Every Company, while carrying out its business activities, has to comply with the prescribed rules and regulations relating to the Companies Act, Securities laws, FEMA, Industry Specific laws and General and should also pursue the good governance practice Secretarial Audit covers non-financial aspects of the business having impact on the efficient performance of the company and verifies compliances of applicable laws, regulations and guidelines. The Secretarial Audit provides for an independent verification of the records, books, papers and documents by a Company Secretary in order to check the compliance status of the company as per the provisions of various statutes, laws and rules & regulations and also to ensure the legal compliance procedural requirements and processes followed by the company. Secretarial Audit has not been made mandatory for private companies and small public companies. These companies may adopt secretarial audit practices for ensuring compliance and avoiding the risks associated with non-compliance.

An audit is to be on the principle of “Prevention is better than cure” rather than post mortem exercise and to find faults. It strengthens the image and goodwill of a company in the minds of regulators and stakeholders. It acts as an effective compliance risk management tool or a governance tool.

Need of Secretarial Audit

A Company Secretary in practice is a professional who is well-versed in matters of statutory, procedural and practical aspects of laws applicable to companies, both listed and unlisted public and private companies. A strong knowledge base makes him a competent professional to conduct Secretarial Audit. In terms of section 204(1), 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.

Applicability of Secretarial Audit

Section 204(1) of the Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that-

1. every listed company;

2. every public company having a paid-up share capital of fifty crore rupees or more; or

3. every public company having a turnover of two hundred fifty crore rupees or more

shall annex with its Board’s Report made in terms of sub-section (3) of section 134, a Secretarial Audit Report, given by a Company Secretary in practice, in form MR- 3.

The term ‘Turnover’ has been defined in section 2(91) and amended under the Companies (Amendment) Act, 2017 (effective from 09.02.2018 ) to mean the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

In view of considering the turnover/paid up share capital as per latest audited financial statement, as has been provided in section 149 regarding the appointment of women director/ independent director, the thresholds specified in section 204 shall be required to be checked throughout the year. Therefore the secretarial audit report shall be required to be annexed with the Board report:

(i) if any time during the year (in respect of which board report is prepared) any security of the company has remained listed on any recognised stock exchange; or

(ii) if any time during the year (in respect of which board report is prepared) the company beena public limited company, having turnover of Rs. 250 crores or more or having paid up share capital of Rs. 50 crores or more.

Applicability of Section 204 to a Company which is a subsidiary of a Public Company

Section 2(71) of the Companies Act, 2013 defines a “Public Company” as a company which

(a) is not a private company; and

(b) has a minimum paid-up share capital as may be prescribed.

The proviso to the definition states that “Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.”

In view of this, it is clear that Section 204 is applicable to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies. Although, the companies which are not covered under section 204 may opt for conducting Secretarial Audit voluntarily as it provides an independent assurance of the compliances of applicable laws by the company.

With the Notification of SEBI (Listing Obligations and Disclosure Requirement) (Amendment) Regulations, 2018, the Secretarial Audit is mandatory for listed entities and their material unlisted subsidiaries incorporated in India and shall be annexed with the Annual Report of the company.

The Secretarial Audit Report is to be submitted in a format prescribed under sub-rule (2) of rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the format of the Secretarial Audit Report shall be in Form No. MR-3 which shall be issued by a Company Secretary in Practice. In terms of section 204(1), 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. As per rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014, secretarial auditor is required to be appointed by means of resolution at a duly convened meeting of the Board of Directors of the company.

The appointment of the Secretarial Auditor should be at the beginning of the financial year as secretarial audit entails checking of compliances on a continuous basis. As a good practice, the Secretarial Auditor should submit a report to the Board at the end of each quarter as to the compliances of the company.

SCOPE

In terms of Form MR-3, the Secretarial auditor needs to examine and report the compliance of the following:

(i) The Companies Act, 2013 (the Act) and the rules made thereunder;

(ii) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;

(iii) The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;

(iv) 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;

(v) The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-

(a) Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

(b) Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992/ SEBI (Prohibition of Insider Trading) Regulations,2015;

(c) Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;

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

(e) Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

(f) 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) Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and

(h) Securities and Exchange Board of India (Buyback of Securities) Regulations,1998;

(i) Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018;

(j) Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

(k) SEBI (Share Based Employee Benefits) Regulations, 2014;

(l) Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

‘(vi) Other laws as may be applicable specifically to the’

Further the 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.

