In the world of business and finance, complying with laws and regulations is a must to ensure smooth transactions and avoid legal complications. This is why the concept of secretarial audit in India has emerged as an essential compliance requirement for companies. As per the Companies Act 2013, secretarial audit is mandatory for all companies in India. It is a process that checks whether a company complies with applicable laws, regulations, and good corporate practices. In this blog post, we will delve into the process, benefits, and essential provisions of secretarial audit in India.
1. Introduction to Secretarial Audit in India
Secretarial audit in India is a mandatory process that companies have to carry out to comply with the legal provisions of the Companies Act 2013. The audit ensures that the proper compliance system is in order and helps protect the interests of stakeholders. This audit is performed by a Practicing Company Secretary who ensures that the legal and procedural requirements of the law and regulations are being met. Secretarial audit is a continuous process, and if any faults are found, the management can rectify them. The audit is mandatory for public companies with a paid-up share capital of at least Rs 50 Crore, a turnover of Rs 250 Crore or more, or an outstanding loan or borrowing from Banks or FIs of Rs. 100 Crore or more. The process of secretarial audit involves documentation and liaising with the concerned authority. It is vital to comply with the requirements to avoid fines, penalties, and legal actions against the company. The audit process includes the appointment of a Secretarial Auditor by resolution passed at a Board Meeting and filing of the same with ROC within 30 days in form MGT-14. The secretarial audit report format is defined under Companies Act 2013 rules and regulations.
2. Process of Secretarial Audit
The of Secretarial Audit begins with appointing a Secretarial Auditor and communicating with earlier incumbents followed by their acceptance. The auditor then discusses the company with the management followed by an initial meeting with the Secretarial Auditor and finalizing the audit plan. Once the plan is in place, testing, interviewing, and analysis take place. Working papers and audit summary are prepared for discussions, and the Secretarial Audit Report is submitted.
One of the important features of Secretarial Audit is its ability to recognize instances of non-compliance and facilitate taking corrective measures. As stated by Corpbiz, “The intention of this audit is to add value and improve the operations of the Company. It helps accomplish the company’s objectives by bringing a systematic productive approach to examine the control and governance processes and potential effectiveness of risk management.”
The Benefits of Secretarial Audit are numerous, such as helping with due diligence in the case of acquisition, ensuring good corporate practices and portraying a good image in front of investors. Secretarial Audit is mandatory for companies with a paid-up share capital of 50 crore or more, a turnover of more than Rs. 250 crores or more, and those with borrowings of 100 crores or more.
3. Mandate for Secretarial Audit
The mandate for Secretarial Audit in India is a legal requirement for certain types of companies. The Companies Act 2013 and Listing Regulations mandate that certain companies, such as public companies with a paid-up share capital of Rs. 50 crore or more, or those with a turnover of Rs. 250 crore or more, must conduct Secretarial Audit. Companies with outstanding loans or borrowings from banks or public financial institutions of Rs. 100 Cr. or more are also required to undergo this process. The objective of the Secretarial Audit is to ensure compliance with various laws and regulations, and to monitor the company’s adherence to legal and procedural requirements. In terms of punishment for non-compliance, fines can be imposed on the company or its officers. It is important to note that every company, including private and public companies, must undergo Secretarial Audit. Companies can also choose to conduct voluntary Secretarial Audits to assess their compliance with applicable laws and regulations. The Secretarial Audit process involves planning and scoping the audit, conducting the audit, preparing a report, and making recommendations for improvement.
4. Provisions of Secretarial Audit
The provisions of Secretarial Audit in India are essential and mandatory for certain classes of companies to obtain a secretarial audit report as required by the Companies Act 2013. The Secretarial Audit is a process where a Secretarial Auditor checks whether the organisation complies with applicable laws and regulations. This audit is done to check the compliance of different legislations like the Companies Act and other corporate laws, rules and procedures applicable to an organization. It helps in spreading a level of confidence to the directors & Key Management Personnel (KMP) as well as to the management regulators and stakeholders regarding statutory compliance, good governance, and proper and adequate processes and systems. The intention of this audit is to add value and improve the operations of the Company. The Secretarial Audit report includes a comprehensive analysis of the company’s compliance and governance processes and can help identify potential risks and areas of improvement. As per the provisions, the Secretarial Auditor needs to examine and report the compliance with various laws like The Companies Act 2013, The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations 1993, among others. The audit report also includes recommendations for any necessary improvements or corrective actions.
5. Benefits of Secretarial Audit
There are numerous benefits to conducting a secretarial audit in India, particularly for companies that are required to do so. Here are just a few of the advantages:
– First and foremost, a secretarial audit helps ensure that a company is compliant with relevant laws and regulations. This can help prevent costly legal action or penalties down the line.
– By demonstrating their commitment to good corporate governance, companies that conduct secretarial audits can build trust with stakeholders such as investors, regulators, and customers.
