A secretarial audit is a major compliance check that ensures that a company complies with the legislation and economic regulations applicable in India. The law prescribes that businesses must undergo periodic secretarial audits in accordance with Section 204 of the Companies Act of 2013.The significance of secretarial audit is that it aims to guarantee that businesses adhere to sensible compliance regulations; the Ministry of Corporate Affairs has published Corporate Governance Guidelines. For companies that have their shares listed on a stock exchange, The 24A SEBI (LODR) rule, 2015 stipulates that all listed entities and their unlisted subsidiaries established in India must conduct a secretarial audit and attach their secretarial audit report, in addition to the legal compliance rule. It is required by the Companies Act, Section 204(1), that the secretarial report be appended to the annual board report as prepared in the Annual General Meeting of the Board of the Company. Since the significance of the secretarial audit is applicable to the nature of business, there are additional special regulations that need to be considered, such as labour laws and income tax.
An annual secretarial audit for a company can be conducted only by an authorized person. Section 204(1) of the Companies Act, 2013 defines an Authorized auditor as a professional who holds a certificate of practice from the Institute of Companies Secretaries of India.
Are all Companies Required to Undergo a Secretarial Audit?
Previously, the Companies Act of 1956 did not contain any provisions that mandated secretarial audits for companies in India. In 2009, the Ministry of Corporate Affairs released the “Corporate Governance Voluntary Guidelines,” which introduced the significance of secretarial audits as mandatory corporate compliance for bigger companies. Subsequently, with the enactment of the Companies Act of 2013, secretarial audits were made mandatory compliance features for all types of companies. Accordingly, Section 204 of the Companies Act of 2013 and Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 include the following companies within the ambit of Secretarial Audit in the company’s annual compliance–
- Every company that is listed on a stock exchange.
- Every Public business company having paid-up share capital of at least Rs. 50 crore or annual revenue of Rs. 250 crore.
- Every Private company or firm having paid-up share capital of rs. 50 crore or annual revenue of Rs. 250 crore or more.
- Every company having outstanding loans or borrowing from banks or public institutions or Rs. 100 crore or more is required to undergo an audit of its books of accounts.
The 2013 act and subsequent rules have expanded the scope of secretarial audits by extending their applicability to bigger listed as well as unlisted companies that have significant loans and borrowings from banks and NBFCs. This ensures that the loans and borrowed funds are not misappropriated or diverted.
Who is a Secretarial Auditor?
A secretarial auditor is a person authorized by the Ministry of Corporate Affairs. He is appointed to conduct an audit of a company under various laws and regulations pertaining to corporate compliance. Rule 8 of the Companies (Meetings of the Board and its Powers) rules of 2014 prescribes that the secretarial auditor has to be appointed through a Board Resolution passed at a Board Meeting. An intimation of appointment is required to be filed with the MCA in Form ADT -1 along with a special resolution in Form MGT -14 within 30 days of the board meeting. In order to become eligible for the position of a secretarial auditor, a person must be a Practising Company Secretary (PCS), hold a valid certificate of practice and be registered with the Institute of Company Secretaries of India.
Scope of Secretarial Audit
The law requires the secretarial audit process, as well as the auditor, to comply with several laws and regulations. This would imply that the company has undergone its necessary corporate due diligence and there are no incorrect compliances or conflicts with the laws. The significance of secretarial audit in the company’s annual compliance has to be efficiently executed by the auditor to satisfy compliances under various laws and regulations such as –
- The Companies Act, 2013 and subsequent rules
- The Securities Contract (Regulation) Act, 1956
- The Depositories Act, 1996
- Foreign Exchange Management Act, 1999 and related rules
- Benami Transactions (Prohibition) Act, 1988
- The host of Securities Exchange Board of India (SEBI) Regulations –
- SEBI (Substantial Acquisition of Shares and Takeovers) regulations of 2011.
- SEBI (Issue of Capital and Disclosure) Requirements of 1992.
- SEBI (Prohibition of Insider Trading)Regulations of 1992.
- SEBI (Issue and Listing of Debt Securities) Regulations of 2008.
- The SEBI (Delisting of Equity Shares) Regulations of 2009.
- The SEBI (Buyback of Securities) Regulations of 2018.
- The SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines of 1999.
Significance of Secretarial Audit in Company’s Annual Compliance
The significance of secretarial audit can be understood as it is immensely beneficial to the company and its stakeholders since it helps refine the internal mechanism of the company as well as establish compliance with the regulatory oversight of the present legal framework. It not only helps risk mitigation and address compliance issues for the companies but also helps instil confidence within the investors, shareholders, promoters, professionals and executives of the company. The benefits and significance of secretarial audit are –
1. Compliance With Laws and Regulations
Compliance with laws and regulations is the most important aspect of a secretarial audit. The audit process helps the company identify the legal and regulatory obligations set down by the government so that the company can conduct its operations without any administrative hindrance.
2. Improve relations with stakeholders
By assessing the business, examining it for compliance with governance standards, and making sure it complies with legal requirements, the significance of secretarial audit is to guarantee better relationships with investors and stakeholders while assisting them in making well-informed decisions.
It helps the following stakeholders of the company –
A) Investors
A secretarial audit assesses the company’s adherence to governance standards and compliance, which aids potential investors in making well-informed investment decisions. Making crucial investment decisions increasingly depends on how closely companies adhere to the fundamentals of sound corporate governance and compliance.
