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2021

Applicability of Secretarial Audit in India

Applicability of Secretarial Audit in India

Secretarial audit is a mandatory compliance which has to be carried out by certain companies in India. The main law that regulates secretarial audit in India is the Companies Act, 2013. Under section 204(1), companies are required to obtain a secretarial audit report from the secretarial auditor. Such provision has to be read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014.

The Secretarial Audit is an audit where the Secretarial Auditor expresses an opinion as to whether there subsist appropriate systems and processes in the company proportionate with the size and operations of the company to monitor and check compliance with applicable laws, rules, regulations, and guidelines. In this article we will discuss some of the key features of Secretarial Audit.

Applicability of Secretarial Audit:

As per section 204(1) read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014, the following companies require to carry out secretarial audit:

  1. Every Listed Company; and
  2. Every Public Company:
    1. Having a paid-up share capital of 50 crore rupees or more. Or
    2. Having a turnover of more than Rs. 250 crore or more.
  3. Every company having a borrowing of 100 crores or more.

Note: If a private company is a subsidiary of a public company, then secretarial audit would be carried out as per the requirements of the public company.

Procedure of the Secretarial Audit:

The below steps must be carried out in process of conducting Secretarial Audit:

  1. Appointment of Secretarial Auditor;
  2. Communication to earlier Incumbent;
  3. Acceptance of Appointment by the Secretarial Auditor;
  4. Preliminary Discussions about the company with the Secretarial Auditor;
  5. Preliminary Meeting with the Auditor;
  6. Finalization of Audit plan and briefing the staff;
  7. Testing, Interview and Analysis;
  8. Preparing the working papers;
  9. Audit Summary for Discussions;
  10. Submission of Secretarial Audit Report.

Eligibility of Secretarial Auditor:

Members of the ICSI (Institute of Company Secretaries of India), who are holding the certificate of practice which validates to perform as a secretarial audit, can only conduct Secretarial Audit and prepare the Secretarial Audit Report of the Company.

Appointment of Secretarial Auditor:

Obtain the consent of secretarial Auditor.
File certified true copy of a resolution passed in Board Meeting with the Registrar of Companies as an attachment in MGT– 14.
Appoint the Secretarial Audit in Board Meeting.
Fix the remuneration in Board Meeting.

Statutory Laws covered under the Scope of Secretarial Audit:

Following Statutory laws are covered under the scope of Secretarial Audit.

  1. Companies Act, 2013 and the rules made thereunder.
  2. Securities Contracts (Regulation) Act, 1956 (‘SCRA’), and the rules made thereunder.
  3. Depositories Act, 1996, and the rules made thereunder.
  4. 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.
  5. Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’).
  6. Reporting on the compliance of secretarial standards issued by the Institute of Company Secretaries of India.
  7. Reporting on Compliances with the Listing Agreement.
  8. 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.
  9. Examines and reports regarding the adequacy and efficiency of the systems and processes with other laws.
  10. Monitor and ensure compliance with general laws like labor laws, competition law, and environmental laws.
  11. Examines and reports on the specific observations or qualification, reservation or adverse remarks in respect of the Board Structures/system and processes relating to the Audit period.
  12. Secretarial Auditor may rely on reports given by statutory auditors or other designated professionals to check compliance with other laws like Income Tax, Customs, GST.

Document Checklist for Secretarial Audit:

Verification of the following documents/registers/reports fall under the scope of Secretarial Audit:

  1. Notice, agenda, notes on agenda minutes of meetings, attendance registers;
  2. Draft Financial Statements, Auditor’s Report, Director’s Report;
  3. Statements for borrowings and investments;
  4. Disclosures / Consents / Declarations;
  5. Filings with RoC / Regulatory Authorities / RBI;
  6. Filings / submissions to Stock Exchanges;
  7. Relevant Approvals/correspondence/disclosures by directors;
  8. Compliance Certificates of functional heads for compliance of applicable laws;
  9. Charter Documents and Statutory Registers;
  10. Annual Performance Reports, Lease Deed, Bonds and returns;
  11. Registers maintained under Labour Laws;
  12. Admission and Statement for code of conduct received from the directors;
  13. Remuneration and Sitting fees details paid to directors;
  14. Particulars of CSR amount;
  15. SAST Disclosures;
  16. Bank account details for dividend;
  17. Details of ECB Returns, in case of foreign borrowings in the company.

Secretarial Audit Report:

Just like the Independent Auditors’ Report, the Secretarial Audit Report is also to be addressed to the Members. There are two types of reports to be submitted as a part of secretarial audit as follows:

  1. Secretarial Audit Report:
  • Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed with effect from the year ended March 31, 2019.
  • The said report shall be submitted in the Form MR-3.

2. Secretarial Compliance Report:

  • This report is to be submitted in addition to the Secretarial Audit Report.
  • All listed companies to submit, in addition to Secretarial Audit Report, Secretarial Compliance Report to the stock exchanges within 60 days of closure of financial year.
  • This report is a feeder to SAR.
  • SCR applied only to Listed Entities (Not applicable to Material Unlisted Subsidiary).

Note: “Material Unlisted Subsidiary” means a subsidiary of a listed company whose income or net worth exceeds 10 % of the consolidated income or net worth, respectively, of the Company and its Subsidiaries in the immediately preceding accounting year.

Frauds and Penalties:

Section 448:

  • Section 448 of Companies Act 2013, deals with the 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 thereunder, any person makes a statement –
  • Which is false in any material particulars, knowing it to be false; or
  • Which omits any material fact, knowing it to be material, he shall be liable under section 447.
  • In Terms Of Section 448, a PCS is liable to attract penal provision if, he makes statement in the Secretarial Audit Report which is false is any material particulars, knowing it be false or omits any material fact knowing it to be material.

Section 447:

  • Section 447 deals with Punishment for Fraud.
  • It provides that any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which

Punishment for Defaulter:

  • If a company or any officer of the company or the company secretary in practice, contravenes the provisions of this secretarial audit, then
    • The company, or
    • Every officer of the company, or
    • The company secretary in practice,

…who is in default, shall be punishable with:

  • Minimum fine of Rs. 1 lakh which may extend up to Rs. 5 lakh.

 

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