This article is written by ACS Akanksha Gupta
Meaning of Secretarial Audit
Secretarial Audit is a term used
for the process of verification of legal compliances which a company is
required to fulfill in a given financial year.
Usually when the term
“Secretarial Audit” is mentioned, the first impression a common man has is
What is “Compliance” under Secretarial
Audit??
When we talk about Secretarial
Audit, the word “Compliance” is repeatedly used. It means the formalities which
needs to be completed with respect to various applicable laws and further with
respect to its various aspects.
For example, under Companies Act 2013,
Compliance does not only include filing
a)
Maintenance
of proper documents/ Registers/ Records under various relevant Acts.
b) Memorandum and/or Articles of Association
c) Meetings of Directors or relevant committees
thereof, shareholders and other stakeholders
d) Following Secretarial standards.
e) Appointment, Resignation, Change in roles of
Directors and Key Managerial Personnel (“KMP”)
f) Issue, transfer and transmission of shares
and other securities and related matters
g) Declaration and distribution of Dividend
h) Loans, investments, guaranties and securities
i)
Loans
to directors etc.
j)
Disclosures
of relevant information as per Act
k)
Following
proper procedure for Deposits/ Borrowings
With Respect to other Acts
(where applicable):
a) The
Securities Contracts (Regulation) Act, 1956 and the Rules made under that Act:
With special reference to
a.
listing delisting
b) The
Depositories Act, 1996 and the Regulations and Bye-laws
c) The
Foreign Exchange Management Act, 1999 and the Rules and Regulations made
thereunder to the extent of
a.
Foreign Direct Investment,
b.
Overseas Direct Investment and
c.
External Commercial Borrowings
d) The
regulations and guidelines made under the Securities and Exchange Board of
India Act, 1992
e) The
various laws/ regulations/ guidelines which could be considered under this are
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, 2015;
c.
The Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009;
d.
The Securities and Exchange Board of India
(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,
1999;
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;
h.
The Securities and Exchange Board of India
(Buyback of Securities) Regulations, 1998;
i.
“SEBI (Listing Obligations and Disclosures
Requirements), Regulations, 2015”
Other relevant Laws
There may be laws which may be
specifically applicable to a Company because of the industry to which they
belong. For example;
For Banks – Banking Regulation act, 1949, RBI Act, 1934, etc
For Insurance Companies – Insurance Act, 1938, etc
For Pharmaceutical Companies - The Drugs and Cosmetics Act, 1940, etc
And so forth.
In other words, compliance means
an overall framework of a company which is to be followed so that it is completely
in-line with the applicable laws.
Purpose of Secretarial Audit
Secretarial Audit provides for a
necessary surety and comfort to the management, regulators and various
stakeholders of the organization because:
Ø
It focusses on the statutory compliance of the
company
Ø
It is an effective Governance and risk
compliance tool for the company
Ø
It checks whether there exists proper and
adequate systems and process with respect to their working and compliance.
Ø
It helps to detect instances of non-compliance
and ensures taking corrective measure at the right time.
Who are Required to undergo
Secretarial Audit?
As per section 204( 1) of
Companies Act, 2013 read with rule 9 of the Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014, the following companies are
required to obtain Secretarial Audit Report : -
·
Every listed company; -
·
Every public company having a paid-up share
capital of Rs. 50 crores or more; or
·
Every public company having a turnover of Rs.
250 crores or more.
Where “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. [Section 2( 91) of Companies Act, 2013]
Companies falling under Section
204( 1) as mentioned above are also required to annex the Secretarial Audit
Report with the Board’s Report.
Companies which are not covered
under section 204 may obtain Secretarial Audit Report voluntarily as it
provides an independent assurance of the compliances in the company.
Periodicity/ Time Interval for
Secretarial Audit Report
It is advisable that the
Secretarial Audit is conducted on a continuous basis such as quarterly or
half-yearly. This would help the company to keep a track on the on-going
compliance and take any corrective measures on time, if required.
