Secretarial Audit in India

Secretarial audit report is filed by a company secretary to ensure that the company has complied with all the applicable laws, rules and regulations. It includes a comprehensive analysis of the company’s compliance and governance processes, and can help identify potential risks and areas of improvement. The report also includes recommendations for any necessary improvements or corrective actions. It is mandatory for certain classes of companies in India to obtain a secretarial audit report, as required by the Companies Act, 2013.

Who can be appointed as Secretarial Auditor?

Members of the Institute of Company Secretaries of India, who are holding the certificate of practice which certifies to perform as a secretarial audit, can only conduct Secretarial Audit and provide with the secretarial audit report applicability to the Company or organization.

The applicability of Secretarial Audit is as follows:

• Every listed company is required to conduct a secretarial audit of its records every year
• Any public business with a paid-up share capital of at least ₹50 crores or a yearly revenue of at least ₹250 crores is obligated to undergo an annual secretarial audit of its books
• Every private firm that has a paid-up share capital of at least ₹50 crores or a yearly revenue of at least ₹250 crores is obligated to conduct an annual secretarial audit of its books
• Every business that owes banks or other public financial institutions loans or borrowings totaling at least ₹100 crore is expected to undergo an annual secretarial audit of its books.

Secretarial Audit is a process of ensuring that a company is complying with all the applicable laws and regulations. The documents required for the secretarial Audit are as follows:

• Company’s Certificate of Incorporation or Memorandum of Association and Articles of Association
• Company’s Share Capital Structure
• Company’s Board of Directors and their details
• Company’s General Meetings and their minutes
• Company’s Financial Statements and their reports
• Company’s Register of Members
• Company’s Register of Directors and Key Managerial Personnel
• Company’s Register of Shareholdings
• Company’s Register of Debentures and Bonds
• Company’s Register of Charges
• Company’s Minutes of Board Meetings
• Company’s Annual Reports
• Company’s Agreements with third parties
• Company’s Statutory Compliance Documents
• Company’s Internal Policies and Procedures

• Step 1: Prepare a checklist for the audit, which includes all the statutory and regulatory requirements to be complied with
• Step 2: Verify the compliance of the company with the checklist prepared
• Step 3: Management of the business is informed of the verification process’ results and, if necessary, suggestions for corrective action
• Step 4: The company’s management is expected to take necessary action to rectify any non-compliances identified in the audit report
• Step 5: The final step is to file the audit report with the relevant regulatory authorities.

• Enhanced Compliance: Secretarial Audit helps companies to identify and rectify any non-compliance with legal and regulatory requirements, thereby reducing the risk of penalties and legal action.
• Improved Governance: Secretarial Audit promotes good corporate governance practices by ensuring that the company is operating in a transparent and accountable manner.
• Enhanced Stakeholder Confidence: Secretarial Audit helps to build trust and confidence among stakeholders, such as investors, creditors, and customers.
• Reduced Risk of Legal Disputes: Secretarial Audit helps to identify and mitigate potential legal risks, thereby reducing the likelihood of costly legal disputes.
• Improved Decision-Making: Secretarial Audit provides companies with valuable insights into their compliance status, which can help them to make better-informed business decisions.

Depositories Act, 1996

Labour, Fiscal, and Other laws are limited to the applicability of the Company

Companies Act, 2013

• Review of Charter Documents alterations if any and related compliances
• Share Capital and Debentures Rules – Compliance related to ICDR, Pre and Post Issue Compliances
• Borrowings – Borrowing Limit, Pre and Post Borrowing Compliances
• Public Deposit if any – Pre and Post Compliances
• Board and General Meetings – Notice, Agenda and Minutes
• Declaration and Payment of Dividend – Pre and Post Compliances
• Board of Directors – Appointment & Resignation
• Internal Audit and Internal Audit Report
• Auditor Appointment, Tenure of Appointment & Rotation
• CSR Compliances – Committee Formation, Limit of Contribution
• Related Party Transactions & its Compliances
• Inter Corporate Loan, Investments and Corporate Guarantee
• Buy-Back of Shares – Pre & Post Compliances
• Annual Return & Annual Compliances
• Member Register and Change in any Shareholding Pattern
• Secretarial Standards

Foreign Exchange Management Act

• Foreign Direct Investment
• Overseas Direct Investment
• External Commercial Borrowings

Securities And Exchange Board Of India Act, 1992

• 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, 2015
• The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009
• The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
• 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 (Listing Obligations and Disclosure Requirements) Regulations, 2015