(ii) The Listing Agreements entered into by the Company with ….. Stock Exchange(s), if Applicable/ The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015;

Further also the Secretarial Audit report also requires reporting on whether –

  • The Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non-Executive Directors, Independent Directors, and Women Director.
  • The changes in the composition of the Board of Directors that took place during 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 all applicable laws including general rules like labour laws, competition law, Environmental laws, regulations and guidelines.
  • Secretarial Auditor is required to report and provide details of specific events and actions that occurred during the reporting period having major bearing on the affairs of the company in pursuance of above referred laws/ rules & regulations.

Appointment of Secretarial Auditor

As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013, secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting.

Communication to earlier Incumbent

Whenever a company secretary in practice is engaged as a secretarial auditor in place of an earlier incumbent, he should communicate to the earlier incumbent about the proposed engagement in writing to be sent by registered/speed post or any other mode of delivery, as may be recognised by the Institute of Company Secretaries of India.

Acceptance of Appointment

A formal letter for appointment should be issued by the company to the secretarial auditor along with the copy of the board resolution for appointment. The secretarial auditor should confirm acceptance of appointment in writing.

Preliminary Discussions/Surveys

It is important to have relevant information about the company. The secretarial auditor is expected to take general overview of the operations of the company and interact with the personnel involved to know about the nature of the business. He may opt for surveys for generating information about the company.

Preliminary Meeting

The preliminary meeting with the senior management and the administrative staff involved in the audit will give a fair idea of what is expected and the manner in which audit activities are to be undertaken. At this stage a time frame of the secretarial audit should be determined and finalized. The secretarial auditor shall discuss the scope and objectives of the audit, gather information on important Board processes, evaluate existing control systems and prepare the audit plan.

Finalization of Audit Plan and Briefing the Staff

It is important to work out an audit plan. The plan involves briefing the audit staff as to allotment of work, fieldwork responsibilities and other roles. The audit plan should comprehensively outline the fieldwork and usage of auditing tools. The review of controls helps the auditor determine the areas of highest risk and design tests to be performed in the fieldwork section. It is essential that the audit plan adheres to the timelines. Detailed checklist for each aspect of secretarial audit should be prepared and audit staff should be properly sensitized before commencement of audit.

Testing, Interviews and Analysis

The secretarial auditor may use a variety of tools and technology to gather information about the company’s operations. The secretarial auditor should determine whether the controls identified during the preliminary review are operating properly and in the manner described by the Company.

Fieldwork typically consists of interviewing with staff of the company whether formally or informally, reviewing procedure manuals, and processes, testing and analyzing compliance with applicable policies and procedures and laws, rules, regulations and assessing the adequacy of controls. This exercise may result in significant findings which the secretarial auditor may bear in mind while preparing the secretarial audit report.

Working Papers

Working papers are a vital tool of the audit process. They form the basis for expression of the audit opinion. They connect the management’s records and information to the auditor’s opinion. They are comprehensive and serve many purpose for the company as well as for the Auditor.

It is recommended that the findings during the course of audit are summarized and presented for initial discussions with the management for their views/ clarifications/replies.

After considering the clarifications/replies of the management, the secretarial auditor shall prepare the secretarial audit report in form MR. 3 (Annexure A). The report is addressed to the members but is to be submitted to the Board. The report shall contain the opinion on the statutory compliances examined by the auditor and shall state whether in his opinion the Company is carrying out/not carrying out due compliances of the applicable provisions of the various laws. The report shall be provided with or without qualifications.