Format of
Secretarial Audit Report
The format of
the Secretarial Audit Report shall be in FORM No. MR.3 (Rule 9 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014).
The major points which are
required to be covered in MR.3 are discussed in the section “What is “Compliance” under Secretarial Audit??”
Apart from
those mentioned, Format of 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
and Independent Directors.
·
The changes in the composition of the Board of
Directors that took place during the 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 applicable laws, rules, regulations and guidelines.
Manner of
Reporting Qualification in Secretarial Audit Report
A
qualification, reservation or adverse remarks, if any, should be stated by the
Secretarial Auditor at the relevant places in his report in bold type or in italics.
If the
Secretarial Auditor is 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
for the same.
If the
Secretarial Auditor is unable to express an opinion due to limitation in the
information provided by the Company for conducting Secretarial Audit, the
Secretarial Auditor should state that in the absence of necessary information
and records, he/she is unable to express opinion/ report on compliance relating
to such areas by the Company.
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 Auditor
Only a Company Secretary in
Practice i.e. member of the Institute of Company Secretaries of India holding a
Certificate of Practice can conduct Secretarial Audit and furnish Secretarial
Audit report to the Company under Section 204( 1) of the Companies Act, 2013.
The Secretarial Auditor should
prepare a list of specific laws which are applicable to the company in the
financial year whose secretarial audit is being conducted and then verify
compliance with the same. Secretarial Standard - 1 requires every company to
specify list of laws applicable specifically to the company at its Board
Meeting.
Appointment of Secretarial
Auditor
As per Rule 8 of the Companies
(Meetings of Board and its powers) Rules, 2014, read with section 179 of the
Companies Act, 2013, Secretarial Auditor is required to be appointed by means
of Resolution at a duly convened Board
Meeting.
Points to be kept in mind by
for Appointment of Secretarial Auditor
1. If
a Practicing Company Secretary has been engaged as a Secretarial Auditor in
this financial year in place of an earlier incumbent, the now-engaged
Practicing Company Secretary should inform to its predecessor of the proposed
engagement in writing in specific mode of delivery as may be prescribed by the
Institute of Company Secretaries of India.
2. Formal
letter should be issued by the company to the Secretarial Auditor in respect of
his appointment along with a copy of the Board resolution.
3.
This appointment shall be accepted in writing by
the Secretarial Auditor.
4.
Preliminary discussions and surveys should be
made so as to gain overall view of the operations of the Company and their
related matters.
5.
The Secretarial Auditor so appointed shall make
sure to have a formal meeting the Senior management of the Company so as to
understand the actual requirement and expectation of the management as well.
Role
of Secretarial Auditor
Company
Secretary in practice conducting secretarial audit should comply with the
provisions of Section 143 (14) of the Act which specifies the power and duties
of auditor with respect to frauds and reporting of the same.
In accordance
with the format of secretarial audit report in MR.3, Secretarial Auditor is
required to examine compliance by the company with the applicable clauses of
Secretarial Standards issued by the Institute of Company Secretaries of India
and certify compliance or non-compliance thereof.
Approach to Secretarial Audit
a) Knowledge
about Nature and its Activities:
The Secretarial Auditor
should work upon gaining knowledge about the various laws applicable to the
sector in which the Company works. He/ She should acquaint him/herself with the
activities which the company undertakes during its course of business. Only
then can the purpose of Secretarial Audit be justified.
b) Team:
Secretarial
Auditor shall build a team for conducting the Audit and specify roles so to
cover all the necessary areas which are to be reported in the Secretarial Audit
Report.
c) Documentation
– Maintaining Manual and Checklist:
The Secretarial
Auditor will require many documents from the Company on the basis of which it
can form its opinion and report. These documents will serve as proof of opinion
and report and hence should be very well maintained.
d) Third
party Support:
Can take support
from guidelines by various Regulatory Authorities such as MCA, SEBI, etc.
e) Timeline:
A timeline needs
to be chalked out within which specific tasks can be completed which would help
in completing the Audit within time.
f) Professional
Duty:
The secretarial
Auditor must provide an unbiased and objective view about the compliance and
activities of the Company.
g) Company
Secretary in Practice should be independent from the company being audited.
