SEBI New Rule: Annual Secretarial Compliance Report and MR-3 By CS Shiriti Kumari


WITH EFFECT FROM MARCH 31, 2019
 
 
The circular is issued in exercise of the powers conferred under sections 11 and 11A of the Securities and Exchange Board of India Act, 1992 read with Regulations 24A and 101 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
 
Applicable Section & Rule under Companies Act, 2013:
 
Section 204 of the Companies Act, 2013 read with rule 9 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014
 
204(2): company to give assistance
204(3): BOD’S Shall Explain Any Qualifications in Their Report
 
I. Applicability of Annual Secretarial Audit Report (MR-3):
 
  1. All Listed Entities (whose equity shares are listed);
  2. and their material unlisted subsidiaries; (Newly Inserted)
  3. Every Public Company having share capital more than Rs. 50 Crore;
  4. Every Public Company having a *turnover of more than Rs. 250 Crore;
*“Turnover” means the aggregate value of the realization of the amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)]
 
(Note: Secretarial Audit is also mandatory to a private company which is a subsidiary of a public company and which falls under the prescribed class of companies.)
 
⇒ Reporting on the compliance of 5 laws as mentioned in Form MR-3:

  1. Companies Act, 2013
  2. Securities Contracts (Regulation) Act, 1956 (‘SCRA’)
  3. Depositories Act, 1996
  4. Foreign Exchange Management Act, 1999
  5. Securities & Exchange Board of India Act, 1992 Take Over / Insider Trading / ICDR / ESOP / Listing of Debt/ Delisting / RTA / Buy Back
⇒ Reporting on the compliance of ‘Other laws as may be applicable specifically to the Company’ which shall include all the laws which are applicable to specific industry.
 
⇒ Examining and reporting ‘whether the adequate systems and processes are in place’ to monitor and ensure compliance with general laws like labor laws, competition law, environmental laws etc.
 
⇒ In case of financial laws like tax laws etc., Secretarial Auditor may rely on the Reports given by statutory auditors or other designated professionals
 
 
II. Applicability of Annual Secretarial Compliance Report:
 
  1. Every Listed entities
Reporting on ONLY compliance of SEBI act, regulations, circulars, guidelines by SEBI time to time.
 
This circular shall come into force as under:
 
a. With respect to the Annual Secretarial Audit Report, in the annual reports of the listed entities and the material unlisted subsidiaries from the financial year ended March 31, 2019, onwards.

b. With respect to the Annual Secretarial Compliance Report, applicable to listed entities, with effect from the financial year ended March 31, 2019, onwards.
 
As per Regulation 16(c) of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015Material Unlisted Subsidiary” means a subsidiary of a listed company whose income or net worth exceeds 10 % of the consolidated income or net worth, respectively, of the Company and its Subsidiaries in the immediately preceding accounting year.”
 
SEBI came up with the most awaited notification to enhance the level of Corporate Governance and the level of transparency. The aim is to examine the effect of good corporate governance practices on corporate transparency and performance of all listed companies and their material subsidiaries.
 
Compliances is an important element of efficient management and ensure better scope for stakeholders as it can enhance the credibility of the performance of any organization in the considerable course of time and process.
 
BACKGROUND:
 
The SEBI Committee on corporate governance was formed on June 2, 2017, under the Chairmanship of Mr. Uday Kotak with the aim of improving standards of corporate governance of listed companies in India.
 
The Committee’s approach to the recommendations has been driven by the primary objective of enhancing corporate governance for listed entities. In this regard, the Committee believes that there are certain recommendations which may require implementation by authorities/regulators in addition to SEBI. Therefore, the Committee has suggested that SEBI take up such recommendations with the relevant authorities/ regulators.
 
The Committee on Corporate Governance (“Kotak Committee”) presented its *report (“Kotak Committee Report”dated October 05, 2017, recommended the following in view of the criticality of secretarial functions to efficient board functioning:
 
a. Secretarial audit to be made compulsory for all listed entities under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Regulations”) in line with the provisions of the Companies Act, 2013.
 
b. Secretarial audit to be extended to all material unlisted Indian subsidiaries in line with the recommendations of the Committee on strengthening group oversight and improving compliance at a group level for listed entities.
 
 
The aforesaid recommendations were accepted and in order to implement the same, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 have been amended to include the following Regulation 24A:
 
 “24A: Secretarial Audit Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a *company secretary in practice, in such form as may be prescribed with effect from the year ended March 31, 2019.”
 
