Introduction
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 due processes. It is essentially a mechanism to monitor compliance
with the requirements of stated laws and processes.
Introduction
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 due processes. It is essentially a mechanism to monitor compliance
with the requirements of stated laws and processes.
Timely examination of compliance reduces risks as well as
potential cost of non-compliance and also builds better corporate image.
Secretarial Audit establishes better compliance platform by checking the compliance with the provisions of various statutes, laws, rules &
regulations, procedures by an independent professional to make necessary
recommendations/ remedies. The primary objective of the Compliance
Management backed Secretarial Audit is to safeguard the interest of the
Directors &officers of the companies, shareholders, creditors, employees,
customers etc. With the introduction of concept of ‘Secretarial Audit’ in
Companies Act, 2013, it has gained wider importance and an area
of professional opportunity among Company Secretaries.
A Company Secretary in Practice has been assigned the role of
Secretarial Auditor in section 2(2)(c)(v) of The Company Secretaries Act 1980,
which is the only statute in the country, carving out ‘Secretarial Audit’ as an
area of practice.
A practicing Company Secretary (PCS) is the competent, fit and
proper professional to conduct Secretarial Audit. A significant area of competence
of PCS is “Corporate laws” owing to intensive and rigorous coaching,
examinations, training and continuing education programs. PCS is a
highly specialized professional in matters of statutory, procedural and
practical aspects involved in proper compliances under corporate laws. Strong
knowledge base makes PCS a competent professional to conduct Secretarial Audit.
The Institute of Company Secretaries of India realizing the
importance of this topic has already introduced “Secretarial
Audit, Compliance Management and Due Diligence” as one
of the subject in its Professional curriculum w.e.f. 01st September,
2013.
Background
The concept of Secretarial Audit is not new in Indian context.
The Ministry of Corporate Affairs has already released CORPORATE
GOVERNANCE VOLUNTARY GUIDELINES, 2009 on December 21, 2009. The
preamble to Guidelines states that “These guidelines provide for a set of good
practices which may be voluntarily adopted by the Public companies. Private
companies, particularly the bigger ones, may also like to adopt these
guidelines.”
The Guidelines, amongst other things, recommend the introduction
of Secretarial Audit. Companies, which do not adopt these guidelines, either
fully or partially, are expected to inform their shareholders about the reasons
for not adopting these Guidelines.
The earlier Companies Act, 1956 provides for a compliance
certificate to be issued by a Company Secretary in practice and annexed to
Board Report by certain class of Companies. As per Section 383A of
the Companies Act, 1956, every Company having a paid-up capital of not
less than Rs. 10 lakhs or more but less than Rs. 5
crore shall be required to file a compliance certificate given by a practicing
Company Secretary with the Registrar of Companies within 30 days from the date
on which its annual general meeting was held with the requisite fees and a copy
of such certificate was attached with Board’s report.
Provisions in Companies Act, 2013
The Companies Act, 2013 has now introduced the Secretarial Audit
as a new class of audit in addition to Statutory Audit, Internal Audit and Cost
Audit prescribed in the act. Section 204 of the Act read with The Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014 notified
w.e.f. 01st April, 2014 deals with provisions relating to
Secretarial Audit.
1. Applicability
The requirements of Secretarial Audit are not applicable on all
companies. According to Sub-Section 1 of Section 204 of the Act, every
listed company and a company belonging to other class of companies as may be
prescribed 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 as may be prescribed.
Rule 9 of The Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014 prescribes the other class of companies as
under:
(a) every public company having a
paid-up share capital of 50 crore rupees or more;
o
or
(b) every public company having a
turnover of 250 crore rupees or more.
2. Duties, Rights and
Powers of Company Secretary in Practice conducting Secretarial Audit
According to Sub-Section 2 of Section 204 of the Act, 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 of the
company. Further, a company secretary in practice conducting secretarial audit
has been granted similar powers and rights as that granted to statutory
auditor. (Section 143(14) of the Act).
The report of Board of Directors prepared under Section 134(3)
of the Act shall include explanations or comments by the Board on every
qualification, reservation or adverse remark or disclaimer made by the company
secretary in practice in his secretarial audit report. (Sub-Section 3 of
Section 204 of the Act).
3. Punishment for Default
According to Sub-Section 4 of Section 204 of the Act, if a
company or any officer of the company or the company secretary in practice,
contravenes the provisions of section 204 of the Act, 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 1 lakh rupees but
which may extend to 5 lakh rupees.
