UNIT 20: KEY MANAGERIAL PERSONNEL

(Section 196 to 205)

MEANING OF Key Managerial Personnel: Section 2(51)
KEY Key Managerial Personnel, in relation to a company, means:
MANAGERIAL (a) The Chief Executive Officer or the managing director or the manager;
PERSONNEL (b) The Company Secretary;
(c) The Whole – Time Director;
(d) The Chief Financial Officer; and
(e) Such other officer as may be prescribed.

Functions of Company Secretary (Section 205 of the Companies Act, 2013)

The functions of the company secretary shall include:
(a) To report to the Board about compliance of this Act and its rules and
other laws applicable to the company;
(b) To ensure the compliance of the applicable secretarial standards as
issued by ICSI;
(c) To discharge such other duties as may be prescribed by the Act.

Additional Functions
(a) To provide guidance to the directors of the company either collectively
and individually as they may require, with regard to discharge their duties,
responsibilities and powers;

(b) To convene the meetings and attend Board, committee and general
meetings, and maintain the minutes of these meetings;

(c) To obtain approvals from the Board, general meetings, the Government
and such other authorities as required under this Act;

(d) To represent before various regulators, Tribunal and other authorities

under this Act;

(e) To assist the Board in the conduct of the affairs of the company;

(f) To assist and advise the Board in ensuring good corporate governance;
and

(g) To discharge such other duties as may be assigned by the Board from
time to time or as prescribed in this Act.

PROVISIONS Appointment of Key Managerial Personnel

RELATING TO Section 203 of the Companies Act, 2013 & Rule 8 of Companies
KMP (Appointment and Remuneration of Managerial Personnel) Rules, 2014, w.
(December 2015) e. f. 1st April, 2014.
Every listed company and every unlisted public company having a paid – up
share capital of ` 10 Crores or more shall appoint following whole – time key
managerial personnel:
(a) Managing Director, or Chief Executive Office or Manager and in their
absence, a whole – time director;
(b) Company Secretary; and
(c) Chief Financial Officer.

Insertion of New Rule 8A of Companies (Appointment and

Remuneration of Managerial Personnel) Rules, 2014, w. e. f. 9th June,
 2014.
A company other than a company covered under rule 8 which has a paid up
share capital of five Crores rupees or more shall have a whole – time
company secretary other than the KMP as given in Rule 8.

Appointment of KMP by the Board

Every whole – time key managerial personnel of a company shall be
appointed by passing a Board Resolution containing the terms and
conditions of the appointment including the remuneration.

No KMP shall become the Chairperson unless the articles of such a

Note:
company provide otherwise.

Whole – time key managerial personnel shall not hold office in more than
one company except in its subsidiary company at the same time. However,
he can hold directorship in other companies with the permission of the
Board.

Re – appointment of KMP by the Board

If the office of any whole – time key managerial personnel is vacated, the
resulting vacancy shall be filled – up by the Board within 6 months from the
date of such vacancy.

Note:A whole – time key managerial personnel holding office in more than
one company at the same time has to choose one company within 6 months
from the date of commencement of this Act.

APPOINTMENT Tenure for MD/WTD/Manager: (Section 196)

OF MANAGING A company shall not appoint or re – appoint any person as its MD, WTD or
DIRECTOR, Manager for a term exceeding 5 years at a time and no reappointment shall
WHOLE – TIME be made earlier than one year before the expiry of his term.
DIRECTOR OR
No company shall appoint or employ at the same time a Managing Director
MANAGER
or a Manager.

Appointment by Board Resolution: A MD, WTD or manager shall be

appointed and the terms and conditions of such appointment and
remuneration payable should also be approved by the Board Meeting.

Approval by Shareholders & CG: The approval from shareholders is required

in case any variances in the terms & conditions as specified in Schedule V.

Approval of the CG is not necessary if the appointment of MD, WTD or

Note:
Manager, is made in accordance with the terms & conditions as specified in
Schedule V.

In short, the appointment of a MD, WTD or manager and the terms and
conditions of such appointment and remuneration payable thereon must be
first approved by the Board and then by an ordinary resolution passed at a
general meeting of the company.

Filing of return for the appointment of KMP

Rule 3 of Companies (Appointment and Remuneration of Managerial

Personnel) Rules, 2014

A company shall file a return of appointment of a MD, WTD or Manager,

CEO, CS and CFO within 60 days of their appointment, with the ROC in
Form No. MR – 1.

