In today’s time, new corporates are emerging and growing in every nook and corner of India. With the ease of FDI policy, other business related regulations and digitalisation, doing business in India has become relatively easier as compared to earlier times. New horizons have opened for corporates to explore and grow. With the growth of corporates, corporate frauds are getting witnessed every now and then, inspite of the penalties and punishments stated in the various laws dealing with corporates. In such an era, where corporates are witnessing massive growth, huge corporate scams are also getting noticed on a large scale. In such a scenario, Secretarial Audit is an effective tool to safeguard the interests of various stakeholders in corporates. The new Companies Act, 2013 has introduced this concept in the year 2014 for various companies.
Now before understanding how Secretarial Audit is an antidote, we need to know what Secretarial Audit is and who all are the stakeholders?
MEANING OF SECRETARIAL AUDIT
It is an audit of corporate law compliances, listing agreement compliances, SEBI rules and regulations and other laws specifically applicable to the corporates.
APPLICABILITY OF SECRETARIAL AUDIT
Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, alongwith its amendments deals with the applicability of Secretarial Audit.
As per the aforesaid section and rule, Secretarial Audit is mandatory for the following companies:-
(1) Every listed company
(2) Every public company having a paid-up share capital of Fifty Crore rupees or more;
(3) Every public company having a turnover of Two Hundred Fifty Crore rupees or more.
Apart from these, every private company, subsidiary of a public company, having paid up share capital of Rs.50 crores or more or turnover of Rs.250 crores or more, also falls within purview of this audit.
These companies are required to get the Secretarial Audit Report from an independent practising Company Secretary in form MR-3. It implies that only practising Company Secretary can conduct Secretarial Audit for companies.
However, other companies can also get Secretarial Audit conducted voluntarily in order to be assured of compliances of all applicable rules and regulations.
HOW TO APPOINT SECRETARIAL AUDITOR
Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, alongwith its amendments, deals with the appointment of Secretarial Auditor. According to the Rule, the Secretarial Auditor is required to be appointed by means of resolution passed at a duly convened Board meeting and resolution for the said appointment shall be filed with Registrar of Companies within 30 days in E-form MGT-14.
It is suggested for the Secretarial Auditor to get the letter of engagement from the company. He/ She should formally accept the letter of engagement.
As per Guidance Note to Secretarial Audit issued by ICSI, it is advisable / recommended that the Secretarial Auditor is appointed at the beginning of the year and compliances should be checked on a continuous basis and quarterly report is submitted at the end of each quarter to the Board.
SCOPE OF SECRETARIAL AUDIT
As per Form MR-3 and the clarifications issued by ICSI, the secretarial auditor has to check compliances by the company under the following laws and rules made there-under:-
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’):-
a. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
b. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;
c. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
d. The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
e. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
f. 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;
g. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and
h. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
i. The Securities and Exchange Board of India (Listing Obligations and Disclosures requirements) Regulations, 2015.
vi. Secretarial Standards issued by The Institute of Company Secretaries of India.
vii. The Listing Agreements entered into by the Company with Stock Exchange(s), if
viii. Other laws as may be specifically applicable to the company
Thus the scope of Secretarial audit is not limited to the corporate laws applicable to company but also extends to all other laws specifically applicable to Company.
Reporting on compliance of ‘Other laws as may be applicable specifically to the company’ shall include all the laws which are applicable to the specific industry for example; for Banks- all laws applicable to Banking Industry; for insurance company-all laws applicable to insurance industry etc.
In addition to above compliances, the Secretarial Auditor has also to report on
√ 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.
√ whether 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.
√ adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days 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.
√ majority decision is carried through while the dissenting members views are captured and recorded as part of the minutes.
√ 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.
√ to report and provide details of specific events and actions occurred during the reporting period having major bearing on the affairs of the Company in pursuance of above referred laws/ rules & regulations.
TIMELINE FOR SUBMISSION OF SECRETARIAL AUDIT REPORT
As per Section 204 of the Companies Act,2013, every listed company and a company belonging to prescribed class of companies shall annex with its Board’s Report made as per Section 134(3), a secretarial audit report, given by a practising company secretary, in such form as may be prescribed.
Thus, this Report needs to be submitted with the Board before conducting of board meeting for approval of Directors’ Report, since it shall be part of Directors’ Report.
PUNISHMENT FOR DEFAULT
Section 204(4) of the Companies Act, 2013, provides that 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 one lakh rupees but which may extend to five lakh rupees.
PUNISHMENT IN CASE OF NON-REPORTING OF FRAUD
Moreover as per section 143(12) of the Companies Act, 2013, if an auditor, has reason to believe that an offence of fraud, involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. As per Section 143(15) :- Failure to do so shall attract a fine which shall not be less than one lakh rupees but which may extend to twenty five lakh rupees.
PROFESSIONAL RESPONSIBILITY AND PENALTY FOR INCORRECT AUDIT REPORT
Section 448 of Companies Act, 2013 deals with punishment for false statements. The section provides that if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.
Section 447 deals with punishment for fraud which provides that any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. In case, the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
BENEFITS OF SECRETARIAL AUDIT
When a corporate comes into picture, parallely lot of stakeholders also emerge like promoters, non-executive / independent directors, Government authorities, investors, Banks / financial institutions / creditors. How it is helpful to all?
It assures the promoters that the persons in charge of management are conducting the affairs as per the prescribed laws and regulations and they are insured against unintended risk of non-compliances / frauds.
2. Non-executive / Independent Directors
Since non-executive and independent directors are not directly involved in the affairs of the company, with this audit, they are assured of compliances being done as per prescribed laws, thus safeguarding them from any kind of liabilities on account of non-compliances / frauds.
3. Government authorities
Secretarial Audit Report facilitates the reporting of any kind of non-compliances / frauds and the government authorities can take action against those corporates immediately.
Secretarial Audit is a great tool in the hands of investors; as a result they can take informed decisions as the Report gives clarity on the corporate governance practices being followed in the company.
5. Banks / Financial institutions / Creditors
Secretarial Audit Report provides information to the Bank / Institution about the Corporate in terms of compliances with laws and they can evaluate whether to provide any funds or not.
To conclude with, Secretarial Audit provides a bandwidth to the Company itself in building a good corporate image globally while assuring all the stakeholders against any kind of unintended risk/ frauds/ penalties.
Author: Ms. Brij Agnihotri is Proprietor of Brij Agnihotri & Associates, Company Secretaries and can be reached at [email protected]