– The audit process itself can help companies identify areas where they may be falling short on compliance or where their operational processes could be improved. This can lead to greater efficiency and lower risk over time.
– For potential acquirers or partners, a secretarial audit can be part of due diligence and provide reassurance that the company is being run properly.
– Finally, for companies whose audits go smoothly and reveal no major issues, the process can be a source of pride and a way to distinguish themselves from competitors who may not be as diligent about compliance.
As the saying goes, an ounce of prevention is worth a pound of cure, and the benefits of conducting a secretarial audit can be significant for any company.
6. Beneficiaries of Secretarial Audit
Secret Audit can benefit a wide range of stakeholders such as the promoters, shareholders, board members, senior management, government, and regulators. As per the Companies Act 2013, large companies with certain criteria have to mandatorily conduct a Secretarial Audit. Apart from being a compliance requirement, Secretarial Audit ensures good corporate governance practices and helps in maintaining transparency and accountability. A Secretarial Audit Report gives assurance to the management, investors, and regulators regarding the company’s compliance with applicable laws and regulations. The report also identifies areas of improvement and highlights any non-compliance, leading to corrective measures and better risk management. For prospective buyers or joint venture partners, Secretarial Audit can form a part of due diligence to assess the legal records and management of the company. In summary, as rightly said by Corpbiz, “The Secretarial Audit is one of the most transparent ways of showcasing your Company’s good Corporate Governance practices,” and “it adds a feather in the cap of the organisation.”
7. Laws covered in Secretarial Audit Report
The Secretarial Audit Report covers various laws that a company must comply with. It aims to ensure that a company follows statutory guidelines and regulations. The report outlines how the company adheres to laws specified in the form MR-3. These include the Companies Act 2013, Securities Contracts (Regulation) Act 1956, Depositories Act 1996, Foreign Exchange Management Act 1999, and SEBI Act. In addition, the report encompasses Secretarial Standards issued by The Institute of Company Secretaries of India, Listing Agreements entered into by the Company, and other applicable laws specific to the company.
“The scope of Secretarial Audit is wide, and it is used to ensure that every facet of the company is transparent and compliant with the laws of the land. The idea is to make sure that the company is carrying out operations within legal boundaries.”
Incorporating secretarial standards in the audit is essential to ensure that the company is carrying out operations in line with good corporate practices. Furthermore, the board of directors has a duty to give full explanations on any qualification or observation or other remarks mentioned in the Secretarial Audit report. Overall, the Laws covered in the Secretarial Audit report help companies remain compliant, which is essential for maintaining corporate governance and public trust.
8. Duties of Board regarding Secretarial Audit
The Board of Directors of a company has an essential role to play in the process of Secretarial Audit. They are responsible for ensuring that the company is complying with the applicable laws and regulations. The following are the duties of the Board regarding Secretarial Audit:
– Appointing a Secretarial Auditor: The Board is responsible for appointing a qualified Secretarial Auditor who meets the required criteria.
– Co-operating with the Secretarial Auditor: The Board of Directors is expected to provide full co-operation to the Secretarial Auditor throughout the process of Secretarial Audit.
– Reviewing compliance status: The Board must review the status of the company’s compliance with applicable laws and regulations periodically.
– Ensuring corrective actions: The Board must ensure that corrective actions are taken promptly in case any non-compliances are identified during the Secretarial Audit.
– Ensure adherence to good governance practices: The Board must ensure that the company adheres to good governance practices and implements the recommendations provided by the Secretarial Auditor.
– Approving Secretarial Audit Report: The Board must approve the Secretarial Audit Report before filing it with the relevant regulatory authorities.
Quoting Meerad, “By appointing the Secretarial Auditor, the Board can ensure that the company is complying with all the applicable laws and regulations. This will not only help the company avoid penalties and legal hassles but will also enhance its reputation and goodwill in the market.”
9. Importance of Secretarial Audit
Secret Audit is a critical process for companies to ensure their compliance with various laws and regulations. It helps organizations detect non-compliances and take the necessary corrective measures. Besides, it is mandatory for certain classes of companies in India to obtain a Secretarial Audit report. But why is the audit so crucial?
According to the legal framework, Secretarial Audit is essential for ensuring a company’s adherence to regulatory and legal contexts. It also helps establish effective corporate governance, which is crucial for every organization’s success in today’s business climate. With increasing accountability on corporate governance in India, having a Secretarial Audit has become more necessary than ever.
Moreover, possessing a Secretarial Audit gives organizations an effective mechanism to ensure their compliance is in check. It also helps reduce the work of law enforcement authorities. As one article notes, “By following this, it shows the rig…”
In summary, Secretarial Audit is not just a process to monitor compliance with different laws and procedures applicable to an organization. It is also crucial for maintaining strong corporate governance, reducing risks, and establishing an effective mechanism to ensure compliance. As such, companies must carefully consider whether a Secretarial Audit is required based on their specific situation.
