checklist

Secretarial Auditor or the firm of Secretarial Auditors shall provide the checklist for carrying out the secretarial audit of the company depending upon the nature of business activities carried on by the Company

 COMPLIANCES UNDER COMPANIES ACT, 2013;

General Compliances

1. Whether company has kept and maintained all statutory registers, filed all forms, return and notices to respective authorities as per companies Act, 2013

2. Whether company follow all requirements of the Act and provisions of MOA & AOA

Details of Documents to be Checked

Register and Records

• Register & Index of members
• Register & Index of debenture holders
• Foreign registers of members of debenture holders
• Registers and returns
• Minutes book of meetings
• Minutes book of class meeting/creditors meeting
• Register of investments
• Register of deposits
• Register of charges (creation)
• Books of accounts & cost records
• Register of contracts
• Register of directors, MD, manager & secretary
• Register of directors’ shareholding
• Register of investments, loans made, guarantee given or security provided
• Register of renewed & duplicate certificates
• Register of directors’ attendance
• Register of shareholders’ attendance
• Register of proxies
• Register of Transfer
• Register of fixed assets
• Register of debenture holders

 Returns

• Annual Returns
• Annual Accounts (Balance Sheet and Profit and Loss Account)
• Return of Allotment
• Notice of change in situation of Registered office
• Court or CLB Order
• Return of Appointment of MD/WTD/Manager
• Return of Deposits
• Registration of Resolutions and Agreements
• Registration of Creation/ modification/ satisfaction of Charge

 Meetings

• Board of Directors Meetings, as per section 173 of Companies Act, 2013
• Extraordinary General Meeting, as per section 100 of Companies Act, 2013
• Annual General Meeting, as per Section 96 of Companies Act, 2013
• Committee Meetings duly convene as per provisions of Companies Act, 2013
• Minutes of All Meetings maintained as per section 118 of Companies Act, 2013
• Proof of Dispatch of Notices to Members/ Directors as per respective provisions of Companies Act, 2013

e- Filing

Check whether company has filed the following Documents;

MGT- 14 within 30 Days of passing Special Resolutions/Board Resolutions as the case may be

MGT-14 in case of Board Resolutions (other than Private Company)

• To make political contributions
• To Diversify the Business of the Company
• To approve Merger, Amalgamation or Reconstruction
• To takeover of the Company
• To Appoint Company Secretary as an Secretarial Auditor (section 204 of Companies Act, 2013)
• To Appoint Internal Auditor (section 138 of Companies Act, 2013)
• To invest the fund of Company under section 186 of Companies Act, 2013
• To Approve Financial statement and Board’s Report
• To Appoint or Remove KMP (defined under section 2(51) of the Companies act,2013
• To issue securities including debenture, by letter of offer
• To Borrow Monies from any sources including Directors
• To authorize Buy Back of Securities under Section 68

 MGT- 14 in case of Ordinary Resolutions

• For Appointment of Director under section 152 of companies Act, 2013
• Invitation given to member for Deposit as per section 73 of Companies Act, 2013
• Appointment of Small Shareholder Director (section 151 )
• Appointment of independent Director
• Issue of Bonus Share
• Change of the name of the Company MGT-14 in case of Special Resolutions
• Conversion of Private Company into OPC
• Approve the any scheme for giving loan to MD/WTD under section 185
• Loan or Investment by Company exceeding the limit under section 186 of the Companies Act, 2013
• Special resolution for winding of the Company
• Appoint Managerial Personnel exceeding the age of 70 Years
• Remuneration to managerial personnel in case of inadequacy of profit a per Schedule V
• Resolutions under Section 180 (a), (b) and (c) of the companies Act, 2013
• Re- appointment of Independent Director
• For keeping of the register any other place in India
• For buyback of share as per section 68
• For reduction of share capital as per section 66
• Issue of Sweat equity share as per section 54
• Private Placement of Securities
• Conversion of Section 8 Company in any other kinds or alteration of its MOA
• Change of its registered office under section 12 and 13 of Companies Act, 2013

File return of allotment in form PAS-3 within 30 days of allotment of share with ROC

File SH -11 returns in respect of Buy back of Securities

File form DPT 3 for return of deposit

File CHG-1 in case of Application for registration of creation, modification of charge, within 30 days of its creation

Particular for Satisfaction of Charge in form no CHG-4 filed with ROC

For condonation of delay in filing of charges has been made to CG in form no CHG 8

Whether MGT 7 (Annual Return) filed with ROC within 60 days of its AGM

Whether company maintained AOC 2 for related party disclosure

Whether company file ADT 1 within 30 days of Appointment of Auditors

Whether application has been made to CG in ADT 2 for removal of Auditors

Whether company received DIR 2 (consent to act as a director)

Whether company Filed DIR 12 (particular for Appointment of Director, KMP and changes among them) with ROC within 30 days of appointment or changes

Whether DIR 11 filed with ROC within 30 days of its Resignation

Whether Company maintain Register of Loans and investment in MBP 2

Whether Company Receive MBP 1 (nature of Interest) from all director in its first BM of Financial Year

Whether company maintained register of Contract and arrangement in which director are interested in Form MBP 4

Whether company file MR 1 with Roc within 30 days of appointment of MD/WTD/Manager

Whether MR 2 filed with CG for approval of appointment or reappointment and remuneration or increase in remuneration or waiver for excess or over payment to managing director or whole time director or manager and commission or remuneration

Share Certificates, Transfer/Transmission of Shares, Dividend, Board’s Report

• Copies of Endorsed shares certificates and other securities
• Transfer Deeds and transmission request letters etc.
• Declaration, payment and transfer of dividend
• Board’s report
• Transfer of unpaid amounts to the IEPF

 COMPLIANCES UNDER SECURITIES CONTRACTS (REGULATION) ACT, 1956

(1) Check whether the company’s securities are already listed on a Stock Exchange;

(2) Check whether the company has issued shares/debentures/bonds to the public. If yes, whether:

(a) An application for this purpose to the stock exchange has been made along with the documents and particulars mentioned in Rule 19(1) of the Securities Contracts (Regulation) Rules, 1957;

(b) Has the listing agreement been finalized and approved by the company’s Board and executed with the stock exchange concerned. In case any conditions have been imposed by the stock exchange, have those restrictions/conditions been incorporated in the agreement.