Note:Where an appointment of a MD, WTD or manager is not approved by

the company at a general meeting, any act done by him before such
approval shall be treated as valid.

No company shall appoint at the same time a Managing Director or a

Manager.

Procedure for Approval of Central Government

An application seeking approval to the appointment of a MD, WTD or
Manager shall be made to the Central Government in e – Form No. MR – 2.

The Central Government shall consider the following with regard to the
appointment of a MD, WTD or Manager:
(a) The financial position of the company;
(b) The remuneration or commission drawn by the individual concerned in
any other capacity;
(c) The remuneration or commission drawn by him from any other company;
(d) Professional qualifications and experience of the individual concerned;
(e) Such other matters as may be prescribed.

Disqualifications of KMPs
No company shall appoint or continue the employment of any person as its
MD, WTD or Manager who:
(a) Is less than 21 years or has attained the age of 70 years; (A person, who
has attained 70 years, may be appointed by passing a special resolution.)
(b) Is an undischarged insolvent or has at any time been adjudged as an
insolvent; or
(c) Has suspended the payments to his creditors;
(d) Has convicted by a court of an offence and sentenced for a period of more
than 6 months.

Apart from the above conditions, a person to be eligible for appointment as

MD, WTD, or manager without the approval of the Central Government.
These conditions are as below:

Part – I of Schedule – V
(a) He had not been sentenced to imprisonment for any period, or to a fine
exceeding ` 1000/-, for the conviction of an offence under any of the
following Acts, namely:-
1. The Indian Stamp Act, 1899,
2. The Central Excise Act, 1944,
3. The Industries (Development and Regulation) Act, 1951,
4. The Prevention of Food Adulteration Act, 1954,
5. The Essential Commodities Act, 1955.
6. The Companies Act, 2013
7. The Securities Contracts (Regulation) Act, 1956,
8. The Wealth – tax Act, 1957,
9. The Income – tax Act, 1961,
 10. The Customs Act, 1962,
11. The Competition Act, 2002,
12. The Foreign Exchange Management Act, 1999,
13. The Sick Industrial Companies (Special Provisions) Act, 1985,
14. The Securities and Exchange Board of India Act, 1992,
15. The Foreign Trade (Development and Regulation) Act, 1992,
16. The Prevention of Money Laundering Act, 2002;

(b) He had not been detained for any period under the Conservation of
Foreign Exchange and Prevention of Smuggling Activities Act, 1974;

(c) Where he is a managerial person in more than one company, he draws

remuneration from one or more companies;

(d) He is resident in India.

Note: Resident in India includes a person who has been staying in India for a
continuous period of not less than twelve months immediately preceding the
date of his appointment as a managerial person and who has come to stay
in India:
(i) For taking up employment in India, or
(ii) For carrying on a business or vocation in India.

MANAGERIAL The provisions relating of the Managerial Personnel in the Companies Act,
REMUNERATIO 2013 are as under:
N OF KMP
(December 2015) (a) Section 197: Overall ceiling for Managerial Remuneration i. e. 11% of the
Net Profit or Individual limit.

(b) Section 198: Calculation of Net Profit as required under section 197.

(c) Schedule V: Conditions for Appointments of KMPs and their

remunerations in case of a Company having no profit or inadequate profits.

OVERALL LIMIT The maximum ceiling for payment of managerial remuneration by a public
OF company to its MD, WTD and which shall not exceed 11% of the net profit of
MANAGERIAL the company in a particular financial year. This section only applies to
REMUNERATIO public company or a private company which is a subsidiary of a public
N company.
(SECTION 197)
The calculation of net profit for the purpose of Managerial Remuneration
(December 2015)
shall be made in accordance with section 198. A company may pay more
than 11% of the Net Profit with authority of shareholders via Special Resolution
in General meeting and with the previous approval of Central Government.

Individual limit of Managerial Remuneration to MD, WTD or Manager

The remuneration payable to any one MD or WTD or Manager shall not
exceed 5% of the net profits and if there are more than one such directors
and manager, remuneration shall not exceed 10% of the net profits.

Individual Limit to directors other than MD, WTD or Manager

The remuneration payable to Directors other than MD or WTD shall not
exceed:
(a) 1% of the net profits, if there is a MD, WTD or Manager;
(b) 3% of the net profits in any other case.

