Earlier, the word Audit was connected only with the finance. It revolves around checking company’s books of accounts, financial figures and reports but now the scope of word Audit has been widened after an enactment of Companies Act, 2013 which introduced the concept of ‘Secretarial Audit’. Secretarial Audit is a process to check compliance with the provisions of various laws and rules/regulations/procedures by an independent professional to ensure that the company has complied with the legal and procedural requirements and also followed the due process. It is essentially a mechanism to monitor compliance with the requirements of stated laws. The secretarial auditor is expected to express an opinion, after satisfying himself, that there exist 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.
The objectives of Secretarial Audit may be summarized as under.
- To check and report on Compliances of applicable laws and Secretarial Standards;
- To point out Non-Compliances and Inadequate Compliances;
- To protect the interest of various stakeholders i.e. Shareholders, Creditors, Customers, Employees, Government etc.;
- To avoid any unwarranted legal actions and penalties by law enforcing agencies and other persons as well.
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Provisions of Secretarial Audit under the Companies Act, 2013
Section 204 of the Companies Act, 2013 provides for mandatory Secretarial Audit for every listed company including debt listed private company and companies belonging to other prescribed class. As per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the prescribed class of companies is as under:
> Every public company having a paid-up share capital of Rs.50 (fifty) crore or more; or
> Every public company having a turnover of Rs.250 (two hundred fifty) crore or more.
> Every company (including private company) having outstanding loans or borrowings from banks or public financial institutions of Rs.100 (one hundred) crore or more.
Secretarial Audit is also applicable to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies as indicated above.
The companies which are not covered under section 204 may obtain Secretarial Audit Report voluntarily as it provides an independent assurance of the compliances of applicable laws of the company.
Scope of the Secretarial Audit
The scope of Secretarial Audit comprises verification of the compliances under the following acts, rules, regulations, notifications and guidelines:
> Companies Act, 2013 and the rules made thereunder;
> Securities Contracts (Regulation) Act, 1956 and the rules made thereunder;
> Depositories Act, 1996 and the Regulations and Bye-laws framed under that Act;
> Foreign Exchange Management Act, 1999 and the Rules and Regulations made thereunder to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings;
> The regulations and guidelines made under the Securities and Exchange Board of India Act, 1992; (where applicable)
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- The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
- The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
- The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
- The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
- The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
- 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;
- The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;
- The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
- The Securities and Exchange Board of India (Listing Obligations and Disclosures Requirements), Regulations, 2015.
In addition to the above, Secretarial Auditor has to check and report on compliance of ‘Other laws as may be applicable specifically to the Company’ which mean 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.
The Secretarial Auditor should prepare a list of specific laws as applicable to the company whose secretarial audit is being conducted and verify compliance with the same. Secretarial Standard-1 requires every company to specify list of laws applicable specifically to the company at its Board Meeting. Examining and reporting whether the adequate systems and processes are in place to monitor and ensure compliance with general laws like labour laws, competition law, and environmental laws.
Format of Secretarial Audit Report
The section 204 further provides that Secretarial Audit Report is to be submitted in a format prescribed under the rules. As per sub-rule (2) of Rule 9 Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the format of the Secretarial Audit Report shall be in Form No. MR.3.
Section 134 and Sub-section (3) of section 204 provides that the Board of Directors, in its report, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in the secretarial audit report.
Benefits of Secretarial Audit
The benefits of secretarial audit includes the following:
- It assures the promoters and shareholders that management and affairs of the company are being conducted in accordance with requirements of laws.
- It ensures the management that the company has complied with the laws and, therefore, they are not likely to be exposed to penal or other liability or to action by law enforcement agencies for noncompliance by the company.
- It can be an effective due diligence exercise for the prospective acquirer of a company or controlling interest or a joint venture partner.
- Secretarial Audit being proactive measure for compliance with a plethora of laws, it will have a salutary effect of substantially lessening the burden of the law-enforcement authorities.
- Instilling professional discipline and self-regulations.
- Reduces the work load of the regulators due to better and timely compliances.
Process or Stages to Conduct the Secretarial Audit
1. Knowledge of the Client and his business
Before commencement of audit process, Auditor must understand the business of the client, sector in which it is operated, applicable laws etc. After knowing the business and sector, Auditor has to prepare a set of laws applicable to the auditee company. Auditor has to ask the auditee company also to provide a list of laws that are applicable to their business. The scope of the secretarial audit is limited to only laws specifically applicable to the nature of business of the company. These are business-specific laws. For e.g: For Power Generation Company, Electricity Act, 2003. Surely, the idea is not to extend to generic laws – for example, sales-tax, income tax, excise, etc which are applicable to every entity generically.
2. Prepare set of check-list for all applicable laws
After knowing the applicable laws, Auditor has to prepare various check list for all the applicable laws like Companies Act, SEBI Rules and regulations, Industry specific laws etc. Auditor have to check whether any corporate actions were taken place during the previous year like dividend, bonus, Esop, issue of shares, transfer of shares etc. If yes, you have to prepare checklist for these corporate actions.
3. Off-site Audit
In this stage, Auditor can start the audit process off-site i.e He / She can start taking search on MCA portal, Stock exchange portal, Company website for website compliances etc. He can ask for various other documents from the company to verify the same. In this process, Auditor should try to catch apparent non-compliance like non-filing of any e-from with the RoC, non-submission of any documents with the stock exchange etc.
4. On-site Audit
In this stage, Auditor has to go to the Company’s place to verify the documents. He should check secretarial records, legal records etc. He should check industry specific laws, its compliance requirements etc. If company is MNC and having plant in different different places and it is difficult to check the compliances of every branch and offices, he can check samples and rely on management representation letter. Please note that Management Representation Letter can be used only when there is a situation wherein auditor is unable to check and verify the compliances of the laws.
5. Preparation of Draft Secretarial Audit Report
In this stage, Auditor has to prepare a draft audit report with all your observation, compliance and non-compliance of laws.
6. Sharing draft audit report with auditee company and taking necessary clarification from them.
7. Finalizing Audit report.
There are many laws, rules, regulations, statutes etc. that govern the functioning of a company. It is necessary to have Secretarial Auditor and manage the compliance with such laws for protection of the shareholder’s interests and avoid any legal action against the company.
Author Bio
1. How come 204 applicable to debt listed companies?
– Rule 2A of The Companies (Specification of Definitions Details) Rules, 2014 read with proviso to clause (52) of Section 2 of the Companies Act, 2013 excludes them.
2. Chapter IV of SEBI LODR, 2015 are only applicable to listed companies which has listed its specified securities AND non-convertible securities