The Institute of Company Secretaries of India (ICSI) recently sent a letter to the Ministry of Corporate Affairs, outlining concerns and recommendations about the appointment and removal of Secretarial Auditors under the Companies Act, 2013. In the letter, the ICSI argues for empowering shareholders to appoint and remove Secretarial Auditors. This article aims to dissect the implications and importance of these suggestions.
Lack of Explicit Guidelines
The Companies Act, 2013, although encompassing in many aspects, falls short in defining the manner of appointment and removal of Secretarial Auditors. While the act provides guidelines for the roles and responsibilities of Secretarial Auditors, it does not delve into the specific appointment procedures.
Sections 139 and 140: These sections outline how auditors should be appointed but do not extend these rules to Secretarial Auditors.
Section 143: It does extend the power and duties of auditors, including fraud reporting, to Secretarial Auditors, leaving a gap in the legislative framework concerning their appointment and removal.
The Argument for Shareholder Empowerment
ICSI suggests that Secretarial Auditors should be independent of the management for unbiased reporting. Their reports are ultimately presented to the shareholders; therefore, it would make sense for shareholders to have a say in their appointment and removal.
Form MR-3: This form presents the Secretarial Auditor’s compliance report before the shareholders, emphasizing the need for shareholder involvement in appointment and removal decisions.
Section 143(12): Given the Secretarial Auditor’s responsibility to report fraud to the Central Government, their role is too critical to be under the control of management.
Government Companies and CAG
ICSI further proposes that the appointment of Secretarial Auditors for government companies should be done by the Comptroller and Auditor General (CAG), similar to Statutory Auditors.
Aligning with Statutory Auditors: This brings Secretarial Auditors in line with the rules governing Statutory Auditors in government companies, offering a uniform approach.
Conclusion
The ICSI’s letter to the Ministry of Corporate Affairs serves as a crucial step towards closing the gaps in India’s corporate governance framework, specifically concerning Secretarial Auditors. Empowering shareholders in the appointment and removal process not only lends credibility but also ensures that the auditor’s role remains unbiased and in line with good corporate governance. The proposed changes, if adopted, could provide a more transparent, standardized, and accountable method for the appointment and removal of Secretarial Auditors, thereby strengthening corporate governance in India.
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THE INSTITUTE OF
Company Secretaries of India
IN PURSUIT OF PROFESSIONAL EXCELLENCE
Statutory body under an Act of Parliament
(Under the jurisdiction of Ministry of Corporate Affairs)
CL: MCA: 2023 Dated: August 24, 2023
Shri Manoj Govil, IAS
Secretary
Ministry of Corporate Affairs
Government of India
Shastri Bhawan
New Delhi -110001
Subject: Appointment and Removal of Secretarial Auditor under the Companies Act, 2013
Ref: ICSI Letter dated March 22, 2017 and October 12, 2018
Dear Sir,
The Institute of Company Secretaries of India with its vision “to be a global leader in promoting good corporate governance” has been working tirelessly through its members to strengthen the existing corporate governance framework of the India Inc. The role played by Company Secretaries both in employment and in practice has been well recognized under the Companies Act, 2013.
The Company Secretaries in practice have been known to maintain transparency and ensure compliance by way of Secretarial Audit as prescribed under the Act. However, the Companies Act, 2013 does not provide the manner of appointment and removal of Secretarial Auditor.
While the powers and duties and of auditors including reporting of fraud as contained in section 143 have been extended mutatis mutandis to the Company Secretary in Practice conducting secretarial audit under section 204, the provisions with regard to the appointment of auditors as contained in sections 139 and 140 have not been extended to Company Secretary in Practice conducting Secretarial Audit.
Submissions
Akin to statutory auditors, the Secretarial Auditors are also required to be independent of the management of the company. Just as the Auditor’s reports of Financial Statement, the report of Secretariat Auditor on compliance of all the applicable laws by the company concerned is placed before the shareholders as per form MR-3 prescribed for the purpose. I therefore, as shareholders are empowered with the appointment and removal of Auditors at annual general meeting; in case of Secretarial Auditors, since their reporting is to the shareholders, their appointment and removal should also be by the shareholders.
Furthermore, Secretariat Auditors have been assigned with the responsibility of reporting fraud to the Central Government under section 143(12) of the Act and if their appointment or removal will be subject to approval of management, the repot Ling may become subject to scrutiny of the management and hence defeat the purpose of independent reporting to shareholders and Central Government. Therefore, the secretarial auditor should be appointed in the Annual general, Meeting of, the company and other provisions with regard to the term, rotation etc. should also apply. His removal should also be at the AGM of the company.
Appointment of Secretarial Auditor of the Government Companies by CAG
It is also submitted that the appointment of Secretarial Auditor of the Government Companies also be made by CAG in the same manner as Statutory Auditor is appointed. Accordingly, suitable amendment be made in Section 204 of the Companies Act, 2013.
We shall be pleased to provide any further information or clarification in this regard on hearing from your goodself.
Thanking You,
Yours faithfully,
(CS Manish Gupta)
President
The Institute of Company Secretaries of India