*Practicing Company Secretary holding a valid Certificate of Practice issued by ICSI.
 
By amending the Rule, Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and annex with its annual report, a secretarial audit report, given by a PCS, in such form as may be prescribed w.e.f. the year ended March 31, 2019. 
 
We seek to understand how corporate governance affects transparency in emerging corporates, where information asymmetry is endemically high. The results are robust step by SEBI with notifying the Format for Annual Secretarial Audit Report and Annual Secretarial Compliance Report for listed entities and their material subsidiaries. More fundamentally, we believe that the responsibility of professionals as well as Board members of Companies extends beyond disclosure.
 
The following shall be complied with by a listed entity and its material unlisted subsidiaries, as applicable:
 
  • Currently, Section 204 of the Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires Secretarial Audit by Practicing Company Secretaries (PCS) for listed companies and certain unlisted companies above a certain threshold in From No. MR-3.
  • In order to avoid duplication, the listed entity and its unlisted material subsidiaries shall continue to use the same Form No. MR-3 for the Annual Secretarial Audit Report. (as required under Companies Act, 2013 and the rules made thereunder for the purpose of compliance with Regulation 24A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as well)
ICSI on April 6, 2015 has issued guidelines for issuing secretarial audit report –Effective from the financial year 2015-16. For a firm of Company Secretaries, the ceiling in respect of Secretarial Audit would apply to each partner.
 
LIMITS FOR AUDIT BY ICSI
 

No. of years as a member of ICSI
as on 1st April of each Financial Year

Number of Secretarial Audit Reports

Upto & equal to 5 years

5

More than 5 years but less than or equal to 10 years

10

More than 10 years

20

 
RESPONSIBILITY OF PCS
 
  • While the Annual Secretarial Audit shall cover a broad check on compliance with all laws applicable to the entity, listed entities shall additionally, on an annual basis, require a check by the PCS* on compliance of all applicable SEBI Regulations and circulars/ guidelines issued thereunder, consequent to which, the PCS shall submit a report to the listed entity in the manner specified in this circular.
  • ICSI may consider issuing a guidance note for Annual Secretarial Compliance Report to Practicing Company Secretaries to enable them to undertake certifications in accordance with the Regulations and this circular in letter and in spirit
  • To adhere to the highest professional standards and justify the confidence reposed in the profession
  • A qualification, reservation or adverse remarks, if any, should be stated in bold type or in italics.
  • If unable to express an opinion on any matter, he should mention that he is unable to express an opinion on that matter and the reasons thereof.
 
(Note: *There are no such restrictions in the SEBI circular for the PCS who performs Secretarial Audit can also issue the Secretarial Compliance Report. As far, it is optional to retain different PCS for Secretarial Audit and Secretarial Compliance Report or can be the same.)
 
OBLIGATION TO COMPANY
 
  • The listed entities and their material subsidiaries shall provide all such documents/information as may be sought by the PCS for the purpose of providing a certification under the Regulations and this circular.
  • The Annual Secretarial Compliance Report in the aforesaid format shall be submitted by the listed entity to the stock exchanges within 60 days of the end of the financial year.
  • Duty of the Company to give all assistance for auditing the secretarial and other records.
  • The Board of Directors, in their Report, shall explain in full any qualification or observation or other remarks made by a company secretary in practice in his report.
  • Further; the Board of Directors; in its Board’s report, shall explain in full any qualification or observation or other remarks made by the Company Secretary in Practice in the Secretarial Audit Report/Secretarial Compliance Report.
GENESIS OF SECRETARIAL AUDIT&SECRETARIAL COMPLIANCE REPORT
 
  • Abide by all applicable laws and the internal regulatory framework.
  • Gives necessary comfort to the management, regulators and the stakeholders
  • Independent and intended to improve operations of a company
  • A systematic approach to improve control, and governance processes
FORMAT

ANNUAL SECRETARIAL COMPLIANCE REPORT

(Compliance of SEBI act, regulations, circulars, guidelines by SEBI time to time.)
 
