The Secretarial Audit is governed by Section 204(1) of the Companies Act, 2013. The requirement of Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 relating to the Secretarial Audit Report has come into effect from April 1, 2014. This mechanism gives necessary comfort to the management, regulators, and stakeholders, with regards to compliance of applicable laws and the existence of proper and adequate systems and processes in the Company. It gives additional responsibility to a Company Secretary in Practice to ensure compliance of legal and procedural requirements and processes.

It becomes the duty of the Company to give all the assistance and facilities to the Company Secretary in Practice for auditing the Secretarial and related record of the Company. If the prescribed Company does not comply with the provisions mentioned in the Companies Act, 2013, the penalty will be imposed.

Secretarial Audit

Secretarial Audit is a mechanism that gives necessary comfort to the management, regulators, and the stakeholders, as to the compliance by the company of applicable laws and the existence of proper and adequate systems and processes in the company. It postulates verification on a test basis of records, books, papers, and documents to check compliance with the provisions of various statutes, laws, and rules & regulations by a Company Secretary in Practice to ensure compliance of legal and procedural requirements and processes.

Applicable Sections And Rules

Section 204(1) of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 and Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014.

Applicability Of Secretarial Audit

The applicability of the Secretarial Audit is on the bigger Companies as per the Section 204(1) of the Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that:

1. Every listed company; OR
2. Every public company having a paid-up share capital of fifty crore rupees or more; OR
3. Every public company having a turnover of two hundred fifty crore rupees or more

shall annex with its Board’s 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 (Form No. MR-3) as may be prescribed.

Note:

1. Secretarial Audit is not applicable to the Private Company provided that it is applicable to a private company which is a subsidiary of a public company.
2. Paid Up Capital: the paid-up share capital as per the latest audited financial statement,
3. Turnover: means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

Appointment Of Secretarial Auditor

In terms of section 204(1), only a member of the Institute of Company Secretaries of India holding a certificate of practice (company secretary in practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company.

The secretarial Auditor is required to be appointed by the Board Resolution passed by the Board of Directors of the Company in their Board Meeting.

Note: If a company or any officer of the company or the company secretary in practice, contravenes the provisions of this section (section-204), 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 one lakh rupees but which may extend to five lakh rupee.

Required E-Form

The Board Resolution for the Appointment of the Secretarial Auditor is required to be filed with Registrar of the Companies in E-form MGT-14 within a period of 30 days from the date of appointment.

Time Of Appointment Of Secretarial Auditor

It is advisable that Secretarial Auditor is appointed at the beginning of the financial year as secretarial audit entails checking of compliances on a continuous basis. As a good practice, the Secretarial Auditor should submit a report to the Board at the end of each quarter as to the compliances of the company.

Secretarial Audit Report (Mr-3)

The report of the secretarial audit shall be in the prescribed format in Form No. MR-3 (SECRETARIAL AUDITOR REPORT) and annex with Board’s Report.

Scope Of Secretarial Audit

In terms of Form No.MR-3, the Secretarial auditor needs to examine and report the compliance of the following five specific laws:

1. The Companies Act, 2013 (the Act) 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. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-
1. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
2. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992*;
3. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
4. The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999**;
5. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
6. The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with the client;
7. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and
8. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;

In addition, the form MR-3, point (vi) also refers to ‘Other laws as may be applicable specifically to the company.’

It may be noted that the scope of MR- 3 includes ‘The Securities and Exchange Board of India (Listing obligations and Disclosures Requirements) Regulations, 2015’.

‘Other areas’ which need to be checked- Secretarial Auditor needs to examine and report on the compliance with the applicable clauses of the following:

1. Secretarial Standards issued by The Institute of Company Secretaries of India.
2. The Listing Agreements entered into by the Company with Stock Exchange(s), if applicable;