The Company may increase the above limit of Managerial Remuneration

subject to the approval of shareholders in general meeting by Special
Resolution. (No CG approval required in case of sub limits)

PROVISIONS RELATING TO SITTING FEES

The above mentioned limit of managerial remuneration shall be exclusive of
sitting fees payable to directors for attending the board
meetings/committees meetings.

The maximum sitting fees payable to the each director for attending the
Board Meeting or any committee meeting shall not exceed ` 1 lakh per
meeting.

Provided further that different fees for different classes of companies and
fees in respect of independent director may be such as may be prescribed.

Provided that for Independent Directors and Women Directors, the sitting
fee shall not be less than the sitting fee payable to other directors.

REMUNERATION TO DIRECTORS IN OTHER CAPACITY:

The remuneration payable to the directors including MD, WTD or Manager
shall be inclusive of the remuneration payable for the services rendered by
him in any other capacity except
 The services of a professional nature and
 In the opinion of the Nomination and Remuneration Committee or the
Board, the director possesses the requisite qualification for the services
of the professional nature.

OTHER PROVISIONS RELATING TO MONTHLY REMUNERATION TO

DIRECTOR OR MANAGER
(a) Permissible forms of Remuneration: A director or manager may be paid
remuneration either by way of a monthly payment or at a specified
percentage of the net profits of the company or partly by one way and partly
by the other.

(b) Commission or remuneration from holding or subsidiary company: Any

director who is in receipt of any commission from the company and who is a
MD, WTD or Manager of the company shall not be disqualified from
receiving any remuneration or commission from any holding company or
subsidiary company of such company subject to its disclosure by the
company in the Board’s report.

(c) Independent directors are not entitled to stock options: An independent

director shall not be entitled to any stock option and may receive
remuneration by way of fees, reimbursement of expenses for participation in
the Board and other meetings and profit related commission as may be
approved by the members.

(d) Insurance Premium not part of Remuneration: Where any insurance is

taken by a company on behalf of its MD, WTD, Manager, CEO, CFO or CS
for indemnifying against any liability in respect of any negligence, default, or
breach of trust for which they may be guilty in relating to the company,
 such insurance premium shall not be treated managerial remuneration.

If such KMP is proved to be guilty, the premium paid on such insurance

shall be treated as part of the remuneration.

PUNISHMENT FOR NON COMPLIANCE:

If any person contravenes the provisions of this section, he shall be
punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees.

CALCULATION SCHEDULE – V
OF PROFIT FOR CONDITIONS FOR APPOINTMENTS OF KMPS AND THEIR REMUNERATIONS
PURPOSE TO
PAY PART – I of the Schedule V
MANAGERIAL
PART – II of the Schedule V
REMUNERATIO
N UNDER Section I: Remuneration by Companies having Profits
SECTION 197. A company having profits in a financial year shall pay remuneration to its
KMP in accordance with Section 197.

Section II: Remuneration by Companies having no profits or inadequate

profits
Where in any financial year, if a company has no profits or inadequate
profits, it may pay the remuneration to the managerial person not exceeding
the limits as mentioned in Table A and Table B below:

TABLE – A (LOSS MAKING COMPANY)

Effective Capital Remuneration (Annually)
Negative or less than ` 5 ` 60 Lakhs
Crore
More than ` 5 Crore but ` 84 Lakhs
less than ` 100 Crore
More than ` 100 Crore ` 120 Lakhs
but less than ` 250 Crore
` 250 Crore and above ` 120 Lakhs plus 0.01% of the effective
capital in excess of ` 250 Crore

Note: The above limits shall be doubled if a special resolution is passed by

the shareholders. It is clarified that for a period less than one year, the
limits shall be pro – rated.

TABLE – B (A COMPANY HAVING INADEQUATE PROFIT)

In the case of managerial person who was not a shareholder, employee or a
Director of the company at any time during the 2 years prior to his
appointment as managerial person: 2.5% of the current relevant profit.

Note: A company may double the above limits (Specified in Table – B) by

passing a special resolution for a period not exceeding 3 years and subject
to the additional approval by:
(a) Nomination and Remuneration Committee and
(b) Board of Directors

Section 200: Notwithstanding anything contained in this Chapter, the

company may, while according its approval under section 196, to any
appointment or to any remuneration under section 197 in respect of cases
where the company has inadequate or no profits, fix the remuneration
within the limits specified in this Act, at such amount or percentage of
profits of the company, as it may deem fit and while fixing the
remuneration, the company shall have regard to—
(a) the financial position of the company;
(b) the remuneration or commission drawn by the individual concerned in
any other capacity;
(c) the remuneration or commission drawn by him from any other company;
(d) professional qualifications and experience of the individual concerned;
(e) such other matters as may be prescribed.