Labour, Fiscal & Other Laws

• Factories Act, 1948
• Industrial Disputes Act, 1947
• The Payment of Wages Act, 1936
• The Minimum Wages Act, 1948
• Employees’ State Insurance Act, 1948
• The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952
• The Payment of Bonus Act, 1965
• The Payment of Gratuity Act, 1972
• The Contract Labour(Regulation and Abolition)Act,1970
• The Maternity Benefit Act, 1961
• The Child Labour (Prohibition and Regulation Act), 1986
• The Employees’ Compensation Act, 1923
• The Apprentices Act, 1961
• Equal Remuneration Act, 1976
• The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959
• The Environment (Protection) Act, 1986
• The Sexual Harassment Of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
• The Water (Prevention & Control of Pollution)Act,1974
• The Air (Prevention & Control of Pollution) Act, 1981
• Tax deducted at Source
• Advance Tax
• GST
• Professional, Property & Dividend Tax

Secretarial Audit is an independent assessment of a company’s compliance with legal and regulatory requirements. It is an essential tool for business matters, as it helps to identify and mitigate compliance risks. By ensuring that a company follows all applicable laws and regulations, secretarial Audits can help protect the goodwill of the company and its directors. It can also help to improve the company’s governance and stakeholder relationships.

Secretarial audit services typically cover the following areas:

• Company formation and registration: Review the company’s incorporation documents and ensure all required filings have been made.
• Share capital management: Verifying the company’s share capital structure and ensuring that all shareholdings are properly recorded.
• Board and general meeting procedures: Review the company’s board and general meeting procedures to ensure that they are compliant with the law and the company’s articles of association.
• Regulatory compliance: Reviewing the company’s compliance with all applicable laws and regulations, including the Companies Act, SEBI regulations, and FEMA provisions.
• Maintenance of statutory registers: Verifying that the company is maintaining all required statutory registers, such as the register of members, the register of directors, and the register of charges.
• Return filing: Ensuring that all required returns are filed with the Registrar of Companies and other regulatory bodies within the prescribed time limits.

In India, the Companies Act, 2013, requires certain companies to conduct a Secretarial Audit. The limit for Secretarial Audit is as follows:

• All listed companies and their Indian subsidiaries
• Public companies with a paid-up share capital of ₹50 crores or more
• Private companies with a paid-up share capital of ₹50 crores or more
• Companies with an annual turnover of ₹250 crores or more.

Therefore, if a company falls under any of the above categories, it is required to conduct a Secretarial Audit.

Section 448 of the Companies Act 2013 lays out rules about dishonest statements. If someone knowingly makes a false statement in any document required by the Act, they could be penalised under section 447.

The false statement could either be:
(a) Incorrect and known to be so by the individual; or
(b) An omission of an important fact known to be significant.

Section 447 stipulates the penalties for fraud. A person found guilty of fraud could be imprisoned for six months to ten years. They might also be fined an amount up to three times the amount involved in the fraud. If the fraud impacts the public, the minimum jail term is three years.

Under Section 448, a Practicing Company Secretary who knowingly lies or omits an important fact in the Secretarial Audit Report could face penalties. They might also be penalised for professional misconduct as per the Company Secretaries Act, 1980. If found guilty, the penalties could include:

(i) For misconduct as per the First Schedule:
(a) A formal reprimand;
(b) Removal from the register of members for up to three months;
(c) A fine of up to one lakh rupees.

(ii) For misconduct as per the Second Schedule:
(a) A formal reprimand;
(b) Permanent removal from the register of members, or for a period determined by the Disciplinary Committee;
(c) A fine of up to five lakh rupees.

Section 204(4) of the Companies Act, 2013 states that any officer, official, or auditor found in violation of the Secretarial Audit provisions, as outlined in the Companies Act or any other law, will be fined. This fine will be no less than ₹1 lakh and can go up to ₹5 lakh.

If an auditor uncovers any deceptive actions or fraud against the company, it must be reported to the Central Government immediately. Any delay or failure in this reporting can result in a fine ranging from ₹1 lakh-₹25 lakh in severe cases.

There are other penalties as well:

• A person may face imprisonment for 6 months to 10 years or a fine up to 3 times the amount involved in the offense for fraud against the rules stated in Section 448. This includes giving false statements in any report, certificate, financial statement, or other documents of public interest.
• If a Company Secretary in practice is found guilty of breaking any rules stated in the Schedules of the Company Secretaries Act, 1980, they may face the following actions:

1. Removal from the register of members for up to 3 months;
2. A formal reprimand;
3. Permanent removal from the register of members, or for a period decided by the Disciplinary Committee;
4. A fine of at least ₹1 lakh, which can go up to ₹5 lakh rupees.

