Every company needs to abide by numerous rules, regulations, and laws. These laws, if not complied with, attract penalty and puts a company at risk. Therefore, it is necessary to periodically review whether a company is compliant with its applicable regulations or not. An audit that helps in such a review is called a secretarial audit.

The law-abiding nature of a company and its management can be measured through a secretarial audit. In this blog, we walk you through the benefits, applicability, scope, and other related aspects of the secretarial audit.

What is a secretarial audit?

It’s an audit done to check whether a company has complied with various corporate and economic laws applicable to it including the Companies Act, 2013. A secretarial audit helps in detecting instances of non-compliance with rules/legislations and aids in taking corrective measures. It seeks to check whether and to what extent good corporate practices are adhered to by a company. In this way, a secretarial audit is an independent assurance given by the secretarial auditor about the effectiveness of corporate control and governance processes existing in a company. Such an evaluation adds value to the company’s operations, thereby improving them.

Benefits of secretarial audit

Secretarial audit acts as an effective tool to generate confidence among creditors, shareholders, promoters, investors, and other stakeholders. All stakeholders can be assured that those in charge of the management are conducting the company’s affairs in accordance with the law and that their stake is not being exposed to any regulatory or governance risk. Moreover, investors can be comforted in making informed investment decisions when they know that proper governance rules are followed by the company.

It also assures the regulators, financial institutions, banks, etc. that appropriate mechanisms are in place in a company to ensure compliance with applicable laws. It, thus, facilitates reducing the burden of regulators in ensuring compliance.

A secretarial audit not only gives assurance to the regulators but also gives benefits to the company itself. It develops a discipline of self-regulation and professional compliance in companies. It, further, acts as a weapon of risk mitigation and helps companies in addressing their compliance risk issues. They shall have lesser chances of being penalized (both by way of fine and imprisonment) if an effective compliance program is in place. Also, companies can build their corporate image if they religiously comply with all requirements of the law. Such companies often enjoy employee & customer loyalty as well as public respect for their brand, which then translates to better market capitalization.

Therefore, a secretarial audit brings greater transparency to overall corporate functioning.

Who conducts a secretarial audit?

A secretarial audit can only be conducted by a member of the Institute of Company Secretaries of India (ICSI) who holds a certificate of practice. Section 204(1) of the Companies Act 2013 requires the secretarial auditor to issue a secretarial audit report to the concerned company and the company is required to annex such report with its board report under Section 134(3).

Also, if there is any qualification, observation, or other remark made by the secretarial auditor in his report, then such observations, etc. have to be explained in full by the company’s Board of Directors in the Board Report.

Moreover, every company is obliged to provide all such assistance, support, and facilities to its secretarial auditor as he or she may need for auditing the records of the company.

Applicability of secretarial audit – Is it mandatory?

Section 204(1) read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes the companies to which a secretarial audit is applicable. These include the following:

1. Every listed company, or

2. Every public company with a paid-up capital of Rs. 50 crores or more, or

3. Every public company with a turnover of Rs. 250 crores or more, or

4. Every company with outstanding loans/borrowings of Rs. 100 crores or more, taken from banks or financial institutions.

For the purpose of determining the applicability of secretarial audit, the values of paid-up capital, loans, turnover, etc. existent on the last date of a company’s latest audited financial statements are taken into account.

Now, it can be inferred that all listed companies and those classes of companies that fall under the above-prescribed criteria are mandatorily required to annex a secretarial audit report with their Board’s report. Rest all companies that are not covered above need not conduct a secretarial audit. But if they want, they may conduct it voluntarily in order to obtain an independent assurance of compliance with the law.

Secretarial audit report

Once a secretarial audit is completed, an audit report is needed to be provided by the secretarial auditor in the format specified in Form MR-3. It is advisable that such an audit must be carried out by the secretarial auditor periodically (yearly/half-yearly/quarterly) and any adverse findings must be reported to the Board on an interim basis. The submission of a secretarial audit report must be made before the preparation of the Board’s report.

The secretarial auditor must report on any specific events/actions that may have occurred during the reporting period and that have a bearing on the affairs of the client company in pursuance of applicable laws & regulations. For instance, he must report whether or not the composition of the Board of Directors is in accordance with the provisions of the Act, whether there was redemption or buy-back of securities, details of any merger, and the like.

Other related points of secretarial audit

Besides the above, a few more important points related to secretarial audits are compiled below:

Penalty for contravention

According to Section 204(4), where there is a contravention in complying with the provisions of Section 204, every company, its officer, or practicing company secretary who is in default, shall be punishable with a penalty of Rs. 2 lacs.

Moreover, if a false audit report or statement is furnished by the secretarial auditor, then Section 447 and 448 get attracted and he may be punishable with imprisonment of 6 months – 10 years and with a fine up to 3 times the amount of fraud.

Compliances to be checked by the secretarial auditor: Form MR-3 specifies the following laws whose compliance is to be checked while performing a secretarial audit:

1. The Companies Act, 2013 and the rules made thereunder

2. The Securities Contracts (Regulation) Act, 1956 and the rules made thereunder

3. The Depositories Act, 1996 and the regulations and bye-laws made thereunder

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

5. The Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder

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

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

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

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

10. 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

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

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

13. Other laws as may be specifically applicable to the client company (for example, banking laws for a banking company, insurance sector laws if the client is an insurance company, etc.)

14. Monitoring compliance with general laws like competition laws, labour laws, environmental laws, etc.

15. Secretarial Standards issued by the Institute of Company Secretaries of India

16. Listing Agreements, if any.

Do financial laws need to be examined? For tax and GST laws, a secretarial auditor can rely upon the reports of statutory auditors.
Fee for conducting secretarial audit The Institute of Company Secretaries of India has prescribed no minimum fees to be charged by the secretarial auditor. The fees charged by the secretarial auditor must be such that it is commensurate with the nature and size of the client company, or efforts required to be put in the audit.
Number of secretarial audits As of now, there is a limit of 10 on the number of audits that can be conducted by a company secretary in practice during one financial year.
The signing of the secretarial audit report The secretarial audit report must be signed by the secretarial auditor who conducts the audit. In the case of a firm of company secretaries, the report must be signed by the partner under whose supervision the audit has been conducted. The practicing company secretary signing the report must hold a valid certificate of practice number.
Appointment of secretarial auditor Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014 requires a secretarial auditor to be appointed by means of a resolution passed at a board meeting. A formal letter of engagement must be duly accepted by him.
Qualification in the audit report Any qualification, adverse remark, or other reservation stated by a secretarial auditor in his report must be in bold type or italics.
Is secretarial audit applicable to private companies?

Under Section 2(71) of the Companies Act, it is expressed that a private company that is a subsidiary of a public company is also deemed to be a public company. Hence, by virtue of this provision, a secretarial audit shall also be applicable to a private company that is a subsidiary of a public company, and which falls under the prescribed limits under Section 204(1).

Even when a private company is not a subsidiary of a public company, Section 204(1) may get attracted if its outstanding loans/borrowings are Rs. 100 crores or more.

Moreover, Regulation 24A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 has also mandated secretarial audits for all material unlisted subsidiaries of a listed company. Hence, if a private company is a material unlisted subsidiary of a listed entity, a secretarial audit would apply to it.

Conclusion: Secretarial audits are pivotal for maintaining compliance, enhancing governance, and securing stakeholders’ trust. Through a comprehensive analysis of its applicability, benefits, and detailed report requirements, companies can bolster their legal posture, reputation, and overall corporate integrity.

I hope the information provided in this blog is of help.

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December 2023