REMUNERATION BY UNLISTED COMPANIES IN CASE OF

INADEQUACY OF PROFITS OR NO PROFIT
An unlisted company and subsidiary of a listed company may pay
remuneration to its managerial person in the event of no profit or
inadequate profit beyond ceiling prescribed in section II, part II of Schedule
V subject to complying with the following conditions:

(a) Approval by the Board & Committee: Payment of remuneration is

approved by a resolution passed by the Board & also approved by
nomination and remuneration committee and while doing so record in
writing clear reason and justification for payment of remuneration beyond
the said limit;

(b) No default on repayments: The company has not made any default in
repayment of any of its debts or debentures or interest payable thereon for a
continuous period of 30 days in the preceding financial year before the date
of appointment of such managerial person;

(c) Approval from shareholders: Prior approval of shareholders by way of a

special resolution at a general meeting of the company for payment of
remuneration for a period not exceeding 3 years;

(d) Statement with Notice: Statement along with a notice calling the general
meeting as referred above is given to the shareholders containing the
following information, namely:-

General Information:
(a) Nature of industry
(b) Date or expected date of commencement of commercial production
(c) In case of new companies, expected date of commencement of activities
as per project approved by financial institutions appearing in the
prospectus
(d) Financial performance based on given indicators
(e) Foreign investments or collaborations, if any.

Information about the appointee:

(a) Background details
(b) Past remuneration
(c) Recognition or awards
(d) Job profile and his suitability
(e) Remuneration proposed
(f) Comparative remuneration profile with respect to industry, size of the
company, profile of the position and person (in case of expatriates the
relevant details would be with respect to the country of his origin)
(g) Pecuniary relationship directly or indirectly with the company, or
(h) Relationship with the managerial personnel, if any.

Other information:
(a) Reasons of loss or inadequate profits
(b) Steps taken or proposed to be taken for improvement
(c) Expected increase in productivity and profits in measurable terms.

Disclosures:
The following disclosures shall be mentioned in the Board of Director’s
report under the heading ―Corporate Governance‖, if any, attached to the
financial statement:-
(a) All elements or remuneration package such as salary, benefits, bonuses,
stock options, pension, etc., of all the directors;
(b) Details of fixed component and performance linked incentives along with
the performance criteria;
(c) Service contracts, notice period, severance fees;
(d) Stock option details, if any, and whether the same has been issued at a
discount as well as the period over which accrued and over which
exercisable.
 SECTION III: REMUNERATION IN SPECIAL CIRCUMSTANCES

Where the company is having no profit or inadequate profit can pay

remuneration to its managerial personnel in excess of amount as mentioned
in Section II above. The following companies are covered in this section:
(a) Foreign Company
(b) New incorporate Company (for a period of 7 years from the date of
Incorporation)
(c) Sick Company (as order passed by BIFR or NCLT for five years from date
of sanction of scheme)
(d) An unlisted company in a Special Economic Zone (Max. `2,40,00,000 per
annum)

SECTION IV: PERQUISITES NOT INCLUDED IN MANAGERIAL REMUNERATION

The following perquisites which shall not be included in the computation of

the ceiling on remuneration specified in Section II and Section III:

(a) Contribution towards Statutory Requirements: Contribution to provident

fund, superannuation fund or annuity fund to the extend these either singly
or put together are not taxable under the Income – tax Act, 1961;

(b) Gratuity: Gratuity payable at a rate not exceeding half a month’s salary
for each completed year of service; and

(c) Leave encashment: Encashment of leave at the end of the tenure.

In addition to the above perquisites, an expatriate managerial person

(including a non – resident Indian) shall be eligible to the following
perquisites which shall not be included in the computation of the ceiling on
remuneration specified in Section II or Section III:

(i) Children’s education allowance: In case of children studying in or outside

India, an allowance limited to a maximum of ` 12,000 per month per child
or actual expenses incurred, whichever is less. Such allowance is admissible
up to a maximum of two children.

(ii) Holiday passage for children studying outside India or family staying
abroad: Return holiday passage once in a year by economy class or once in
two years by first class to children and to the members of the family from
the place of their study or stay abroad to India if they are not residing in
India, with the managerial person.

(iii) Leave travel concession: Return passage for self and family in
accordance with the rules specified by the company where it is proposed
that the leave to spent in home country instead of anywhere in India.