10. Conclusion and Takeaways
In, the Secretarial Audit is essential for every organization in India to ensure regulatory compliance and effective corporate governance. With the launch of fresh legislation and increased accountability on corporate governance, the notion of Secretarial Audit has gained significance in recent years. The legal framework for Secretarial Audit in India is governed by various regulations and laws like Section 204 of the Companies Act 2013, Rules made thereunder, and the SEBI regulations.
Listed companies and companies with paid-up capital of Rs. 50 crore or more or a revenue of Rs. 250 crore or more are mandatorily required to undertake Secretarial Audit. However, it is also advised for small and medium-sized businesses as a good governance practice. The Secretarial Audit process involves appointing a Secretarial Auditor, discussing the company with the auditor, initial meeting, finalizing the audit plan, testing interview and analysis, preparing the working papers and audit summary, and submitting the Secretarial Audit Report.
“A Secretarial Audit helps accomplish the company’s objectives by bringing a systematic productive approach to examine the control and governance processes,” says Corpbiz. The key takeaway is that Secretarial Audit helps in identifying non-compliance, adds value, instills confidence among stakeholders and management, and helps in self-regulation and professional discipline. It is also a crucial part of due diligence for someone who wants to acquire the company or have any interest in the company. Overall, companies must keep themselves updated with the regulatory framework and perform Secretarial Audit for good corporate practices.
11. Documents required for Secretarial Audit in India
Secretarial Audit in India is an efficient tool to ensure corporate compliance management. It helps in detecting non-compliances and taking necessary measures. To conduct secretarial audit, companies need to provide documentation as stipulated under the Companies Act 2013.
The required documents include Board and General Meeting Minutes and Notices thereto, Filings and Intimations with Registrar of Companies, Stock Exchanges, and Newspaper Advertisements (if listed), Annual Performance Reports, Lease Deed, LUT cum Bond, Softex Returns, Filings with RBI (if there is foreign investment), ECB Returns (if there are foreign borrowings in the company), Disclosures and Declaration for code of conduct received from the directors, and Sitting fees and Remuneration details paid to directors.
The audit checklist prepared must include all statutory and regulatory requirements to be complied with. After verifying compliance, the management is informed of the results and if necessary, suggestions for corrective action. The final step is filing the audit report with the relevant regulatory authorities. A comprehensive analysis of the company’s compliance and governance processes can identify potential risks and areas of improvement, with recommendations for necessary improvements or corrective actions.
12. Process of Secretarial Audit in India
The process of Secretarial Audit in India is crucial for companies to ensure compliance with applicable laws and regulations.
The Audit comprises several steps, including appointing a Secretarial Auditor, communicating with earlier incumbents, initial meeting, finalizing the audit plan, testing, interview, and analysis. The documentation required for the audit includes verifying documents, records, and compliance with relevant laws and regulations.
The Secretarial Auditor examines and reports compliance with laws like The Companies Act 2013, the SEBI Act, the SCRA, and so on.
The Audit aims to recognize non-compliance, facilitate corrective measures, and add value to the company’s operations. Furthermore, it helps achieve the company’s objectives and improve its governance processes, risk management, and control effectiveness. The audit provides confidence to management, regulators, and stakeholders that the company follows statutory compliance, good governance practices, and adequate processes and systems. It will portray a good image in front of investors about the legal records of the company.
13. Frequently Asked Questions about Secretarial Audit in India
Secretarial Audit in India is a process to check compliances made by the Company under Corporate Law & other laws rules regulations procedures etc. Here are some frequently asked questions about Secretarial Audit in India:
1. What is Secretarial Audit?
– 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 the due process.
2. Who needs to obtain Secretarial Audit under Companies Act 2013?
– Every public company having a paid-up share capital of (b) Every public company having a turnover of Turnover means the aggregate value of the realisation of 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.
3. Who can be appointed as Secretarial Auditor?
– 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.
4. What laws and rules are examined by a Secretarial Auditor?
– The Companies Act 2013 (the Act) and the rules made there-under
– The Securities Contracts (Regulation) Act 1956 (‘SCRA’) and the rules made there-under
– The Depositories Act 1996 and the Regulations and Bye-laws framed there-under
– Foreign Exchange Management Act 1999 and the rules and regulations made there-under to the extent of Foreign Direct Investment Overseas Direct Investment and External Commercial Borrowings
5. What is the need for Secretarial Audit?
– Effective mechanism to ensure that the legal and procedural requirements are duly complied with.
– Provides a level of confidence to the directors & key managerial personnel etc.
– Directors can concentrate on important business matters as secretarial audit ensures legal and procedural requirements.
– Strengthen the image and goodwill of a company in the minds of regulators and stakeholders.
– Secretarial Audit is an effective governance and compliance risk management tool.