Anil Kumar Popli, FCS
I. Section 204(1) of Companies Act, 2013 introduces concept of Secretarial Audit Report by Company Secretary in practice is a welcome step. It is a step towards good corporate governance and in line with the provisions of Clause 49-C(iii) of the Listing Agreement of Stock Exchanges i.e. part of Corporate Governance which states. The Board shall periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure instances of non-compliances.
The objectivity of secretarial audit is good and appreciated. However, the format of Secretarial audit report to some extent is vague in nature. The format of Secretarial Audit Report i.e. form no.MR-3 [pursuant to Section 204(1) of the Companies Act, 2013 and rule 9 of the Companies (Appointment and Remuneration personnel) Rules 2014] specifies examination of books, papers, minute books, forms and returns filed and other records maintained by the Company for the financial year ended on according to the provisions of Acts specified in the form in sub-clauses ((i) to (v) are good but last (vi) is blank which says mention the other laws as may be applicable specifically to the company and to report specific non compliances, observations, qualifications separately.
The author is very much concerned in respect of sub-clause (vi) which states …. (Mention the other laws as may be applicable specifically to the Company). It is, however, not specified what other laws are applicable to the Company.
There are numerous other laws that may be applicable to the Company. Some of the taxation, environmental and labour laws which may be applicable to majority of companies are enumerated herein below. It is surprising that the Act or rules do not specify what provisions or what laws are to be audited. It is up to the whims and prerogative of the Secretarial Auditor to choose what matters are to be audited and what not. It will definitely differ from one person to another as everybody has own view of audit. It is also not understandable that in cases where some other agency has conducted audit or special audit under some specific law, whether he has to rely on that or to conduct audit as per his knowledge and expertise. So, the author is of the view that this provision is totally vague in nature and do not serve any purpose. More so, it exceeds its jurisdiction.
For example, under Companies Act, financial audit in respect of financial statements is being done by Chartered Accountant and cost audit is being conducted by Cost Accountant under Companies (Cost Audit) Rules and in some cases special audit is being conducted under section 14 and 14AA of the Central Excise Act, 1944 or special audit of Service Tax under section 72A of the Finance Act or special audit in any other law is conducted by any other Agency, whether it would be appropriate that the Company Secretary should also re-audit and report his observations or qualifications in its report, as it is also covered under the definition of other laws. In the Secretarial audit report, there is no exception given to exclude the reporting on such matters which are under audit by other agencies. It is not clear whether Secretarial audit report should also cover the matters over and above other audits. It is, however, understandable that it is duty of Company Secretary who is in whole time employment to report legal compliance on other laws as may be applicable as defined under the provisions of Section 205 of the Companies Act, 2013 but audit of other laws is altogether different. It is also understandable that the Secretarial audit should review the compliance of other laws as may be discussed in the Board of Directors meeting. It is, however, not practical for the Secretarial auditor to audit numerous laws as may be applicable to the Company. It may be noted that any audit should be specific to the extent of compliance of specific provisions of law and no audit can be made in general. I do not understand the logic and objectivity of such a general audit.
Applicability of other laws
|Taxation laws||Labour laws||Environmental laws||Other laws|
|Income Tax Act, 1961||The Factories Act, 1948||Air (Prevention and Control of Pollution) Act, 1981||FEMA, 1999|
|Wealth Tax Act||Industrial Dispute Act||Water (Prevention and Control of Pollution) Act, 1974||Foreign Trade (Development and Regulation Act, 1992|
|Central Excise Act||Payment of Wages Act||The Noise (Regulation and Control) Rules 2000||Indian Contract Act|
|Custom Act||Payment of Bonus Act||The Environment (Protection) Act 1986||Sale of Goods Act|
|Service Tax||Workmen Compensation Act,||Petroleum Act and Rules|
|Sales Tax Act including Value Added Tax Act of 2003||Shop And Establishment Act||The Urban Land (Ceiling &Regulation Act|
|Respective State Sales Tax Acts||Weekly Holiday Act, 1942||Transfer of Property Act|
|Professional Tax||Employees State Insurance Act, 1948||Motor Vehicles Act|
|Education Cess||Employees PF & Misc. Provisions Act, 1954||Essential Commodities Act|
|Research and Development Cess Act, 1991||Payment of Gratuity Act||Information and Technology Act|
|The Boiler Act and Gas Cylinders Act and Rules||Contract Labour (Regulation & Abolition Act) 1970||Right to Information Act|
|Maternity Benefit Act, 1961||Constitution of India|
|Respective State Govt. Factories (Control of Major Industrial Accident Hazard) Rules 2002||Micro, Small And Medium Enterprises Development Act, 2006 and many other Acts|
II. Check list and audit points of Secretarial Audit Report
Applicability- Every public company having a paid-up share capital of fifty crore rupees or more; or (b) Every public company having a turnover of two hundred fifty crore rupees or more are required to conduct secretarial audit from practicing Company Secretary.
All Private Companies, are however, exempt from purview of Secretarial Audit. The author is of the view that Private Companies fulfilling the above criteria should also be covered.
The author is of the view that this audit would be applicable from financial year 2014-15 onward.
Appointment of Company Secretary in Practice
There is no specific provision in the Act regarding appointment of Secretarial Auditor. Therefore, the appointment can be made either in Board or General Meeting. The resolution regarding appointment of Secretarial Auditor is required to be filed with the office of Registrar of Companies under the provisions of Section 117 read with Section 179(3) and rule 8(4) of The Companies (Meetings of Board and its Powers) Rules, 2014 in Form no.MGT-14 within 30 days from the date of appointment.
