Secretarial Audit As Per The Companies Act, 2013 By Kausha Mehta


Dear Professional Colleagues,

As per section 204 of The Companies Act, 2013, every listed company and a company belonging to other class of companies as may be prescribed are required to carry on the secretarial audit. The requirement of the secretarial audit is mostly for big entities to provide requisite comfort to the management, regulators and the stakeholders. It helps to build good governance practice.

The secretarial audit report is prepared by the Company Secretary in Practice and it is to be annexed with its Board’s report made in terms of section 134 (3). It becomes the duty of the company to give all assistance and facilities to the practising company secretary for auditing all the related records of the company. As per Section 134 (3), the Board of Directors should disclose in their report in detail any qualification or observation made by the Practising Company Secretary in his report under sub-section (1). If a company, its officers or practising company secretary contravene this provision then every liable person who is in default, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

SECRETARIAL AUDIT IS COMPULSORY FOR:

In terms of rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, Secretarial Audit is mandatory for:
  • Every public company having a paid-up share capital of Rs. 50 crore or more
  • Every public company having a turnover of Rs. 250 crore or more
Besides all listed companies, some other companies are also required to conduct the secretarial audit. They are as follows:
  • Private company which is a subsidiary of a public company; provided they meet any of the above criteria for capital and turnover;
  • Private company though not falling in any of the above criteria of capital or turnover but listed its debt instrument or any other securities (E.g. preference shares). 
SECRETARIAL AUDIT REPORT:

Only a member of The Institute of Company Secretaries of India holding certificate of practice can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company as per Section 204 (1) of The Companies Act, 2013. The report should be prepared and finalised in Form No. MR. 3 after considering the clarifications of the management. The report should first be submitted to the Board of Directors and should be signed by the secretarial auditor appointed by the Company to conduct the secretarial audit. It is the duty of the company to check that the Report forms the part of Board’s report of the company.

RIGHTS AND POWERS OF SECRETARIAL AUDITOR:

Section 143 specifies all the rights and duties conferred on the secretarial auditor. As per Section 143 (1), an auditor is empowered to inspect all the records and vouchers of the company in relation to the consolidated financial statement. An auditor has the power to inspect all such records at any time whether the same has been kept at the registered office or somewhere else. He shall also be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as an auditor.
 
SCOPE OF SECRETARIAL AUDITOR:

A secretarial auditor has to check the compliances by the company under the following laws and rules made thereunder:

i. The Companies Act, 2013 and the rules made thereunder;

ii. The Securities Contracts (Regulation) Act, 1956 and the rules made thereunder;

iii. The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;


iv. 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;


v. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992:-

  1. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
  2. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
  3. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;
  4. The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
  5. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
  6. The Securities and Exchange Board of India (Registrars to an Issue and Share Transfers Agents) Regulations, 1993 regarding the companies act and dealing with the client;
  7. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and
  8. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
vi. Secretarial Standards issued by The Institute of Company Secretaries of India;

vii. The Listing Agreements entered into by the Company with Stock Exchange(s), if applicable;


viii. Other laws as may be applied specifically to the company.
 
REPORT OF FRAUD:

Section 143 (12) states that “Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed.
 
THRESHOLD LIMIT OF REPORTING:

Rule 13 of the Companies (Audit and Auditors) Rules, 2014 provides the following manner of reporting to the Central Government if auditor has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of Rs. 1 Crore or above, is being or has been committed against the company by its officers or employees:

  1. The auditor shall report to the Board or Audit Committee, as the case may be, immediately within two days of his knowledge of the fraud, seeking their reply or observations within 45 days.
  2. On receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or Audit Committee along with his comments to the Central Government within 15 days from the date of receipt of such reply or observations.
  3. If the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations.
  4. The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an email in confirmation of the same.
  5. The report shall be on the letter-head of the auditor containing a postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number.
  6. The report shall be in the form of a statement as specified in Form ADT-4.
In case of a fraud involving lesser than 1 crore, the auditor shall report the matter to Audit Committee constituted under Section 177 or to the Board immediately but not later than 2 days of his knowledge of the fraud and he shall report the matter specifying the following:-

  1. Nature of Fraud with the description;
  2. The approximate amount involved;
  3. Parties involved.
The following details of each of the fraud, involving an amount of lesser than Rs. 1 crore, reported to the Audit Committee or the Board under sub-rule (3) of Rule 13 during the year shall be disclosed in the Board’s Report:-

  1. Nature of Fraud with the description;
  2. Approximate Amount involved;
  3. Parties involved, if remedial action not taken, and
  4. Remedial actions are taken. 
Hence, the secretarial auditor should not only possess the knowledge of Corporate Laws but also of other economic laws applicable to the company.

Click here to read the disclaimer


Write a Comment