Due Date of filing: Within 60 days from the closure of Financial Year only with Stock Exchanges (not required to be filled with RoC but as optional can)
 
Annexure-A
 
(To be printed on the letterhead of the Practicing Company Secretary)
 
SECRETARIAL COMPLIANCE REPORT
OF
[NAME OF THE LISTED ENTITY] 
FOR THE YEAR ENDED 31.03____


I/We…………….have examined:
 
A. All the documents and records made available to us and explanation provided by [------------] [Name of the listed entity] (“the listed entity”),
 
B. The filings/ submissions made by the listed entity to the stock exchanges,
 
C. Website of the listed entity,
 
D. any other document/ filing, as may be relevant, which has been relied upon to make this certification, for the year ended [--------------] (“Review Period”) in respect of compliance with the provisions of:
 
a. The Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and the Regulations, circulars, guidelines issued thereunder; and
 
b. The Securities Contracts (Regulation) Act, 1956 (“SCRA”), rules made thereunder and the Regulations, circulars, guidelines issued thereunder by the Securities and Exchange Board of India (“SEBI”);
 
The specific Regulations, whose provisions and the circulars/ guidelines issued thereunder, have been examined, include:-
 
a. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015;
 
b. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;
 
c. Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

d. Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018;


e. Securities and Exchange Board of India (Share-Based Employee Benefits) Regulations, 2014;
 
f. Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
 
g. Securities and Exchange Board of India(Issue and Listing of Non-Convertible and Redeemable Preference Shares) Regulations,2013;
 
h. Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
 
i. …………(other regulations as applicable) and circulars/ guidelines issued thereunder;
 
(Note: The aforesaid list of Regulations is only illustrative. The list of all SEBI Regulations, as may be relevant and applicable to the listed entity for the review period, shall be added.)
 
And based on the above examination, I/We hereby report that during the Review Period:
 
a. The listed entity has complied with the provisions of the above Regulations and circulars/ guidelines issued thereunder, except in respect of matters specified below:-
 

Sr.No

Compliance Requirement (Regulations/ circulars / guidelines including specific clause)

Deviations

Observations/ Remarks of the Practicing Company Secretary

       
       
 
b. The listed entity has maintained proper records under the provisions of the above Regulations and circulars/ guidelines issued thereunder insofar as it appears from my/our examination of those records.
 
c. The following are the details of actions taken against the listed entity/ its promoters/ directors/ material subsidiaries either by SEBI or by Stock Exchanges (including under the Standard Operating Procedures issued by SEBI through various circulars)under the aforesaid Acts/ Regulations and circulars/ guidelines issued thereunder:
 

Sr. No.

Action
taken by

Details of violation

Details of action taken E.g. fines, warning letter, debarment, etc.

Observations/ remarks of the Practicing Company Secretary, if any.

         
         
 
d. The listed entity has taken the following actions to comply with the observations made in previous reports:
 

Sr. No.

Observations of the Practicing Company Secretary in the previous reports

Observations made in the secretarial compliance report for the year ended…

(The years are to be mentioned)

Actions taken by the listed entity, if any

Comments of the Practicing Company Secretary on the actions taken by the listed entity

         
         
 
Note:
  1. Provide the list of all the observations in the report for the previous year along with the actions taken by the listed entity on those observations.
  2. Add the list of all observations in the reports pertaining to the periods prior to the previous year in case the entity has not taken sufficient steps to address the concerns raised/ observations.
E.g. In the report for the year ended 31st March, 2021, the PCS shall provide a list of:
 
  • all the observations in the report for the year ended 31st March, 2020 along with the actions taken by the listed entity on those observations.
  • the observations in the reports pertaining to the year ended 31st March, 2020 and earlier, in case the entity has not taken sufficient steps to address the concerns raised/ observations in those reports.)
Place:
Date:
 
 
Signature with Stamped
Name of the Practicing Company Secretary
(Firm name------------------)
ACS/ FCS No.:---------
C P No.:---------
 
 
PENAL PROVISION

204(4) of Companies Act, 2013

 

If a Company or any officer of the Company or the CS in Practice, contravenes the provisions; 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 Rs.1 lakh but which may extend to Rs.5 lakhs

 

Section 448 of Companies Act, 2013

Deals with penalty for false statements. The section provides that if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for the purposes of any of the provisions of this Act or the rules made there-under, any person makes a statement,— (a) which is false in any material particulars, knowing it to be false; or (b) which omits any material fact, knowing it to be material, he shall be liable under section 447 (Punishable for Fraud).

 

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Non-compliance of Listing Regulations may lead to compulsory delisting of the non-compliant listed company will take place which will be commenced by the stock exchanges in accordance with the provisions of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 read with the Securities Contracts (Regulation) Act, 1956, the Securities Contracts (Regulation) Rules, 1957 as amended from time to time.

https://www.sebi.gov.in/legal/circulars/may-2018/

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