(c) Whether listing was done within the statutory time limit

(d) Where permission for listing has been refused by the Stock Exchange:

• Whether appeal was filed
• What is the outcome of the appeal?

(e) Whether all terms and conditions of the listing agreement have been complied with.

 Contravention/ Punishment

If a company or any officer of the company or the company secretary in practice, contravenes the provisions of this secretarial audit, then

1. The company, or

2. Every officer of the company, or

3. The company secretary in practice,

who is in default, shall be punishable with

Fine:- Minimum Rs. 1 lakh.

Maximum Rs. 5 lakh.

Objectives of Secretarial Audit

The objectives of Secretarial Audit are mentioned below as follows:-

1. To verify & report on compliances of applicable laws and Secretarial Standards;

2. To point out non-compliances and inadequate compliances;

3. To protect the interest of various stakeholders i.e. the customers, employees, society etc;

4. To avoid any unwarranted legal actions/penalties by law enforcing agencies and other persons as well.

Benefits of Secretarial Audit

Broadly, the need for Secretarial Audit is:

1. An effective mechanism to make sure of the compliance with the legal and procedural requirements

2. Provides a level of confidence to the directors & Key Managerial Personnel etc.

3. Secretarial Audit ensures legal and procedural requirements so directors can concentrate on important business matters.

4. Strengthen the goodwill of a company for their regulators and stakeholders.

5. Secretarial Audit is an effective governance and compliance risk management tool.

6. It helps the investor in analyzing the compliance level of companies, thereby increases the reputation

Conclusion

Secretarial Audit is an independent, objective assurance intended to add value and improve an organization’s operations. It helps to accomplish the organization’s objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

AMENDMENT (MCA)

Secretarial Audit has been made mandatory for private companies and Small Public companies in case of total outstanding debt of Rs 100 crore or more to banks and financial institutions. Under the previous rules, public companies with a paid-up share capital of Rs 50 crore or more or those with a turnover of Rs 250 crore or more were required to submit secretarial audit reports along with their board reports. In a move aimed at boosting the ease of doing business, the threshold for paid up capital at which private companies are required to employ a company secretary was raised from Rs 5 crore to Rs 10 crore.

 These companies may adopt secretarial audit practices for ensuring compliance and avoiding the risks associated with non-compliance.

Audit strengthens the image and goodwill of a company in the minds of regulators and stakeholders. It acts as an effective compliance risk management tool or a governance tool.

 FORM NO. MR-3

SECRETARIAL AUDIT REPORT

For the financial year ended March 31, 2019

[Pursuant to section 204(1) of the Companies Act, 2013 and rule No.9 of the Companies (Appointment and Remuneration Personnel) Rules, 2014]

 To

The Members

M/s XYZ INDIA Limited

XXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXX

We have conducted the Secretarial Audit of the compliances of applicable statutory provisions and the adherence to good corporate practices by M/s XYZ INDIA LTD (hereinafter called the Company). Secretarial Audit was conducted in a manner that provided us a reasonable basis for evaluating the corporate conducts/statutory compliances and expressing our opinion thereon.

Based on our verification of the M/s XYZ INDIA LTD books, papers, minute books, forms and returns filed and other records maintained by the company and also the information provided by the Company, its officers, agents and authorized representatives during the conduct of secretarial audit, we hereby report that in our opinion, the company has, during the audit period covering the financial year ended on March 31, 2017, generally complied with the statutory provisions listed hereunder and also that the Company has proper Board-processes and compliance mechanism in place to the extent, in the manner and subject to the reporting made hereinafter:

We have examined the books, papers, minute books, forms and returns filed and other records maintained by M/s XYZ INDIA LTD for the financial year ended on March 31, 2017, according to the provisions of:

(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 there under 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’):-

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

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

3. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)Regulations, 2009;

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

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

6. 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;

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

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

(vi) Other laws applicable to the Company as per the representations made by the Management.

We have also examined compliance with the (Listing Obligations and Disclosure Requirements) Regulations, 2015 by the Company with Bombay Stock Exchange Limited and also the Secretarial Standard I and Secretarial Standard II issued by the Institute of Company Secretaries of India (ICSI) were applicable to the Company for the period under review.

We further report that 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.

We further report that adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent adequately 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. Decisions at the Board Meetings, as represented by the management, were taken unanimously.

We further report that as per the explanations given to us and the representations made by the Management and relied upon by us there are adequate systems and processes in the Company commensurate with the size and operations of the Company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.

We further report that during the period under review, as explained and represented by the management, there were no specific events/actions in pursuance of the above referred laws, rules, regulations, guidelines, standards etc., having a major bearing on the Company’s affairs.

CS PQR

Practicing Company Secretary

1. No. ; C.P. No.

Place: Delhi

Dated: 01.09.2019

Important Dates