Secretarial Audit: Company Compliance in India

Secretarial Audit

What is Secretarial Audit?

“Secretarial Audit” is a is connected with the audit of the non-financial aspects of the company. Every Company, while doing business, has to comply with the rules and regulations relating to the Companies Act, Securities laws, FEMA, Industry Specific laws and General laws like Labour laws, Competition law and Environmental and Pollution related laws and should also pursue the good governance practice, Secretarial Audit covers non-financial aspects of the business impact on the performance of the company and verifies compliance of applicable laws, regulations and guidelines.

Requirement

  • It is required to ensure compliance with the legal and procedural requirements.
  • It free the directors of the company to concentrate on important issues.
  • It increase the goodwill of the company between shareholders, investors & regulators.
  • It can be used as a tool to minimise the compliance risk and helps to minimize penalty under different legislation.

Applicability

As per section 204, Secretarial Audit is compulsory for:

  • every listed company;
  • every public company having a paid-up share capital of fifty crore rupees or more; or
  • every public company having a turnover of two hundred fifty crore rupees or more.

Section 204 is applicable to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies. Although, the companies which are not covered under section 204 may opt for conducting Secretarial Audit voluntarily as it provides an independent assurance of the compliance of applicable laws by the company.

With the Notification of SEBI (Listing Obligations and Disclosure Requirement) (Amendment) Regulations, 2018, the Secretarial Audit is mandatory for listed entities and their material unlisted subsidiaries incorporated in India and shall be annexed with the Annual Report of the company.

Appointment of Secretarial Auditor

As per section 204(1), only a member of the Institute of Company Secretaries of India holding certificate of practice (company secretary in practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company. As per rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014, secretarial auditor is required to be appointed by means of resolution at a duly convened meeting of the Board of Directors of the company.

Scope of Secretarial Audit

As per Form MR-3, the Secretarial auditor needs to examine and report the compliance of the following:

  • The Companies Act, 2013 (the Act) and the rules made thereunder;
  • The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;
  • The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;
  • 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;
  • The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-

(a) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

(b) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992/SEBI (Prohibition of Insider Trading) Regulations, 2015;

(c) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009/2018;

(d) The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999/ SEBI (Share Based Employee Benefits) Regulations, 2014;

(e) The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

(f) 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;

(g) The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and

(h) The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998/2018;

(i) The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

‘Other laws as may be applicable specifically to the company.’

Further the Secretarial Auditor needs to examine and report on the compliance with the applicable clauses of the following:

(i) Secretarial Standards issued by The Institute of Company Secretaries of India.

(ii) The Listing Agreements entered into by the Company with ….. Stock Exchange(s), if Applicable/The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015;

Further also the Secretarial Audit report also requires reporting on whether –

  • The Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non-Executive Directors, Independent Directors, and Women Director.
  • The changes in the composition of the Board of Directors that took place during period under review were carried out in compliance with the provisions of the Act.
  • Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days in advance, and a system exists for seeking and obtaining further information and clarifications on the agenda items before the meeting and for meaningful participation at the meeting.
  • Majority decision is carried through while the dissenting members’ views are captured and recorded as part of the minutes. There are adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with all applicable laws including general rules like labour laws, competition law, Environmental laws, regulations and guidelines.
  • Secretarial Auditor is required to report and provide details of specific events and actions that occurred during the reporting period having major bearing on the affairs of the company in pursuance of above referred laws/ rules & regulations.

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