Professional Responsibility and
Penalty for Incorrect Audit Report
Companies Act, 2013 casts an
immense responsibility on the Practicing Company Secretaries while conducting
such audits. Further, Practicing Company Secretary also attracts he penal
provisions Company Secretaries Act, 1980 for any failure or lapse on their
part.
Section 447 and 448 of
Companies Act, 2013
Section 448 of the 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 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,
Section 447 deals with punishment for fraud which provides that any
person who is found to be guilty of fraud, shall be
Þ
punishable with imprisonment for a term which
shall not be less than six months but which may extend to ten years and
Þ
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.
Þ
In case, the fraud in question involves public
interest , the term of imprisonment shall not be less than three years.
Section 448 applies to “any person”.
In view of this, a company
secretary in practice, who is an independent professional, will be attracting
the penalty, as prescribed in Section 448 in case his observations in the
secretarial audit report turns out to be false or omits any material fact, knowing
it to be false or material, along with the other signatories to the
Annual Return.
Section 204 (4) of Companies
Act, 2013
Section 204( 4) also cast
responsibility on the company secretary in practice in case of default of
provision of section 204 and shall be punishable with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees.
Company Secretaries Act, 1980
Company Secretary in Practice
shall be liable for professional or other misconduct mentioned in First or Second
Schedule or in both the Schedules to the Company Secretaries Act, 1980 and
where held guilty, be liable for the following actions:
1) where
found guilty of professional or other misconduct mentioned in the First
Schedule:
a.
reprimand ;
b.
removal of name from the Register of members
upto a period of three months;
c.
fine which may extend to one lakh rupees.
2) where
found guilty of professional or other misconduct mentioned in the Second
Schedule:
a.
reprimand ;
b.
removal of name from the Register of members
permanently or such period as may be thought fit by the Disciplinary Committee;
c.
fine which may extend to five lakh rupees.
Checklist/ Important Points with
examples which should be remembered while doing Secretarial Audit
Ø Related Party Transactions
For eg . Satyam
Scam, Polypack, etc , the main onus of fraud was Related-party transactions. In
the case of Satyam, related-party transactions amounting to approx. Rs . 14000
crores were put through for approval between Satyam Computers and Maytas
Properties and infrastructure.
Ø Excessive Managerial Remuneration
These scams
involve overstatement of Profits to draw extra remuneration. Though the
remuneration paid is within the prescribed limits, however, whether or not an
element of fraud is present needs to be checked properly. For eg . Worldom , Tyco
scam, etc.
Ø Insider Trading
The secretarial
auditor needs to check whether any KMP or employee(s) of that company has
bought/ sold shares before nay critical event. For eg . KMP of Health South sold
off their shares before announcement of loss for that year.
Ø Inter – Company Transactions
Group company
transactions are to be examined carefully to identify fraud elements. For
eg . In the case of
HIH
scam, a leading health insurance company, the inrcomntepay
transactions indirectly benefitted KMP of the parent company.
Ø Mergers/ Demergers/ Acquisitions
In many scams relating to acquisitions fraud in the form of asset stripping has taken place as in
the case of Phone4U, Penta Media
etc.
General principles while
conducting Secretarial Audit
The following are general TECHNIQUES OF AUDITING which can be used
by the Secretarial Auditor
Ø Sample
checking
Ø Test
checking
Ø Random
checking
Ø Trial
and error checking
Hence,
Secretarial Audit offers a wide scope for the Practicing Company Secretaries to
explore their expertise in corporate laws.
Company Secretary GAURAV SHARMA+919990694230 Connect on Watts App with Gaurav Email us [email protected] Submit your guest articles for our