The Companies Act, 2013 gives the secretarial auditor the same rights and powers as the statutory auditor. According to Section 204 of the Companies Act, 2013, the secretarial auditor can ask for any information or explanation from the company’s officers. They can do this if they think it’s necessary for their auditor duties.

The purview of a secretarial audit is the set of activities that the audit procedure covers. So fo them are discussed below:

• It includes the examination of the company’s legal and regulatory compliance, corporate governance framework, secretarial and procedural compliances, and overall compliance with applicable laws and regulations
• The audit aims to ensure that the company is functioning within the framework of the law and that the interests of stakeholders, shareholders, and the public are protected
• A certified company secretary conducts the audit, evaluates the business’ performance, and makes suggestions for strengthening compliance and governance.
• The scope of the audit may differ based on the size and nature of the company and the industry it operates in.

Company secretarial audit characteristics include:

• The main goal of a secretarial audit is to make sure that the organisation is in compliance with all applicable laws and regulations
• A company secretarial audit is an independent evaluation of the company’s compliance with the law. This helps in providing an unbiased view of the company’s operations
• A secretarial audit covers a broad range of areas, including company law, securities law, taxation, labor laws, and environmental laws
• The company secretary prepares a secretarial audit report that includes observations, qualifications, and recommendations.

Here are some key items that are typically included in a secretarial audit checklist:

• Review of company registration documents
• Verification of the company’s statutory registers
• Review of board and shareholder meeting minutes
• Review of director appointments and resignations
• Review of share capital and related transactions
• Compliance with Companies Act provisions
• Compliance with other applicable laws and regulations
• Filing of statutory returns and other documentation
• Examining transactions between linked parties
• Review of the business’s policies and code of conduct
• Review of the company’s risk management practices
• Review of the company’s sustainability practices
• Review of the company’s financial statements and related disclosures
• Verification of compliance with the company’s internal controls and policies.

• The board of directors, stockholders, management, governmental organisations, and other stakeholders of the business profit from secretarial investigations
• It helps to ensure that the company’s operations are conducted in accordance with legal and regulatory requirements, minimise the risk of non-compliance, and improve corporate governance
• The audit report can also be useful for potential investors and creditors who can evaluate the company’s compliance status and governance practices before investing or extending credit to the company.

Important clauses relating to secretarial audit include some of the following:

• Every listed company and any public company with a paid-up share capital of ₹50 crores or more or a revenue of ₹250 crores or more is required to perform a secretarial audit under Section 204 of the Companies Act, 2013, according to the law
• The secretarial audit of the firm must be carried out by a company secretary
• The Companies Act of 2013 and other relevant laws, rules, regulations, and guidelines are evaluated for conformity as part of the secretarial audit’s scope
• The secretarial audit report must be presented to the company’s board of directors in Form MR—3 and must be attached to the board’s report
• The board’s report, the company’s financial statements, and the secretarial audit report must all be submitted with the Registrar of Companies (ROC).

• To make sure a business abides by the relevant laws, rules, regulations, and requirements
• To assess the efficacy of the company’s entire governance structure in ensuring that the company’s goals and objectives are met
• To guarantee that the company’s board of directors and management adhere to accepted moral and ethical standards
• To evaluate and evaluate the company’s internal control system and find any vulnerabilities or weak points
• To identify and address any instances of non-compliance or potential non-compliance with legal and regulatory requirements.

• A member of the Institute of Company Secretaries of India (ICSI) is required for the secretarial auditor
• The secretarial auditor must have a certificate of practice (CoP) issued by the ICSI
• The secretarial auditor must have undergone training in secretarial audit conducted by the ICSI
• There cannot be any conflicts of interest between the secretarial auditor and the company under audit
• The secretarial auditor must have experience in handling secretarial matters of companies
• The secretarial auditor must not have been convicted of any offence involving moral turpitude
• The secretarial auditor must not have been found guilty of professional misconduct by the ICSI
• The secretarial auditor must have a good reputation and high professional standards
• The secretarial auditor must have the necessary infrastructure and resources to conduct the audit
• The secretarial auditor must comply with the ethical guidelines and standards set by the ICSI

A corporate secretary must be chosen by the business.

• The company secretary must provide all the necessary documents and information required to conduct the audit
• The company secretary must provide access to all the books and records of the company, as well as to all the members of the board of directors, auditors, and officers of the company
• The company must ensure that the secretarial auditor is independent and has no conflicts of interest with the company.