Powers and duties of auditors and auditing standards
Pursuant to provisions of Section 143(14) (b) of the Companies Act, 2013 the provisions of this Section shall mutatis mutandis apply to ..(b) the Company Secretary in practice conducting secretarial audit under section 204.
The Secretarial auditor shall have all the power and access to the books of accounts, financial statements and secretarial records whether kept at the registered office of the Company or at any other place and shall be entitled to require from the officers of the Company such information and explanation as he may consider necessary for the performance of his duties as auditor as specified in the provisions of Section 143 of the Act.
As per provisions of Section 143(12) of the Companies Act, 2013 notwithstanding anything contained in this section, if the auditor of a Company, in the course of performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committee against the Company by officers and employees of the Company, he shall immediately report to the Central Government within such time and in such manner as may be prescribed.
It is surprising that the format of Secretarial auditor report i.e. MR-3 missing any statement about involvement of any fraud or economic offence committed against the Company by its officers and employees of the Company.
Contents of Report – It should be in form no.MR-3 [pursuant to Section 204(1) of the Companies Act, 2013 and rule 9 of the Companies (Appointment and Remuneration personnel) Rules 2014]
The Secretarial auditor has to report on compliances of
i) The Companies Act, 2013 (the Act) and Rules made there under;
ii) The Securities Contracts (Regulation) Act, 1956 and rules made thereunder;
iii) Foreign Exchange Management Act, 1999 and the rules to the extent Foreign Direct Investment, Overseas Direct Investment and External Commercial borrowings;
iv) The Depositories Act, 1996 and regulations and bye-laws framed thereunder;
v) Various regulations and guidelines under Securities and Exchange Board of India
vi) .. (Mention the other laws as may be applicable specifically to the Company.
Further, examination and compliances of Secretarial standards issued y the Institute of Company Secretaries of India and on provisions of Listing Agreement.
Comments of Report in Board of Directors Report
As per provisions of Section 134(3)(f) of the Act, the Board of Directors are required to give explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by .. (ii) by the Company Secretary in practice in his secretarial audit report.
III. Jurisdiction of Companies Act and MCA to take action
In case of non compliance reported by CS in its report regarding other acts like labour laws, taxation laws and environmental laws, whether Registrar of Companies or MCA is empowered to take appropriate action against the Company or its officers in defaults under these laws. Obviously the ROC or MCA cannot take any action against any irregularity or non compliance of other laws except Companies Act, hence in such an eventuality whether MCA shall report the matter to other operating Agencies to take appropriate action and/or the matter ends here and if so what would be the use of audit of other laws.
It is also a question “Whether MCA is over stepping its jurisdiction to cover or report the compliance or non compliance of other laws’. Whether reporting of other laws is justifiable under provisions of Companies Act, 2013 when there are specific laws and enactment and there are separate agencies to report thereon.
IV. Good Governance
The Secretarial audit is a step towards good governance and like the provisions of clause 49-c(iii) of Listing Agreement. As per the listing Agreement, the Board of Directors have to report compliance of other applicable laws and the deficiency or non compliance, need to be reported. The Board of Directors accordingly can take remedial measures and cure the same in near future. This is good corporate governance. As a matter of good corporate governance, if audit of other laws is to be done, that should be conducted based upon specific line of action and some standards should be fixed so that there is specific reporting of non compliance etc. The author is of the view that every audit report or a certificate should be specific in nature and should report specific compliance or non compliance. The general audit and general reporting of compliances of various laws may defeat the purpose of good governance. The author is of the further view that there should be audit of internal legal system and compliance of others laws by the Company. The auditor should review all the legal compliance report, if any, produced or discussed in the Board and also the mechanism of the Board how it cures or improves the legal compliance system and report thereon to give effect to good corporate practice and governance. The effort should be in line of development of legal system and emphasis should be on legal matters which basically effect the corporate restructuring and/or future contingencies on liability of the corporate in case of non-compliance.
In the present scenario the Secretarial audit report of each Company may differ. The management may take note of some laws as may be applicable to them and in the view of Company Secretary there might be many laws which may be applicable. There might be confusion and difference of opinion on applicability and reporting of certain laws in the Secretarial Audit Report. As per present format of Audit report, the scope of audit is much wider and even includes the financial audit which is part of other laws. Certainly, the objectivity of the Secretarial Audit Report is good corporate governance but somewhere the reporting of other compliance of other laws and its applicability in the Companies Act is not defined specifically. No secretarial auditor is in a position to conduct audit of all taxation, environment, labour and administrative laws and report his observations of each law in its report. No secretarial auditor is competent to conduct audit of environmental laws, energy audit and administrative laws audit. Such type of special audits can be done by Engineers and technical experts. It is out of the purview of scope of company Secretary. The attention of MCA is drawn on reporting on other laws.
In the perspective, introduction of Secretarial Audit Report by Company Secretary in practice is a welcome step. The secretarial audit will also boost the corporate compliance level and step towards good corporate governance. However, audit of other applicable laws needs to be amended to the extent specific compliance of specific provisions of laws. The format of Secretarial audit report needs amendment to include compliance of specific provisions of law instead general applicability of other laws.
(Author – Anil Kumar Popli, FCS, LLB is a Company Secretary in Practise from Delhi and can be contacted at firstname.lastname@example.org)