Further, the provision of Section 143 mutatis mutandis applying
to company secretary in practice in conduct of secretarial audit, if the
company secretary in practice, in the course of the performance of his duties
as secretarial auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of
the company, he shall immediately report the matter to the Central Government
within such time and in such manner as may be prescribed. If company secretary
in practice conducting Secretarial Audit u/s 204 of the Act do not comply with
such provisions, he shall be punishable with fine which shall not be less than
1 lakh rupees but which may extend to 25 lakh rupees. (Sub-Section 15 of
Section 143 of the Act).
4. Reporting Requirements
Rule 9 of The Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014 provides that the format of the Secretarial
Audit Report shall be in FormNo.MR – 3. The format of the report (MR – 3) is
also available in the aforesaid Rules. The scope of reporting is very broad and
the Company Secretary in practice has to ensure compliances of following
statutory provisions in addition to Secretarial standards issued by The
Institute of Company secretaries of India, the Listing Agreement and The
Companies Act, 2013(including the rules made thereunder):
1. The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and
the rules made thereunder;
2. The Depositories Act, 1996 and the Regulations and Bye-laws
framed thereunder;
3. 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;
4. The following Regulations and Guidelines prescribed under
the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):
o
The Securities
and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011;
o
The Securities
and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992;
o
The Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009;
o
The Securities and
Exchange Board of India (Employee Stock Option Scheme and Employee Stock
Purchase Scheme) Guidelines, 1999;
o
The Securities and
Exchange Board of India (Issue and Listing of Debt Securities) Regulations,
2008;
o
The Securities and
Exchange Board of India (Registrars to an Issue and Share Transfer Agents)
Regulations, 1993 regarding the Companies Act and dealing with client;
o
The Securities and
Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and
o
The Securities and
Exchange Board of India (Buyback of Securities) Regulations, 1998;
5. any other laws as may be applicable specifically to the
company.
Conclusion- While the Companies Act, 2013 has opened up a
significant area of practice for Company Secretaries, it casts immense
responsibility on Company Secretaries, and poses a great challenge to justify
fully, the faith and confidence reposed in them.The reporting clause of MR-3 –
“I/We hereby report that in my/our opinion, the company has, during the audit
period covering the financial year ended on_____, _____ complied with the statutory
provisionslistedhereunder and also that the Company has proper
Board-processesand compliance-mechanism in place to the extent, in the
mannerand subject to the reporting made hereinafter ………………….” cast an enormous
responsibility on the part of Company Secretary in practice.It, therefore,
becomes imperative for the PCS that he exercises great care and caution while
issuing the Secretarial Audit report and also adheres to the highest standards
of professional ethics and excellence in providing his services. Secretarial
Audit is to be on the principle of “Prevention is better than cure” rather than
post mortem exercise and to find faults.
Also, there is no cap proposed on maximum number of secretarial
audits which a practicing company secretary could conduct. A cap of reasonable
number of secretarial audits would be desirable for equity, quality and
efficiency.
ICSI suggestions to Ministry
The regulator of profession of Company Secretary believes that
the legislative intention of this section 204 of the Act is that every listed
company, big or small, and every big company needs secretarial audit. It does
not envisage distinction between private and public companies. The need for a
company to have secretarial audit company can be linked to scale of operations
or presence which can be determined in terms of paid up capital, turnover,
number of employees, number of shareholders, outstanding borrowings, kinds of
business etc. and has no link whether a company is public or private. In fact,
we had moved to a regime where the law endeavors to provide level playing field
to all kinds of market participants. In fact Companies Act, 2013 has done away
with most of the exemptions/relaxations available to private companies under
the earlier law. This is found on the profound realization that serious
misdemeanor have been noticed in many private companies. The exclusion of
private companies, irrespective of their size, from secretarial audit gives a
message that the matters covered under such audit such as compliance with applicable
laws is not important. It is at least as important as the financial audit which
is compulsory for every company. That is why it is part of the Corporate
Governance Voluntary Guidelines, 2009 of Ministry of Corporate Affairs which is
applicable to all companies.
The Institute of Company Secretaries of India has made a
representation (dated 02nd April, 2014) to the Ministry of
Corporate Affairs for amending the rules relating to Secretarial Audit and
making it applicable to all those companies which are at least subject to
‘Internal Audit’ u/s 138 of the Act.Now, the new Government of 16thLokSabhawill
be tested, how it comes up with this representation/suggestion of ICSI.
Note :-
Reference to Act means Companies Act, 2013 unless stated
otherwise.
Views are personal and may not be relied as an opinion on any
statutory act, section or rule.
-CA. Amit G. Chandani, ACA, ACMA, Lic. ICSI, B.Com-
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