The recent amendment to Section 204 read with Rule 9 of Companies (Appointment and Remunerations) Rules, 2014 has turned the focus of all private limited companies on the applicability of Secretarial Audit. The MCA vide Notification G.S.R. 13(E) dated 3rd January 2020 provided an amendment to the applicability rules of Secretarial Audit. The said amendment provided that “every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more on the last date of the latest audited financial statement are required to comply with Secretarial Audit requirements”. The words “every company” shall also include private limited companies as well. The applicability is effective from the financial year commencing on or after 1st April 2020.
Previously secretarial audit was applicable to listed companies and public companies, fulfilling such criteria as provided under Rule 9 of the Companies (Appointment and Remuneration of Key Managerial Personne) Rules, 2014. But with this amendment, the private limited with huge borrowings will also be required to comply with secretarial audit requirements.
In this article, we will analyse, the applicability of secretarial audit to private limited companies having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more on the last date of the latest audited financial statement, and procedures to be followed by such companies to comply with the requirements and related compliances.
What is a Secretarial Audit?
Secretarial Audit is a process to check, verify compliance of various legislations applicable to the company, including the Companies Act and other corporate and economic laws. It is a detailed analysis of whether the company has adequate systems and processes, that are appropriate with the size of the organisation. Secretarial Audit helps companies to ensure flawless compliance and timely corrective action when non-compliance is discovered. It provides an assurance to management, shareholders, government authorities and other stakeholders that the company is compliant with applicable laws.
Audit means a systematic review or assessment. The secretarial audit is not just a report on non-compliance but it also lets management know the corrective measures to treat such non-compliances and advise necessary precautions so that they do not occur in future. The report serves as guidelines with respect to planning and effective control systems for statutory and other compliances.
Secretarial Audit is an effective corporate governance tool, that can assist management in providing information on compliance of applicable laws and the existence of adequate systems in the company.
Applicability of Secretarial Audit and the recent amendment
The Secretarial Audit is governed by Section 204(1) of the Companies Act, 2013 read with Rule 9 of Companies (Appointment and Remuneration of Key Managerial Personne) Rules, 2014. It provides that
- Every listed company; or
- 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; or
- Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more. (applicable from the financial year commencing on or after 1st April, 2020)
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.
Therefore from the above applicability criteria, it is clear that every company, whether public or private, who has outstanding loans and borrowings from banks or public financial institutions of Rs. 100 crore or more, existing on the last date of the latest audited financial statement, are required to conduct a secretarial audit.
It is further been clarified that for checking the applicability of secretarial audit, paid-up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of the latest audited financial statement shall be taken into account. That means applicability for the financial year 2020-2021 will be based on the financial statements as at 31st March 2020.
Who shall conduct Secretarial Audit?
Section 204 (1) of the Act, clearly specifies that the secretarial audit shall be conducted by the company secretary in whole-time practice. Therefore apart from CS in whole-time practice, no professional can issue the Secretarial Audit Report.
How Report should be issued?
Section 204(!) of the Act, provides a specific format for issue of the secretarial audit report. The secretarial audit report shall be in the format as provided in Form MR-3.
Appointment, Remuneration, Removal and Resignation of Secretarial Auditor
The secretarial auditor shall be appointed by a board resolution passed by the Board of Director of the Company in their Board Meeting at a remuneration fixed by the Board.
The Board resolution so passed for appointment shall be filed in Form MGT-14 within 30 days from the date of appointment.
It is advisable to companies to appoint Secretarial Auditor at the beginning of the financial year as Secretarial Audit demand checking of compliances on a continuous basis. As a good practice, the Secretarial Auditor can submit a report to the Board at the end of each quarter as to the compliances of the Company.
The Act is silent regarding the tenure of appointment of a secretarial auditor. One can determine that the audit is conducted by him is for a particular reporting period and his duty ends as the report is duly submitted by him. Therefore, it can be said that the appointment can be made for each reporting period.
The Act does not provide any procedure regarding removal of or resignation by the statutory auditor. As his appointment is made by Bord, in case of removal, the board can take such necessary steps for his removal or in case of resignation, the same shall be served to the Board only. As his report is addressed to the members, in case of removal, he may make a representation before members for removal.
The Secretarial Auditor and the Company shall formally prepare and execute a letter of engagement. Lastly, it is advisable that change in the Secretarial Auditor during the year should be reported to the members through the Board’s Report.
What does the Secretarial Audit include?
The secretarial audit shall cover every law specifically applicable to a particular business. Unlike listed companies, private limited companies are not required to comply with the SEBI Act or SCRA Act or the provisions or guidelines issued by SEBI etc. The coverage of the report shall include:
- The companies Act, 2013
- Foreign Exchange Management Act, 1999 and rules and regulations made thereunder to the extent of foreign direct investment, overseas direct investment, and external commercial borrowings; and
- Labour Laws
- Environmental Laws
- Business-specific/entity-specific Laws
- Secretarial areas
The secretarial audit may not cover finance-related laws that are applicable to every entity such as sales tax, income tax, excise, etc. The auditor can rely on the Reports given by statutory auditors or other designated professionals.
Scope of Secretarial Audit in case of private limited company
The scope of secretarial audit applicable to private limited shall include:
- Reporting on compliance of five laws as mentioned in form MR-3
Form MR-3 requires reporting on basically 5 laws i.e.
- Companies Act, 2013 and the rules made thereunder;
- Securities Contracts (Regulation) Act, 1956 (‘SCRA’), and the rules made thereunder;
- Depositories Act, 1996, and the rules made 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;
- Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’)
But it can be observed that, in case of private limited company, Securities Contracts Act or Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder are not applicable hence the report may specify the same.