CALCULATION OF EFFECTIVE CAPITAL:

Paid – up share capital : XXXX
(Excluding Application money or advances against shares)
Add:
(a) Credit of share premium account; : XXXX
(b) Reserves and surplus (excluding revaluation reserve); : XXXX
(c) Long – term loans and deposits repayable after one year : XXXX
 (Excluding working capital loans, over drafts, interest due on loans unless
funded, bank guarantee, etc., and other short – term arrangements)
Less:
(a) Aggregate of any investments (except in case of investment by an : XXXX
investment company whose principal business is acquisition of shares,
stock, debentures or other securities)
(b) Accumulated Losses : XXXX
(c) Preliminary Expenses not written off : XXXX
Effective Capital : XXXX

Explanation II:
(a) Where the appointment of the managerial person is made in the year in
which company has been incorporated, the effective capital shall be
calculated as on the date of such appointment;
(b) In any other case the effective capital shall be calculated as on the last
date of the financial year preceding the financial year in which the
appointment of the managerial person is made.

Explanation III: For the purposes of this Schedule, ―family‖ means the
spouse, dependent children and dependent parents of the managerial
person.

Explanation IV: The Nomination and Remuneration Committee while

approving the remuneration under Section II or Section III, shall:
(a) Take into account, financial position of the company, trend in the
industry, appointee’s qualification, experience, past performance, past
remuneration, etc.;
(b) Be in a position to bring about objectivity in determining the
remuneration package while striking a balance between the interest of the
company and the shareholders.

Explanation V: For the purposes of this Schedule, ―negative effective capital‖

means the effective capital which is calculated in accordance with the
provisions contained in Explanation I of this Part is less than zero.

Explanation VI: For the purposes of this Schedule‖

(A) ―current relevant profit‖ means the profit as calculated under section
198 but without deducting the excess of expenditure over income referred to
in section 4(1) thereof in respect of those years during which the managerial
person was not an employee, director or shareholder of the company or its
holding or subsidiary companies.

SECTION V: REMUNERATION PAYABLE TO A MANAGERIAL PERSON IN TWO

COMPANIES
A managerial person shall draw remuneration from one or more companies,
provided that the total remuneration drawn from the companies does not
exceed the higher maximum limit admissible from any one of the companies
of which he is a managerial person.

PART – III
PROVISIONS APPLICABLE TO PARTS I AND II OF THIS SCHEDULE
1. The appointment and remuneration referred to in Part I and Part II of this
Schedule shall be subject to approval by a resolution of the shareholders in
 general meeting.

2. The auditor or the Secretary of the company or where the company is not
required to be appointed a Secretary, a Secretary in whole – time practice
shall certify that the requirement of this Schedule have been complied with
and such certificate shall be incorporated in the return filed with the ROC.

PART – IV
The Central Government may, by notification, exempt any class or classes of
companies from any of the requirements contained in this Schedule.

The auditor of the company shall, in his report under section 143, make a
statement as to whether the remuneration paid by the company to its
directors is in accordance with the provisions of this section, whether
remuneration paid to any director is in excess of the limit laid down under
this section and give such other details as may be prescribed.

On and from the commencement of the Companies (Amendment) Act, 2016,

any application made to the Central Government under the provisions of this
section [as it stood before such commencement], which is pending with that
Government shall abate, and the company shall, within one year of such
commencement, obtain the approval in accordance with the provisions of this
section, as so amended

PRACTICAL QUESTION:
Ms. Jyoti is the Managing Director of Wise (India) Ltd., incorporated under the
Companies Act, 2013. Board of Directors of the company presents the
following financial data extracted from the company’s financial statements as
at 31st March, 2015:

Particulars `(in
Crore)
Authorized equity share capital 60
Paid – up equity share capital 10
Debenture redemption reserve 10
Securities premium account 20
Profit and loss (loss) (10)
Revaluation reserve 20

Due to losses in the financial year 2014 – 15, the company is not in a position
to pay any remuneration to Ms. Jyoti, Managing Director of the company. As
per the agreement of service between Ms. Jyoti and the company, in case of
losses or inadequacy of profits in any financial year, she is to be paid
remuneration on the basis of ‘effective capital’ of the company.

