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Act - 2013: Secretarial Audit

Introduction

Secretarial Audit is a process to check compliance with the provisions of various laws and
rules/regulations/procedures, maintenance of books, records etc., by an independent
professional to ensure that the company has complied with the legal and procedural
requirements and also followed due processes. It is essentially a mechanism to monitor
compliance with the requirements of stated laws and processes.

Timely examination of compliance reduces risks as well as potential cost of non-compliance
and also builds better corporate image. Secretarial Audit establishes better compliance
platform by checking the compliances with the provisions of various statutes, laws, rules &
regulations, procedures by an independent professional to make necessary recommendations/
remedies. The primary objective of the Compliance Management backed Secretarial Audit is
to safeguard the interest of the Directors & officers of the companies, shareholders, creditors,
employees, customers etc. With the introduction of concept of 'Secretarial Audit' in
Companies Act, 2013, it has gained wider importance and an area of professional opportunity
among Company Secretaries.

A Company Secretary in Practice has been assigned the role of Secretarial Auditor in section
2(2)(c)(v) of The Company Secretaries Act 1980, which is the only statute in the country,
carving out Secretarial Audit as an area of practice.

A practicing Company Secretary (PCS) is the competent, fit and proper professional to
conduct Secretarial Audit. A significant area of competence of PCS is Corporate laws
owing to intensive and rigorous coaching, examinations, training and continuing education
programs. PCS is a highly specialized professional in matters of statutory, procedural and
practical aspects involved in proper compliances under corporate laws. Strong knowledge
base makes PCS a competent professional to conduct Secretarial Audit.

The Institute of Company Secretaries of India realizing the importance of this topic has
already introduced Secretarial Audit, Compliance Management and Due Diligence as
one of the subject in its Professional curriculum w.e.f. 01st September, 2013.

Background

The concept of Secretarial Audit is not new in Indian context. The Ministry of Corporate
Affairshas already released CORPORATE GOVERNANCE VOLUNTARY
GUIDELINES, 2009 on December 21, 2009. The preamble to Guidelines states that These
guidelines provide for a set of good practices which may be voluntarily adopted by the Public
companies. Private companies, particularly the bigger ones, may also like to adopt these
guidelines.

The Guidelines, amongst other things, recommend the introduction of Secretarial Audit.
Companies, which do not adopt these guidelines, either fully or partially, are expected to
inform their shareholders about the reasons for not adopting these Guidelines.

The earlier Companies Act, 1956 provides for a compliance certificate to be issued by a
Company Secretary in practice and annexed to Board Report by certain class of Companies.
As per Section 383A of the Companies Act, 1956, every Company having a paid-up capital of
not less than Rs. 10 lakhs or more but less than Rs. 5 crore shall be required to file a
compliance certificate given by a practicing Company Secretary with the Registrar of
Companies within 30 days from the date on which its annual general meeting was held with
the requisite fees and a copy of such certificate was attached with Boards report.

Provisions in Companies Act, 2013

The Companies Act, 2013 has now introduced the Secretarial Audit as a new class of audit in
addition to Statutory Audit, Internal Audit and Cost Audit prescribed in the act. Section 204
of the Act read with The Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014 notified w.e.f. 01st April, 2014 deals with provisions relating to
Secretarial Audit.

1. Applicability

The requirements of Secretarial Audit are not applicable on all companies. According to Sub-
Section 1 of Section 204 of the Act, every listed company and a company belonging to other
class of companies as may be prescribed shall annex with its Boards report made in terms of
sub-section (3) of section 134, a secretarial audit report, given by a company secretary in
practice, in such form as may be prescribed.

Rule 9 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules,
2014 prescribes the other class of companies as under:

a. every public company having a paid-up share capital of 50 crore rupees or more; or
b. every public company having a turnover of 250 crore rupees or more.

2. Duties, Rights and Powers of Company Secretary in Practice conducting Secretarial
Audit

According to Sub-Section 2 of Section 204 of the Act, it shall be the duty of the company to
give all assistance and facilities to the company secretary in practice, for auditing the
secretarial and related records of the company. Further, a company secretary in practice
conducting secretarial audit has been granted similar powers and rights as that granted to
statutory auditor. (Section 143(14) of the Act).

