Definition of Secretarial Audit:
Secretarial Audit Requirements is a measure of total compliance system in an organization. It is the verification of various reports and secretarial records of a company to see the due diligence status of company. The Secretarial Audit is quite a useful tool or mechanism for corporate compliance management. It helps to take timely corrective measures when non-compliance is detected.
“It is like you get your Report Card and your father asks you the reason behind getting low marks in a particular subject or the reason for failing in a particular subject or subjects.”
Why Secretarial Audit is Required?
Background of Secretarial Audit
The corporate sector is governed by a complex set of laws, rules and regulations. However, enactment of laws was not enough and the desired results could not be achieved. Lack of implementation of laws with no mechanism of audit to check their compliances have resulted in frauds. The Satyam Scam witnessed even exodus of independent directors from the Boards of Companies for fear of persecution on account of non-compliance of laws.
Meaning of Secretarial Audit
Secretarial Audit Requirements is a mandatory audit for specified class of companies; it is a part and parcel of total compliance management in an organization. The Secretarial Audit is an effective method of corporate compliance management. It helps in seeking timely corrective measures when non-compliance is detected. Process of verifying records and checking documents to comply with the provisions of various laws and rules/procedures, maintaining of books, records etc. by an independent professional to ensure that the company has complied with the legal and procedural requirements of various acts and also followed due processes.
Objective of Secretarial Audit
Two Fold Objective of Secretarial Audit
- To protect the interests of the customers, employees, revenue, environment and the directors and officers of the company.
- To avoid any unwarranted legal actions by the law-enforcing agencies and other persons as well.
The need of Secretarial Audit Requirements
- Effective mechanism to ensure that the legal and procedural requirement are duly complied with.
- Provides a level of confidence to the directors, offices in default, Key Managerial Personnel etc.
- Strengthen the image and goodwill of a company in the mind of regulators and stakeholders.
- “Secretarial Audit is an effective compliance risk management tool.”
- It helps the investor in analysing the compliance level of companies, thereby helping them to get accurate information or position of the company
- Secretarial Audit is an effective governance tool.
- Several Companies that have committed violations of various legal provisions and shown utter disregard for various Board and other processes contemplated in the Companies Act.
- There is no mechanism in place to verify compliance of various laws applicable to a company. Secretarial audit will fill the vacuum which presently exists in the realm of legal compliance management.
Secretarial Audit Requirements – A New Concept Introduced by Companies Act 2013:
The Companies Act, 1956 has been in need of a substantial change for quite some time now, to make it more contemporary and relevant to corporate, regulators and other stakeholders in India and changing business scenarios in India.
While several unsuccessful attempts have been made in the past to revise the existing Companies Act, 1956, there have been quite a few changes in the administrative portion of the Companies Act, 1956. One of the attempt to revise the Companies Act, 1956 was the Companies Bill, 2012 which was passed on 18/12/2012 by the Lok Sabha, (the Lower House Of the Parliament).
The Bill was passed by the Lok Sabha. It was then considered and passed by the Rajya Sabha also on 8 August 2013 and after receiving President assent on 29 August 2013, Companies Act, 2013 came into force (replacing Companies Act 1956).
The Companies Act, 2013 Act have far-reaching effects that are set to significantly change the manner in which corporates and businesses operate in India.
Section 204(1) of Companies Act, 2013 introduces concept of Secretarial Audit Report by Company Secretary in practice which 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-compliance.
Format of Secretarial Audit Report
Secretarial Audit Requirements 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).
Applicability of Secretarial Audit:
- It is compulsory for listed companies and other specified class of companies which include:
- Public limited company having a paid up capital of 50 crore or more.
- Public limited company having a turnover of 250 crores or more.
- It should be done by a practising company secretary.
Applicability of Secretarial Audit to a Private Company which is a Subsidiary of a Public Company
Section 2(71) of the Companies Act, 2013 defines a “Public Company as one
- Which is not a private company;
- Has a minimum paid-up share capital of five lakh rupees or such higher paid-up 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.