Based on the provisions of the Companies Act, 2013, decide the maximum
remuneration payable to Ms. Jyoti for the financial year 2014 – 15 without
the approval of the Central Government.(Dec. 2015)

RECOVERY OF If any director draws or receives, directly or indirectly, by way of

MANAGERIAL remuneration any such sums in excess of the limit prescribed by this
REMUNERATIO section or without the prior sanction of the Central Government, where it
N is required, he shall refund such sums to the company and until such sum
is refunded, hold it in trust for the company.
[SECTION The company shall not waive the recovery of any sum refundable to it under
197(9)] sub-section (9) unless permitted by the Central Government.

PRACTICAL QUESTION:
It has been found that Mrs. Shweta director of a company, has drawn
remuneration in excess of the prescribed limits. The Chief Financial Officer of
the company has sought your advice in the matter. As the Secretary of the
company, advise the Chief Financial Officer, the course of action that may be
taken in this regard. (Dec. 2016)

COMPENSATIO 1. A company can pay compensation to its directors for loss of office as
N FOR LOSS OF provided in sections 202 of the Companies Act, 2013.
OFFICE 2. Under section 202, such compensation can be paid only to managing
(Section 202) director, director holding the office of the manager and to a whole time
director but not to others.
3. The compensation payable shall be on the basis of average remuneration
actually earned by such director for three years, or such shorter period
as the case may be, immediately preceding the ceasing of holding of such
office and shall be for the unexpired portion of his term or for three years
whichever is shorter.
4. No such payment can be made, if winding up of the company is
commenced before or commences within 12 months after he ceases to
hold office if the assets of the company on the winding up, after
deducting expenses thereof, are not sufficient to repay to the
shareholders the share capital (including the premium, if any)
contributed by them.

5. However, no payment of compensation can be made in the following

cases:
(a) where a director resigns on the ground of amalgamation or
reconstruction and is appointed the office of managing director or manager
or other officer of such reconstructed or amalgamated company,
(b) where the director resigns his office otherwise than on the reconstruction
of the company or its amalgamation as aforesaid,
(c) where the director vacates office under section 167 of the Companies Act,
2013,
(d) where the winding up of the company is due to the negligence of the
director concerned,
(e) where the director has been guilty of any fraud or breach of trust,
(f) where the director has instigated or has taken part directly or indirectly
in bringing about, the termination of his office.

1. Recovery of Compensation paid wrongly:

Bell vs. Lever Brothers, (1932), Lever Brothers removed their managing
director of a subsidiary by paying him compensation. It was afterwards
discovered that during his tenure of office he had been guilty of so many
breaches of duty and corrupt practices that he could have been removed
without compensation. An action was then commenced to recover back the
compensation money. It was held that Bell was not bound to refund the
compensation money and to disclose any breach of his fiduciary obligation
so as to give the company an opportunity to dismiss him. Thus, the
Managing Director is not bound to refund the compensation.
 PRACTICAL QUESTION:
A Managing Director was removed during the tenure of office and certain
compensation was paid to him. It was later on found that during the tenure of
his office that he was guilty of corrupt practices and the company felt that no
compensation should have paid to him and therefore wants to recover the
compensation so paid to him. Can the company succeed?

SECRETARIAL  Secretarial Audit means correction and verification of secretarial records and
AUDIT compliances to be maintained by the Company. In other words,
(Section 204) secretarial audit is a compliance audit and it is a part of total compliance
(December 2015) management in an organization.

 It is an effective tool for corporate compliance management.

 It helps to detect non – compliance and to take corrective measures.

 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
the due process. It is essentially a mechanism to monitor compliance
with the requirements of stated laws.

 1st Time, the Companies Act, 2013 gives statutory recognitions to the
Secretarial Audit. As per section 204 of the Companies Act, 2013, every
listed company and other class of companies as notified have to annex a
Secretarial Audit Report.

 Secretarial Audit should be an independent, objective assurance

intended to add value and improve an organization’s operations.

 It helps to accomplish the organization’s objectives by bringing a

systematic, disciplined approach to evaluate and improve effectiveness of
risk management, control, and governance processes.

 The Board of Directors shall explain, in their report, in full any

qualification made in the Secretarial Audit Report.

Every: L Applicability of Secretarial Audit: The following companies are required to do

U: the secretarial audit :
S: 50 (a) Every listed companies; or
T: 250 (b) Every Unlisted public company having a paid – up share capital of ` 50
Crores or more; or
(c) Every Unlisted public company having a turnover of ` 250 Crores or
more.

Who will conduct the Secretarial Audit of the Companies?

Only a practicing company secretary can conduct the secretarial audit of
the Companies. 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.