Secretarial Audit for bigger Companies

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 practising Company Secretary 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. It helps to deduct any non-compliance occurs by the Company. The provisions of Section 204 of Companies Act, 2013 and Listing Regulations mandates certain companies to conduct the Secretarial Audit in their Companies.

Objectives of Secretarial Audit:

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

  • To verify & report on compliances of applicable laws and Secretarial Standards;
  • To point out non – compliances and inadequate compliances;
  • To protect the interest of various stakeholders such as the customers, employees, society etc.
  • To avoid any unwarranted legal actions/ penalties by law enforcing agencies and other persons as well.

Secretarial Audit

Section 204 says that:

(1) A secretarial audit report given by a company secretary in practice in Form MR-3 shall be annexed with Board’s report made in terms of section 134(3) by:

  • Every listed company and
  • Every public company
having a paid-up share capital of Rs. 50 crore or moreor
having a turnover of Rs. 250 crore or moreor
  • Every Company having outstanding loans or borrowings from banks or public financial institutions of Rs. 100 crore or more.

Rule 9: Secretarial Audit Report.

(1) For the purposes of section 204(1), the other class of companies shall be as under:-

(a) Every public company having a paid-up share capital of Rs. 50 crore or more; or

(b) Every public company having a turnover of Rs. 250 crore or more; or

(c) Every company having outstanding loans or borrowings from banks or public financial institutions of Rs. 100 Cr. or more.

(Insert by Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020 dated 3rd January, 2020 and Amendment effective from on or after 1st April, 2020) 

(2) The format of the Secretarial Audit Report shall be in Form No. MR.3. 

Explanation:-

It is hereby clarified that the paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.

(2) 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.

(3) The Board of Directors shall explain in full any qualification or observation or other remarks made by the company secretary in practice in his Secretarial audit report in Board Report made in terms of sub-section (3) of section 134.

SEBI (Listing obligations and Disclosures Requirements) Regulations, 2015 also talks about Secretarial Audit

Regulation 24A:

Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a company secretary in practice, in such form as may be specified with effect from the year ended March 31, 2019.

Explanation: “Material Subsidiary” Means a subsidiary whose income or net worth exceeds 10% of the consolidated income or net worth, respectively of the company and its Subsidiaries in the immediately preceding accounting year.

Explanation.- The listed entity shall formulate a policy for determining ‘material’ subsidiary.

Recent update:

First Extension of the time for submission of Annual Secretarial Compliance Report by listed Companies due to COVID-19 Pandemic:

As per Circular No.: SEBI/HO/CFD/CMD1/CIR/P/2020/38 dated March 19, 2020

Due to the spread of the COVID-19 virus, a temporary relaxation in the filing of Annual Secretarial Compliance Report which has to submit within 60 days from the end of the financial year i.e May 30, 2020, Accordingly, SEBI had decided to grant relaxation of one month i.e till June 30, 2020.

Further Extension of the time for submission of Annual Secretarial Compliance Report by listed Companies due to continuing impact of COVID-19 Pandemic:

As per Circular No.: SEBI/HO/CFD/CMD1/CIR/P/2020/109 dated June 25, 2020SEBI, wide circular dated march 19, 2020 had extended the timeline for submission of the Annual Secretarial Compliance Report for the year 2019-20, for the listed entities by one month (from may, 2020 to June, 2020),

Further, SEBI has received representation from ICSI in regards to further extension of such report  submission date, after consideration, it has decided by SEBI to further extend the timeline for submission of such Report by one more month i.e upto July 31, 2020.

Punishment for Contravention of Provision of Companies Act:

(4) If a company or any officer of the company or the company secretary in practice contravenes the provisions of this section:

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

How to Appointment of Secretarial Auditor?

Following the steps to appoint the secretarial Auditor:

  • Obtain the consent and eligibility letter of secretarial Auditor.
  • Convene a Board Meeting.
  • Appoint and fix the remuneration of the Secretarial Auditor in Board Meeting.
  • Intimate the appointment to the Auditor
  • File certified a true copy of a resolution passed in Board Meeting with the ROC in form MGT – 14.

Secretarial Audit – The process:

  • Initial discussions

In this phase the auditor gathers relevant information about the Company in order to obtain a general overview of operations.

  • Identifying scope and objectives

Secretarial Auditor discusses the scope and objectives of the examination, in a formal meeting with the management and gathers information on important processes, evaluates existing controls, and plans the audit steps.

  • Obtaining of formal engagement letter

A formal engagement letter from the Management shall be issued to the Auditor. This letter communicates the scope and objectives of the audit. PCS shall then forward a preliminary checklist to the Company that will help the auditor learn more about the company under audit.

  • Meeting with teams/persons involved

The opening meeting should include senior management and any administrative staff who may be involved in the audit.

  • Planning of Audit programme

This program outlines the fieldwork necessary to achieve the audit objectives. The Auditor shall use a variety of tools and techniques to gather and analyze information about the Company’s operations. The review of controls helps the auditor determine the areas of highest risk and design tests to be performed in the fieldwork section.

  • Preparation of Working Papers 

Working papers are a vital tool of the audit profession. They are the support of the audit opinion. They connect the management’s records and financials to the auditor’s opinion. They are comprehensive and serve many functions.

  • Observations/ Discussions with Management 

 The detailed commentary describing the findings and recommended solutions shall be summarised and presented for initial discussions with the management for its insights.

  • Summary of Audit findings and subsequent discussions

After completion of the fieldwork, the auditor to summarize the audit findings, conclusions, and recommendations necessary in the form of the audit report.

  • Secretarial Audit Report

 The auditor shall prepare the final report based on the field work and working papers to present the audit findings and discuss recommendations for improvements, if any. The final report shall be provided with or without qualifications.

  • Follow up to be taken

Finally, Even after the Audit process, the Secretarial Auditor may request the Company to list the actions taken by the Company to resolve the audit report findings by him.

Scope of Secretarial Audit

  • Companies Act, 2013 and the rules made thereunder;
  • Securities Contracts (Regulation) Act, 1956 (‘SCRA’), and the rules made thereunder;
  • Depositories Act, 1996, and the rules made thereunder;
  • Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder;
  • Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’)
  • Compliance of secretarial standards issued by the Institute of Company Secretaries of India;
  • Monitor and ensure compliance with general laws like labour laws, competition law, and environmental laws and also check compliance of Income Tax, Customs, GST.

 Format of MR-3

Amendment:  https://taxguru.in/company-law/companies-appointment-remuneration-managerial-personnel-amendment-rules-2020.html

Do write to me for any Queries/ suggestions.

Disclaimer: The contents of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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2 Comments

  1. B.M.RAUL says:

    As per SEBI LODR, amaterial subsidiary is also required to carry out Secretarial Audit and annex the Report to its Directors’ Report.
    Is the Holding company required to annex the Secretarial Audit Report of its Material subsidiary also to its Directors’ Report.

    Request your clarification on the query. Thank you.

    1. csbhuwantaragi says:

      As per regulation 24A, it is mentioned that the listed company and its material subsidiary company has to annex the Secretarial audit report in its annual report. so, there is no requirement of annex material subsidiary secretarial report in holding Company.

      However, A guidance note issued annual secretarial audit report by ICSI in April 2019, clarifying that:
      The Secretarial Audit Report (MR-3) for the Material Unlisted Subsidiaries is incorporated in India has to be filed to the Stock Exchange by the listed entity along with the Annual Report of the listed entity.

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