2. Reporting on the compliances of secretarial standards issued by ICSI.
3. Reporting on compliance of ‘Other laws as may be applicable specifically to the company” i.e. Industry-specific laws.
4. Examining and reporting whether the adequate systems and processes are in place to monitor and ensure compliance with general laws like labour laws, competition law, environmental laws.
5. Examining and reporting specific observations/qualification, reservation or adverse remarks in respect of the Board Structures/system and processes relating to the Audit period.
6. In case of financial laws like tax laws and Customs Act etc., Secretarial Auditor may rely on
the Reports given by statutory auditors or other designated professionals.
7. Reporting of major events such as buy-back/redemption of securities, merger, amalgamations. Takeovers, etc
The audit shall be conducted in a comprehensive manner so as to ensure that there is no non-compliance. The Secretarial Auditor should detect the instances of non-compliances and in result facilitate taking corrective-measures. Secretarial Auditor, in his/ her report, has to provide the details of specific events and actions which occurred during the reporting period, that have a major bearing on the affairs of the Company pursuant to the applicable laws/ rules & regulations.
Reporting of observations/ adverse remarks
As per section 143(12) of the Companies Act, 2013, if an 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 immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
As per Section 143(15), if any auditor, cost accountant or company secretary in whole-time practice do not comply with Section 143(12), shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 25 Lakhs.
Punishment for Defaults
Section 204(4) of the Companies Act, 2013, provides that if a company or any officer of the company or the company secretary in practice, contravenes the provisions of this Section, 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 punishment 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 thereunder, 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, Then he/she shall be liable under section 447.
Section 447 deals with punishment for fraud which provides that any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. In case, the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
Considering the fine and penalties involved for false reporting or non-reporting of any material facts in the report, it is important to take due care that the report gives true and accurate information.
Limits on the Issue of Secretarial Audit Report
The ICSI has issued guidelines regarding the maximum number of Secretarial Audit the can be carried out by practising company secretary/firm. There is a limit on the number of audits that can be undertaken by the PCS i.e. 10 audits per partner/PCS and an additional of 5 audits in case the auditor is peer-reviewed.
Minimum fees to be charged by PCS for issue of Secretarial Audit Report
The ICSI has not prescribed any minimum fees for issuing the Secretarial Audit report. However, the company secretary in practice shall take proper call about fees considering the nature & size of the company, type of company and the efforts required to be put in while carrying out such exercise. It is expected that member should maintain high standard and quality in the issue of the report.
Signing of Secretarial Audit Report
The Secretarial Audit Report should be signed by the Company Secretary in Practice by whom the exercise for verifying/ checking the compliances was conducted or under whose supervision the same was conducted indicating his FCS/ ACS number along with Certificate of Practice Number issued by the Institute of Company Secretaries of India.
In case of PCS firm, the Secretarial Audit Report may be signed by the partner by whom the exercise for verifying/ checking the compliances was conducted or under whose supervision the same was conducted indicating his FCS/ACS number along with his Certificate of Practice number. The Annual Secretarial Compliance Report cannot be signed by an employee of the PCS firm even if he/she may be a member of the ICSI.
Applicability of UDIN for Secretarial Audit Report
Quoting UDIN on the certifications, attestations has already been made mandatory w.e.f. 1st October 2019. UDIN shall be generated at the time of signing the Secretarial Audit Report and mandatorily be mentioned in the Report and documents annexed to the Report, along with the certificate of Practice number.
This will also enable stakeholders and regulators to verify genuine documents signed or certified by PCS.
Duty of the company to provide assistance
Section 204(2) of the Act, makes it mandatory to the company to give all assistance and facilities to the company secretary in practice, for auditing the secretarial and other records of the company, while conducting the secretarial audit. The management should not conceal the facts from the auditor and the auditor must not be influenced by personal gains and must give an independent opinion.
The process of secretarial audit can act as a tool for good governance only when proper and true information is provided by the management to the auditor. It is also implied that the company secretary of the company shall provide complete assistance to the Secretarial Auditor.
Board’s Report to provide an explanation regarding qualifications or observations made in the report
As per the provisions of Section 204(3) of the Act, the Board’s Report issued under Section 134 shall provide a detailed explanation regarding qualifications or observations or adverse remarks made by the company secretary in whole-time practice in his Secretarial Audit Report.
Good Corporate Governance is possible only through adhering compliances. The Secretarial Audit provides an inbuilt mechanism for enhancing corporate compliance and helps in boosting investor and other stakeholders confidence in the company. It helps an organisation to identify the areas of non-compliances and suggestive measures required for correctness of such non-compliances. It also regulates the systems and procedures followed in the organisation and help the management to achieve the organisation’s core objectives effectively.
Lastly, Company Secretaries, as a corporate saviour, are being looked as an expert when it comes to compliance with the laws. Therefore, be it CS in employment or Practice, both are concerned with adherence to the words of the statute in true letters and spirit.
Thank you for visiting my blog. If this article has helped you in any way, then like, share or leave a comment.
Disclaimer: The information given on this site is based on my understanding and knowledge on the subject and does not constitute legal opinion or advice to the users. All information is provided in good faith, to create awareness of legal provisions, compliance and procedures and are solely for knowledge sharing purpose. however, we make no representation of any kind, express or implied, regarding the accuracy, adequacy and completeness of any information on site all the time. Hence you are advised to opt for professional advice before acting on the information provided herein.