Some of the crucial clauses relating to secretarial audits include the following:

• Appointment of Secretarial Auditor: The board of directors of a corporation must hire a company secretary in practice to carry out a secretarial audit of the business
• Frequency of Audit: A single secretarial audit every fiscal year is required
• Compliance Report: The company’s board of directors will receive a compliance report from the secretarial auditor, which will be attached to the Board’s report.

Secretarial audits are available for larger corporations under Section 204 of the Companies Act,2013. It was praised as a crucial step towards enhancing corporate governance and ensuring effective adherence to the laws and standards that apply to the organisation. Secretarial audits are carried out to make sure the business is in accordance with all applicable laws, including but not limited to company law. As per this section, the secretarial audit report provided by a company secretary in practice, in such form as may be prescribed, must be annexed with every listed company and company belonging to such other class of companies as may be prescribed Board report submitted under Subsection (3) of Section 134.

The secretarial auditor plays a crucial role in Auditing and compliances. Some of the roles include

• To offer direction to the company’s directors regarding their obligations, rights, and powers
• Throughout the course of their audit, to get the company’s books of accounts and other pertinent vouchers
• To learn more about various transactions from corporate officers and get their explanations
• To make sure that the business complies with all relevant laws, rules, and regulations.

Penalties for fraudulent advertising are discussed in Section 448 of the Companies Act of 2013 . A person violates this Section if they include false information in a return, report, certificate, financial statement, prospectus, statement, or other document that is needed to comply with a specific provision of this Act or the rules established thereunder.

• Which, knowing it to be false, is false in any relevant details
• If they conceals a material truth while knowing it to be material, they are responsible under Section 447

Anyone found guilty of fraud is subject to a sentence of imprisonment for a term that must not be less than six months nor more than ten years, as well as a fine that must not be less than the amount involved in the fraud or less than three times that amount, according to Section 447 of the Criminal Code.

If the fraud in question affects the public interest, the sentence must be at least three years in length. If a corporate secretary in practice makes any false claims in the Secretarial Audit Report, omits any material fact while knowing it to be material, or gives inaccurate information on a material detail, he is liable for punishment under Section 448.

Additionally, the company secretary in practice is responsible for any professional or other misbehaviour listed in the First, Second, or both Schedules to the Company Secretaries Act of 1980, and if found guilty, is responsible for the following actions:

If found accountable for any of the First Schedule-listed professional or other misconduct:

• Reprimands
• Removal of a name from the members’ register for up to three months
• Fine of up to ₹1 lakh.

If found responsible for any of the professional or other misbehaviour listed in the Second Schedule:

• Reprimands
• Withdrawal of name from register of members for an indefinite length of time or such other period
• Deemed appropriate by the Disciplinary Committee Fine upto ₹5 lakh.

A secretarial audit would only be available to a select few organisations. Historically, only publicly traded firms and companies with shares listed on a stock market would engage in this Audit. A public firm is one whose shares and securities are listed in a recognised stock market, as defined by Section 2(71) of the Companies Act,2013. A secretarial audit would be performed in accordance with the demands of the public company if a private firm is a subsidiary of the public company.

The Companies Act of 2013 stipulates the following types of sanctions for failing to comply with a secretarial audit.

If Section 204 of the Companies Act, 2013, which deals with conducting a secretarial audit and providing a secretarial audit report along with board report, is breached, every officer of the company, including the company secretary, will be subject to a minimum fine of ₹1 lakh and a maximum fine of ₹5 lakhs.

If the company secretary failed to notify the government of any fraud or other offence committed by a company official or employee, they would be subject to a minimum fine of ₹1 lakhs and a maximum fine of ₹25 lakhs.

According to Sections 448 and 447 of the Companies Act, 2013 anyone who consciously makes a false statement in a return, report, certificate, financial statement, prospectus, or other document or knowingly omits a material fact will be subject to the following fines and penalties:

• Maximum 10-year penalties with a minimum 6-month sentence for
• With a minimum fine of the amount involved, the maximum fine is three times the amount involved in the fraud
• The punishment must be at least three years long if the fraud damages the public interest.

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According to the change made on 3 January 2020, subject to the new Rule 9(C) of the aforementioned rules, every Company having outstanding loans or borrowings from banks or governmental financial organisations of ₹100 crore or more.

Before 03.01.2020 Section 204 of the Act states that the

1. Every Listed Company needs to conduct the audit

2. Also, Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) specifies certain groups of companies which also need Secretarial Audit to be carried out.

Evaluation of Secretaries’ Applicability

1. A public company is one with a paid-up share capital of at least ₹50 crore

2. PUBLIC COMPANY: Possessing a Revenue of at least ₹250 crore