(i) Compliance under Companies Act, 2013

The Companies Act, 2013 and rules thereunder is the first legislation covered under the scope of the Secretarial audit. The Secretarial auditor is expected to update on the amendment in the Act and the Rules & Regulations from time to time. Before commence with the Secretarial audit, the auditors shall go through the following documents, which will help in the identification of the various event held during the audit period, according to which the auditor can prepare the audit plan and can provide the list of document required for the audit purpose to the management of the company:

1. Memorandum and Articles of Association

2. Minutes of the Committee meetings, Board meeting, General meetings

3. Directors reports

4. Annual Returns of the previous year

5. Filing with the MCA, ROC’s, SEBI and Stock Exchanges

6. Financial Statements

7. Quarterly Compliance

Along with the aforesaid documents, the auditor should also go through the following documents during the audit:

1. Forms filed with the Registrar of Companies with

2. Index of Meetings held during the financial

3. Agenda papers, Noting of discussions, Minutes of the Board, its Committees and of General meeting.

4. Proof of Circulation of Notice and Agenda of Board meetings, Committee meetings and theGeneral meeting

5. Proof of circulation of Draft Minutes and Final Minutes of meeting of Board and its

6. Attendance Register of Board and committee meetings

7. All statutory registers, Procedure for Maintenance of registers and records and

8. Copy of financial statement along with notes to accounts and Auditor

9. Report of Internal

10. Notices of annual and event based disclosure of directors’

11 Copies of contracts made between the company and any of the related parties

12. Shareholder List, details of Share Transfers which have taken place during the financialyear

13. Copy of Share Transfer

14. Instruments creating, modifying or satisfying

15. Forms relating to Disclosures from

16. Certificate from RTA stating the number of shareholders as on the close of the

17. Certified true Board Resolution for any type of corporate actions taken by the Company

18. Details of the Holding and Subsidiary Companies

19. Complete details of Shares and Debentures issued during the

20. Details of change in shareholding of the promoters and top ten shareholders of theCompany under Section

21. Details with respect to maintenance of cost records and appointment of cost

22. Details of appointment of Auditor and Internal

23. The list of Related Party

24. Indebtedness Certificate signed by Company Secretary/ CFO of the

25. Listing and Trading Approval(s) from Stock

26. Intimation to Stock Exchanges, Confirmation from National Securities Depository Limited(NSDL) and Central Depository Services (India) Limited (CDSL) for change of the name ofthe company, change in the face value of equity shares,

27. Change of name of the company, change in the face value of the company, new ISIN Noof the Company in respect of the allotment or as a result of any change in capital structuredue to any corporate action taken by the Company during the financial year under

28. Corporate Action Forms filed by the Company with

29. Equity Shareholding pattern and its break up as at the close of the financial

30. Any orders received by the company from the High court/Tribunal or from any otherregulatory

31. Compliance record under FEMA with respect to FDI, ECB and ODI as

32. Copies of Shareholders and joint ventures agreement, if

33. Copy of Declaration received from Independent Director u/s 149(7).

34. Corporate Social Responsibility (CSR)

35. Directors and Key Managerial Personnel (KMP)

36. Bank Statements relating to transfer of Dividend to separate bank account, proof of dispatch of dividend within 30 days of Dividend

37. Advertisement/circular relating to Deposits; Credit rating certificate, deposit insurance, if any

38. Such other documents as required for the purpose of Audit.

(ii) Compliances under Securities (Contract Regulation) Act, 1956 and the rules made thereunder;

The Securities Contracts (Regulation) Act, 1956 (SCRA) defines various terms in relation to securities and provides the procedure for the stock exchanges to get recognition from Government/ SEBI, procedure for listing of securities of companies and operations of the brokers in relation to purchase and sale of securities on behalf of investors. The Central Government promulgated the Securities Contracts (Regulation) Rules, 1957 (SCRR) for carrying into effect the objects of the SCRA, 1956. A company listed on a stock exchange is required to comply with the provisions of SCRA and SCRR.

(iii) The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;

According to section 2(e) of the Depositories Act, 1996, Depository means a company formed and registered under the Companies Act and which has been granted a certificate of registration under section 12(1A) of the Securities and Exchange Board of India Act, 1992.The Depository holds electronic custody of securities and also arranges for transfer of ownership of securities on the settlement dates.

Section 29 of the Companies Act, 2013 also mandates that every company making public offer and such other class or classes of companies as may be prescribed, shall issue the securities only in dematerialized form by complying with the provisions of the Depositories Act, 1996 and the regulations made thereunder. However, unlisted company may convert its securities into dematerialized form or issue securities in physical or dematerialized form.