By this definition, it can be inferred that Secretarial Audit would be applicable to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies.
Areas Verified in Secretarial Audit are:
- Increase in the authorised, issued and paid up capital.
- Appointment and cessation of office of directors.
- Issuance and stamping of share certificates
- Acceptance of deposits, secured or unsecured.
- Payment of dividends.
- Review of board meetings conducted.
- Review of statutory registers maintained by the company.
- Information filed with ROC for change in promoters and shareholders.
- Appointment of key personnel and others, etc.
Laws to be Complied With:
The Institute of Company Secretaries of India has issued guidance for the scope of Secretarial Audit under Companies Act, 2013. As per the guidance, the company should comply with the following laws:-
- The Companies Act 2013
- The Depositories Act 1996.
- The Foreign Exchange Management Act, 1999
- Securities and Exchange Board of India Act, 1992 (‘SEBI Act’)
- The Equity Listing Agreements with BSE Limited and National Stock Exchange of India Limited and GDR Listing Agreement with Luxembourg Stock Exchange and Debt Listing Agreements with National Stock Exchange of India Limited and BSE Limited; and
- The Memorandum and Articles of Association
Appointment of Secretarial Auditor:
- Board to appoint at its meeting the Secretarial Auditor (on yearly basis) and fix his remuneration.
- Company to file the resolution with Registrar of Companies.
Functions of Secretarial Auditor:
As per Companies Act, 2013 the functions of the company secretary shall include:
- To report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company
- To ensure that the company complies with the applicable secretarial standards
Duties of Secretarial Auditor:
The duties of Company Secretary shall also discharge, the following duties, namely:
- To provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers;
- To facilitate the convening of the meetings and attend Board, committee and general meetings and maintain the minutes of these meetings;
- To obtain approvals from the Board, general meeting, the Government and such other authorities as required under provisions of the Act;
- To represent before various regulators, and other authorities under the Act in connection with discharge of various duties under the Act;
- To assist the Board in the conduct of the Affairs of the company;
- To assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices; and
- To discharge such other duties as have been specified under the Act or rules; and
- Such other duties as may be assigned by the Board from time to time
Punishment for Default:
According to sub section 4 of section 204 of the act, if a company or any officer of the company or the company secretary in practice, contravenes the provisions of section 204 of the Act, then:-
the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with the fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.
Secretarial Audit is always in the better interest of every corporate management. As an independent professional i.e a practicing company secretary certifies whether the company has carried out the compliance under the Act. This will also cater to the needs of the shareholders, creditors and employees. Secretarial audit also help the sectoral regulators, MCA and other law enforcement agencies as all the companies covered by the Companies Act will ensure proper compliance. It helps to establish and retain the confidence of various stakeholders who have invested their money in the company.
While the companies Act, 2013 has opened up a significant area of practice for company secretaries, it creates challenges and greater responsibility for company secretaries, and poses a great challenge to justify fully, the faith and confidence reposed in them.
Also, there is no limit proposed on the maximum number of secretarial Audit which a practising company secretary could conduct. But from the financial year 2016-17, the Council of the Institute at its 235th meeting held on February 11, 2016 reviewed the existing limits for the issue of Secretarial Audit Requirements Reports and decided as below:
- 10 Secretarial Audits per partner/ PCS, and
- An additional limit of 5 secretarial audits per partner/PCS in case the unit is peer reviewed.
These limits will be applicable for the Secretarial Audit Requirements Reports to be issued for the financial year 2016-17 onwards.
A minimum reasonable number of secretarial audit would be desirable for equity, quality and efficiency for confidence of shareholder. Therefore, it becomes imperative for practicing CS that he/she exercises great care and caution while issuing the Secretarial Audit report and also adheres to the highest standards of corporate ethics, governance and excellence in providing his/her service.