Ensuring Compliance and Transparency: A Comprehensive Guide to Secretarial Audit

Secretarial audit is a critical process that assesses the non-financial aspects of a company. It involves an independent verification of records, books, papers, and documents by a Company Secretary to evaluate the company’s compliance with various statutes, laws, and regulations. This audit helps to achieve the organization's objectives by improving the effectiveness of its risk management, control, and governance processes.

Applicability of Secretarial Audit

The applicability of Secretarial Audit is governed by the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

1. Under the Companies Act, 2013:

• Section 204(1) of the Companies Act, 2013, read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, mandates a Secretarial Audit for:
  • Every listed company.
  • Every public company having a paid-up share capital of ?50 crores or more.
  • Every public company having a turnover of ?250 crores or more.
  • Every company with outstanding loans or borrowings from banks or public financial institutions of ?100 crores or more.
  Such companies are required to attach the Secretarial Audit Report, prepared by a practicing Company Secretary, in Form MR-3 with their Board Report.

2. Under SEBI (LODR) Regulations, 2015:

• Regulation 24A mandates that:

  • Every listed company and its unlisted material subsidiary incorporated in India must annex a Secretarial Audit Report by a practicing Company Secretary with its annual report.
  • A "material subsidiary" is defined as a subsidiary whose income or net worth exceeds 10% of the consolidated income or net worth, respectively, of the listed entity and its subsidiaries in the immediately preceding financial year.

• Exemptions: As per Regulation 15 of the SEBI (LODR) Regulations, 2015, the compliance requirement specified in Regulation 24A does not apply to:

  • Listed entities having a paid-up equity share capital not exceeding ?10 crores and net worth not exceeding ?25 crores.
  • Listed entities that have listed their specified securities on the SME Exchange.

3. Applicability to Private Companies:

• The provisions of Section 204 also apply to a private company that is a subsidiary of a public company and falls under the prescribed class of companies.

Scope of Secretarial Audit

The Secretarial Auditor is required to examine and report on the company’s compliance with the following:

1. Companies Act, 2013
2. Securities Contract (Regulation) Act, 1956
3. Depositories Act, 1996
4. Foreign Exchange Management Act, 1999
5. SEBI Act, 1992, and various regulations and guidelines prescribed under it:
   • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
   • SEBI (Prohibition of Insider Trading) Regulations, 2015
   • SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
   • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
   • SEBI (Issue and Listing of Debt Securities) Regulations, 2008
   • SEBI (Buyback of Securities) Regulations, 2018
6. Other applicable laws specific to the company.
7. Compliance with:
   • Secretarial Standards issued by The Institute of Company Secretaries of India.
   • The Listing Agreements entered into by the company with Stock Exchanges.

Professional Responsibility and Penalty for Incorrect Secretarial Audit Report

• Section 448 of the Companies Act, 2013 stipulates that if any person makes a statement in any return, report, certificate, financial statement, prospectus, statement, or other document required by the Act or the rules made thereunder:

  • Which is false in any material particulars, knowing it to be false, or
  • Which omits any material fact, knowing it to be material,

  Such a person shall be liable under Section 447 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 Companies Act, 2013, the company, every officer of the company, or the Company Secretary in practice who is in default shall be liable to a penalty of ?2 lakhs.

• A Company Secretary in Practice may also be liable for professional or other misconduct as mentioned in the First or Second Schedules of the Company Secretaries Act, 1980.

Who Can Conduct a Secretarial Audit?

• The 259th meeting of the Council held on 16th March 2019, established that the Secretarial Audit or Secretarial Compliance Report should be conducted by Peer Reviewed Units only for:
  • The Top 100 companies as per market capitalization from April 1, 2020.
  • The Top 500 companies as per market capitalization from April 1, 2021.
  • All listed companies from April 1, 2022.
  • All companies from April 1, 2023.

Limits on Secretarial Audit Reports by Practicing Company Secretaries

• As per the 235th meeting of the Council held on 11th February 2016, the limits for issuing Secretarial Audit Reports are:
  • 10 Secretarial Audits per partner/PCS (Practicing Company Secretary).
  • An additional limit of 5 Secretarial Audits per partner/PCS if the unit is peer-reviewed.

Conclusion

The importance of Secretarial Audit, as mandated by Section 204 of the Companies Act, 2013, is paramount. It plays a crucial role in ensuring corporate transparency, compliance with legal and regulatory frameworks, and enhancing investor confidence. By assigning this essential task to qualified Company Secretaries with the necessary expertise, companies can effectively mitigate risks and lay the groundwork for sustainable growth and long-term success. Regular Secretarial Audits reinforce a firm's commitment to good corporate governance, integrity, accountability, and stakeholder value, fostering a culture of trust and resilience in today's dynamic business environment.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.