B) Promoters
Secretarial audit provides promoters of the company the reassurance that its management is carrying out its business in compliance with legal standards and that the owners’ investment is not being put in unnecessary danger.
C) Employees
Better regulatory controls and functioning enable the company to attract better and more efficient talent since the professionals would prefer a company that imbibes ethical work practices and employee values. Hence, employees would prefer to stay longer in such organizations.
D) Directors
The significance of secretarial audit is that it provides assurance and reliability to all classes of directors- nominee directors, whole-time directors, executive/non-executive managing directors, etc. It also helps directors efficiently discharge their functions.
3. Better internal functioning
Secretarial audit ensures transparency and better internal governance of the company. If the company makes periodic filings with the MCA and keeps records of all activities, they do not have to worry about any repercussions in the future. Hence, an audit serves as a periodic and necessary health check-up of a company.
4. Risk Mitigation and Safeguard
A secretarial audit helps the company mitigate risks and avoid penalties that might be incurred for non-compliance or non-compliance with any provision of law or violation of the same. Thus, the significance of secretarial audit is that it helps reduce the chances of monetary penalties as well as imprisonment for the executive members of the company.
5. Improves goodwill and reputation
Compliance with statutory requirements naturally improves the good will and reputation of the company in the market. It indicates that the company is committed to abiding by the legal framework for companies and has not indulged in any malpractice. Hence, the significance of secretarial audit is good governance and compliance with statutory laws and regulations.
Conclusion
Observance of Annual compliance of company, such as secretarial audits, is very crucial for a company since they not only streamline the reporting and compliance requirements of the company with the regulatory framework of the Companies Act and various other laws but also highlight the reliability and credibility of the company in the market to the stakeholders.
As simple as it may seem, the entire process, from the appointment of a statutory auditor to conducting an internal audit, reporting, and recordkeeping, is a fairly lengthy and intricate process that requires the skilled application of experienced professionals who have the required qualifications to meet the requirements to conduct a secretarial audit.
We at Corbiz are a leading legal and secretarial services provider, assisting companies in compliance with the applicable laws, regulations, guidelines, and framework as laid down by the law. Our team of dedicated and experienced company secretaries and lawyers would help you understand the significance of secretarial audits in your company and will assist in minimizing the risk of non-compliance and ensure the secretarial audit process is smooth and as per the requirements of the Companies Act and all other statutory legislation and rules.
Frequently Asked Questions (FAQs)
What is a Secretarial Audit?
A Secretarial Audit is a tool to examine or verify if a company complies with current laws, rules, regulations, guidelines, norms, and corporate norms. The Companies Act of 2013 introduced the secretarial audit as a mandatory procedure to verify that the firm complies with the regulatory framework.
Who needs a Secretarial Audit?
As per the Companies Act and Rules, every private and public company having paid-up share capital of Rs. 50 crore or more or have a turnover of Rs. 250 crores or more are required to have a secretarial audit.
Who is authorized to conduct a Secretarial Audit of a Company?
The company must engage a statutory auditor to conduct a Secretarial audit of the company.
What shall be the qualifications of an Auditor?
An annual secretarial audit for a company can be conducted only by an authorized person. An Authorized auditor is a professional defined under section 204(1) of the Companies Act, 2013, who holds a certificate of practice from the Institute of Companies Secretaries of India. The auditor must submit the audit report in form MR-3
How an Auditor is appointed?
An auditor is appointed by passing a board resolution in the company's first general meeting. An intimation of appointment is required to be filed with the MCA in Form ADT -1 along with a special resolution in Form MGT -14 within 30 days of the board meeting. Such appointmentremains valid for a period of 5 years.
What are financial and commercial laws whose compliances are checked by the auditor in a secretarial audit?
The auditor is required to examine compliance with other laws as well, such as tax, customs, labour, intellectual property, corporate, property, regulatory and legal, etc.
What is the penalty for non-compliance with secretarial audit requirements?
Penalty for non-compliance with the requirement of secretarial audit can lead to severe penalties for the company and its directors. The ROC can impose a penalty of up to ₹ 5 lakh on the company, and the directors may also face imprisonment of up to six months, which can extend up to 10 years, under the provision of sections 447 and 448 of the Companies Act.
What are the documents required at the time of the secretarial audit?
The documents required at the time of a secretarial audit are –
· Charter documents of the company
· Minutes of the Board Meeting
· Register of records
· Certificates of Compliances
· Material contracts and agreements of the company
· Statutory Policies
· Labour and Employment, HR contract and agreements
· Licences, Permits and approvals are required by the concerned regulatory departments.What is the cost incurred in conducting a secretarial audit?
The Institute of Companies Secretaries of India has issued a guidance note on the cost that can be charged by the statutory auditor for conductinga secretarial audit. Such professional fees shall be computed on the basis of the formula given in the Companies Secretaries Act, 1980. Furthermore, the fees of the secretarial auditor may be computed based on the nature of his/her engagement – hourly, daily, monthly or project-based engagement.
What is the significance of secretarial audit in a company’s annual compliance?
The significance of secretarial audit is to ensure that all legal and procedural requirements are met, allowing directors to focus on crucial business issues. Increase a company's reputation among stakeholders and authorities. A useful instrument for governance and compliance risk management is secretarial audit.
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