The report of Board of Directors prepared under Section 134(3) of the Act shall include
explanations or comments by the Board on every qualification, reservation or adverse remark
or disclaimer made by the company secretary in practice in his secretarial audit report. (Sub-
Section 3 of Section 204 of the Act).

3. 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, the company, every officer of the company or the company secretary in practice, who
is in default, shall be punishable with fine which shall not be less than 1 lakh rupees but
which may extend to 5 lakh rupees.

Further, the provision of Section 143 mutatis mutandis applying to company secretary in
practice in conduct of secretarial audit, if the company secretary in practice, in the course of
the performance of his duties as secretarial auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or employees
of the company, he shall immediately report the matter to the Central Government within
such time and in such manner as may be prescribed. If company secretary in practice
conducting Secretarial Audit u/s 204 of the Act do not comply with such provisions, he shall
be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 25
lakh rupees. (Sub-Section 15 of Section 143 of the Act).

4. Reporting Requirements

Rule 9 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules,
2014 provides that the format of the Secretarial Audit Report shall be in Form No.MR - 3.
The format of the report (MR - 3) is also available in the aforesaid Rules. The scope of
reporting is very broad and the Company Secretary in practice has to ensure compliances of
following statutory provisions in addition to Secretarial standards issued by The Institute of
Company secretaries of India, the Listing Agreement and The Companies Act,
2013(including the rules made thereunder):

1. The Securities Contracts (Regulation) Act, 1956 (SCRA) and the rules made thereunder;

2. The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;

3. 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;

4. The following Regulations and Guidelines prescribed under the Securities and Exchange
Board of India Act, 1992 (SEBI Act):

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

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,
1992;

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

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

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;

5. any other laws as may be applicable specifically to the company.

Conclusion

While the Companies Act, 2013 has opened up a significant area of practice for Company
Secretaries, it casts immense responsibility on Company Secretaries, and poses a great
challenge to justify fully, the faith and confidence reposed in them.The reporting clause of
MR-3 - I/We hereby report that in my/our opinion, the company has, during the audit period
covering the financial year ended on_____, _____ complied with the statutory provisions
listed hereunder and also that the Company has proper Board-processes and compliance-
mechanism in place to the extent, in the mannerand subject to the reporting made hereinafter
. cast an enormous responsibility on the part of Company Secretary in
practice. It, therefore, becomes imperative for the PCS that he exercises great care and
caution while issuing the Secretarial Audit report and also adheres to the highest standards of
professional ethics and excellence in providing his services. Secretarial Audit is to be on the
principle of Prevention is better than cure rather than post mortem exercise and to find
faults.

Also, there is no cap proposed on maximum number of secretarial audits which a practicing
company secretary could conduct. A cap of reasonable number of secretarial audits would be
desirable for equity, quality and efficiency.

ICSI suggestions to Ministry

The regulator of profession of Company Secretary believes that the legislative intention of
this section 204 of the Act is that every listed company, big or small, and every big company
needs secretarial audit. It does not envisage distinction between private and public companies.
The need for a company to have secretarial audit company can be linked to scale of
operations or presence which can be determined in terms of paid up capital, turnover, number
of employees, number of shareholders, outstanding borrowings, kinds of business etc. and has
no link whether a company is public or private. In fact, we had moved to a regime where the
law endeavors to provide level playing field to all kinds of market participants. In fact
Companies Act, 2013 has done away with most of the exemptions/relaxations available to
private companies under the earlier law. This is found on the profound realization that serious
misdemeanor have been noticed in many private companies. The exclusion of private
companies, irrespective of their size, from secretarial audit gives a message that the matters
covered under such audit such as compliance with applicable laws is not important. It is at
least as important as the financial audit which is compulsory for every company. That is why
it is part of the Corporate Governance Voluntary Guidelines, 2009 of Ministry of Corporate
Affairs which is applicable to all companies.

The Institute of Company Secretaries of India has made a representation (dated 02nd April,
2014) to the Ministry of Corporate Affairs for amending the rules relating to Secretarial Audit
and making it applicable to all those companies which are at least subject to Internal Audit
u/s 138 of the Act.Now, the new Government of 16th Lok Sabha will be tested, how it comes
up with this representation/suggestion of ICSI.

Thanks for reading!!
Reference to Act means Companies Act, 2013 unless stated otherwise.
Views are personal and may not be relied as an opinion on any statutory act, section or rule.