ACS Suman Gupta

In common parlance audit refers to the systematic examination and verification of the records, transactions, documents and physical inspection of the activities by qualified personnel.

There are several types of audit.They are:-

i. Compliance Audit

ii. Construction Audit

iii. Financial Audit

iv. Information system audit

v. Investigative audit

vi. Operational Audit

vii. Tax Audit

viii. Secretarial Audit

In this article we will be discussing about secretarial audit and its importance in reference to governance transparency.

Secretarial Audit is an audit to check compliance of various legislations including the Companies Act and other corporate and economic laws applicable to the company. Secretarial Audit helps to detect the instances of non-compliance and facilitates taking corrective measures. It audits the adherence of good corporate practices by the company. It is therefore an independent and objective assurance intended to add value and improve operations of the Company. It helps to accomplish the organization’s objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes. Secretarial Audit thus provides necessary comfort to the management, regulators and the stakeholders, as to the statutory compliance, good governance and the existence of proper and adequate systems and processes.

It is a tool of risk mitigation and will allow companies to effectively address compliance risk issues. It helps the companies to build their corporate image.

Companies that go the extra mile with their compliance programs lay the foundation for good governance. Companies with an effective compliance management programme have lesser chance of receiving penalties, both monetary and by way of imprisonment.  Companies that imbibe business and personal ethics and an effective compliance management programme within their work culture often enjoy employee and customer loyalty and public respect for their brand, which can translate into better market capitalization and shareholder returns. Recognition for the company as a good corporate citizen. The Secretarial Audit provides an in-built mechanism for enhancing corporate compliance generally and help restore the confidence of investors in the capital market through greater transparency in corporate functioning.

Only a member of the Institute of Company Secretaries of India holding certificate of practice (company secretary in practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company. [Section 204(1) of Companies Act, 2013]

As per section 204(1) of Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following companies are required to obtain Secretarial Audit Report: –

– Every listed company

 -Every public company having a paid-up share capital of fifty crore rupees or more

 -Every public company having a turnover of two hundred fifty crore rupees or more.

-Every Private company which is a subsidiary of a Public Company

Companies which are not covered under section 204 may obtain Secretarial Audit Report voluntarily as it provides an independent assurance of the compliances in the company.

“Turnover” means the aggregate value of the realization of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)]

Proactive Secretarial Audit on a continuous basis would help the company in initiating corrective measures and strengthening its compliance mechanism and processes. It is therefore, advisable that the Secretarial Audit is carried out periodically (quarterly/ half year/ annually) and adverse finding if any, is reported on interim basis to the Board immediately. The Secretarial Audit Report to be annexed with Board‟s report is required to be submitted before the preparation of Board‟s Report.

Secretarial Audit Report is required to be provided in the format prescribed in Form MR-3. (Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014).

In terms of Form MR-3, the Secretarial Auditor needs to examine and report on the compliance of the following five specific laws:

(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;

In addition, the form MR-3, point (vi) also refers to „Other laws as may be applicable specifically to the company.‟

  • Reporting on compliance of ‘Other laws as may be applicable specifically to the company’· which shall include 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.
  • 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, environmental laws.
  • Examining and reporting specific observations / qualification, reservation or adverse· remarks in respect of the Board Structures/system and processes relating to the Audit period.
  • In case of financial laws like tax laws and Customs Act etc., Secretarial Auditor may rely on· the Reports given by statutory auditors or other designated professionals. Secretarial Auditor needs to examine and report on the compliance with the applicable clauses of the following:
  • (i) Secretarial Standards issued by The Institute of Company Secretaries of India and approved by the Central Government.
  • (ii) The Listing Agreements entered into by the Company with Stock Exchange(s), if applicable;

Section 448 of Companies Act, 2013 deals with penalty 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 there under, 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

Punishment for default:

Act Consequences
Any officer of the company or company secretary in practice contravenes the provisions of secretarial audit Punishable with fine of Rs 1 lac to 5 lac
Failure report any fraud against company by its officers or employees. Cs Shall be fined with amount of Rs. 1 lac extending to Rs. 5 lac
False Return ore report or certificate or financial statement or prospectus or any other document or intentional omission of material fact -punishable with imprisonment for not less than 6 months

– liable to fine which shall not be less than amount of fraud

-CS shall be punishable with reprimandation , removal of name  from members list and prescribed fine.

Conclusion: The companies Act 2013 has hence mandated the Secretarial Audit for the above mentioned companies and in turn ensures efficient and  effective compliance system in the company. Efficient compliance system will boost the confidence of the stakeholders and regulators which will boost the governance transparency of the company as well. Secretarial audit is a mandate which strengthens the roots of an organization in the long run and vests public confidence upon it

Disclaimer: This is only a knowledge sharing initiative and author does not intend to solicit any business or profession. I assume no responsibility for the consequences of use of such information. In no event shall i be liable for any direct, indirect, special or incidental damage resulting from arising out of or in connection with the use of the information. it is not a professional advice so please do consult your professional adviser for your queries

(The author can be reached at guptacssuman@gmail.com)

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