Secretarial Audit: Introduction and Applicability

What is Secretarial Audit?

Corporates running in India have to comply mandatorily with the provisions and rules prescribed under the Companies Act, 2013(“Act”).

To promote a proper complaint corporate culture, it is necessary to implement the provision within true letter and spirit Thus, to ensure the effective compliance and corporate governance practice it becomes necessary to scrutinise the activities of companies from the point of view of compliance adherence by Companies.

In corporate, compliance of accounting and finance of the Company gets covered under the statutory audit of the Companies whereby chartered accountants provides their Audit Report on the financial performance of the Company. However secretarial compliances of the Company remained unchecked in the statutory audit of the Companies.

To keep such a similar scrutiny over secretarial compliance of Companies, the Act has provided for an audit, which has to independently carry out by professional, for those companies which are prescribed under the Act. 

Further, Companies which are also registered under other regulatory bodies like SEBI, RBI, IRDA etc. or Companies to whom other acts and laws apply like labour law, securities law, factory act etc. have to additionally comply with the rules and regulation prescribed by their respective regulatory authority.

Secretarial audit, justifying its name, is an audit whereby all the compliance pertaining to the secretarial aspect, along with other compliances under various other statute of the Company are scrutinised and assessed and a report is submitted by the Secretarial Auditor to the Company, summarising the compliance status of the Company.

In public companies, where stakeholders interest are generally at higher risk, such audits gives a sense of comfort to the stakeholders as it clearly depicts the true compliance status of the Company and conveys the adequacy of the internal control mechanism of the Company. Furthermore, regulators can also assess the compliance status of the Company through these secretarial audit reports of the Companies.

Which Companies are required to conduct Secretarial Audit?

Section 204 of Companies Act, 2013and Rule9 of the Companies (Appointment and Remuneration Personnel) Rules, 2014 states that below given companies are required to conduct secretarial audit:

Applicability

*existing on the last date of latest audited financial statement

Regulation 24A of SEBI (LODR) 2015 mandates Listed Companies and its material unlisted subsidiaries incorporated in India to conduct secretarial audit Companies are also required to submit Secretarial Compliance Report pursuant to SEBI Circular CIR/CFD/CMD1/27/2019 dated February 08,2019.

Who will conduct Secretarial Audit?

Only a Company Secretary, holding certificate of practice is authorised to conduct secretarial audit as per section 204(1) of “Act”

Company Secretaries are members of the Institute of Company Secretaries of India (ICSI). They are Professionals, having expertise in the secretarial matter and various other domains and are authorised to conduct secretarial audit of the Companies. The ICSI has also issued guidelines to provide a framework and specify the manner in which a Practicing Company secretary can conduct the audit.

Scope of Secretarial Audit

The main intent of conducting secretarial audit is to verify the compliance status of the Company with respect to internal control and secretarial management. Thus, to follow the intent in true letter and spirit the format of MR-3 has captured various laws as applicable to the Company.

Secretarial Auditor of the Company needs to examine and report for below given compliance:

1. The Companies Act, 2013 and the rules made thereunder;
2. The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;
3. The Depositories Act, 1996 and the Regulations and Bye-laws framed 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. Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-
   • The Securities and Exchange Board of India (Listing Obligation and Disclosure Requirement) Regulations, 2015
   • 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 12 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;
   • The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
6. Secretarial Standards issued by The Institute of Company Secretaries of India.
   Other aspects which auditor has to cover in its report:

• The Auditor is required to report on adequate system and processes in the company commensurate with the size and operations of the company.
• Mention details of specific events / actions having a major bearing on the company’s affairs in pursuance of the above referred laws, rules, regulations, guidelines, standards, etc.
• Specify whether the Board of Directors of the Company is duly constituted and the changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of the Act.
• Adequate notice, agenda, notes to agenda is given to all directors to schedule the Board Meetings.

Secretarial Audit holds utmost significance for both Company as well as the Secretarial Auditor of the Company. The Company has to submit the report to its members whereby the adequacy of the internal control and compliance status of the Company will be assessed thus any Company which is required to conduct this audit will try compliant in all respect to maintain its good corporate governance practice.

On other hand, the auditor conducting the audit has responsibility of presenting the true and fair status of the Company before the members of the Company and to raise an alarm in case of any suspect of fraud, further holding a certificate of practice of the ICSI, onus falls on the auditor to conduct the audit with utmost care, honesty and impartiality.