(iv) 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 Reserve Bank of India by issuing Master Directions provides consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions. The RBI issuing one Master Direction for each subject matter covering all instructions on that subject. Any change in the rules, regulation or policy is communicated during the year by way of circulars/press releases. The Master Directions updated suitably and simultaneously whenever there is a change in the rules/regulations or there is a change in the policy. All the changes will get reflected in the Master Directions available on the RBI website. Students are requested to go through the latest master direction relation to

  • Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017
  • Foreign Exchange Management (Cross Border Merger) Regulations, 2018
  • Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004
  • FDI Policy for the relevant period.
  • Master Direction – Foreign Investment in India
  • Master Direction – Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities.
  • Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised dealers.
  • Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad
  • Master Direction – Reporting under Foreign Exchange Management Act, 1999

(v) Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-

For the purpose of the Secretarial Audit, the following Regulations has been specifically prescribed under form MR-3

  • Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
  • Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;
  • SEBI (Prohibition of Insider Trading) Regulations, 2015;
  • The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009:
  • Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;
  • The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999:
  • SEBI (Share Based Employee Benefits) Regulations, 2014;
  • 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; and
  • The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
  • The Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018;
  • The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

(v) Identification and compliance of specific Applicable laws

The Secretarial Auditor may take note of various laws applicable to the Company as identified by the Management of the company; also the auditor shall carry his own efforts to identify various other laws as may be applicable to the company.

Guiding Criteria for Segregation of Specific Laws and General Laws

Segregation of laws applicable on the Company into the Industry specific and general is essential for Secretarial Audit. After considering the following factors the auditor should make the segregation of the same based on the laws being applicable on the Company:

  • Key financial parameters such as Turnover, Paid-up share capital, Net worth, Borrowings, etc.
  • Geographic location of registered office, units/divisions/plants/branches, etc.
  • Status of company such as listed/unlisted
  • Type/Class of company such as Private, Public, Holding, Subsidiary, Foreign, Nidhi, Producer, Section 8, etc.
  • Registration with various authorities such as SEZ, Sectoral Regulators, etc.
  • Segment such as Manufacturing/Trading/Service/e-commerce and Industry classification thereof
  • Agreements governing rights, obligations of shareholders such as Joint venture, shareholders’ agreements.
  • Number, class and category of employees/workers such as women, contractual employees, etc.

The auditor should comprehensively verify all laws, rules, regulations made for regulation of specific Industry and should assess the adequacy of systems and process for other General laws applicable to the Company other than Industry Specific Laws and laws specifically covered under Form MR-3.

(vii) Reporting on Compliance with the applicable clause of Secretarial Standards

Section 118 (10) of the Companies Act, 2013 provides that every company to observe Secretarial Standards with respect to General and Board meetings as specified by the Institute of Company Secretaries of India (ICSI). The Secretarial Auditor shall verify that the company has followed the applicable clause of the Secretarial Standards.

Secretarial Standards are in conformity with the provisions of the applicable laws. However, if, due to subsequent changes in the law, a particular Standard or any part thereof becomes inconsistent with such law, the provisions of the said law shall prevail.

Secretarial Standard on Meetings of the Board of Directors (SS-1) and Secretarial Standard on General Meetings (SS-2) issued by the Institute of Company Secretaries of India (ICSI) are applicable to all companies w.e.f. 1st July, 2015 (except One Person Company in which there is only one director and class or classes of companies which are exempted by the Central Government through notification). The Company Secretary in employment as well as in practice are entrusted to ensure the compliance of applicable Secretarial Standards.

(viii) Reporting on the Constitution of the Board

The Secretarial Auditor shall verify that during the year the Board of Directors of the Company is duly constituted with proportion of Executive Directors, Non-Executive Directors, Independent Directors, and Women Director as required under the applicable Laws, Rules & Regulations.

However, he should also confirm that 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.

(ix) Reporting on Board Processes

The Secretarial Auditor shall verify that during the year 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.

Further, he should also confirm that the majority decision is carried through while the dissenting members’ views are captured and recorded as part of the minutes.

(x) Reporting of the Adequacy of Systems \ Processes

The Secretarial Auditor shall confirm that 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.

(xi) Reporting on the Specific Events

Secretarial Auditor is required to report and provide details of specific events and corporate actions that occurred during the reporting period having major bearing on the affairs of the company in pursuance of above referred laws/rules & regulations.

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