WHAT IS SECRETARIAL AUDIT?
‘Secretarial Audit’ is introduced by recently enacted Companies Act, 2013. It is a process to check compliances made by the Company under Corporate Law & other laws, rules, regulations, procedures etc. It is a mechanism to monitor compliance with the requirements of stated laws and processes. Periodically examination of work is necessary to point out errors & mistakes and to make a robust compliance mechanism system in an organization. Every company needs to comply hundreds of Laws, rules, regulations. These laws are complex and non-compliances would attract major risk to company. Periodically inspecting the records of company gives exact information whether, and if so, to what extent Company has complied with the laws applicable to the Company. Secretarial Audit gives comfort to the regulators, stakeholders and management that company has disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes
TO WHICH COMPANIES SECRETARIAL AUDIT IS MANDATORY?
As per section 204 of the Companies Act, 2013 read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, following companies are required to obtain ‘Secretarial Audit Report’ form independent practicing company secretary; (1) Every listed company
(2) Every public company having a paid-up share capital of Fifty Crore rupees or more; or
(3) (b) Every public company having a turnover of Two Hundred Fifty Crore rupees or more.
. “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)]
. 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
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.
APPOINTMENT OF SECRETARIAL AUDITOR
As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, Secretarial Auditor is required to be appointed by means of resolution passed at a duly convened Board meeting and resolution for appointment shall be filed with Registrar of Companies within 30 days in E-form MGT-14.
It is advisable for Secretarial Auditor to get the letter of engagement from the company. Secretarial Auditor should formally accept the letter of engagement. Further, as a prudent corporate practice, it is advisable that change in the Secretarial Auditor during the year is reported to the members in the Board’s Report.
SCOPE OF SECRETARIAL AUDIT
A secretarial auditor has to check compliances by the company under the following laws and rules made there-under;
i. The Companies Act, 2013 (the Act) and the rules made there-under;
ii. The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made there-under;
iii. The Depositories Act, 1996 and the Regulations and Bye-laws framed there-under;
iv. 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;
v. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):- 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, 1992;
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; and
h. 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 applicable specifically to the company
Thus the scope of Secretarial audit is not limited to the corporate laws applicable to company but it extent to all laws applicable to Company.
Recently Institute of Company Secretaries of India (ICSI) has issued a FAQ on Secretarial Audit and has clarified “Other Laws”, the text of the same is reproduced as below: The Council of the ICSI at its 226th meeting held on November 21, 2014 decided on the Scope of Secretarial Audit as regards “point (vi).( other laws as may be applicable specifically to the company)”, which is placed as under:
. Reporting on compliance of ‘Other laws as may be applicable specifically to the company’ shall include all the laws which are applicable to specific industry for example; for Banks- all laws applicable to Banking Industry; for insurance company-all laws applicable to insurance industry; likewise for a company in petroleum sector- all laws applicable to petroleum industry; similarly for companies in pharmaceutical sector, cement industry etc.
. 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 etc.
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.
Moreover Secretarial Auditor is required to report and provide details of specific events and actions occurred during the reporting period having major bearing on the affairs of the Company in pursuant to above referred laws/ rules & regulations. Few events were also given as example in the format of audit report.
However 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 professional.
POWER TO SECRETARIAL AUDITOR
The Companies Act, 2013 has empowered secretarial auditor and has given him all rights and powers as given to statutory auditor. As per section 204 of the Companies Act, 2013, the secretarial auditor company shall 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 auditor.
PUNISHMENT FOR DEFAULT
Sub-Section 4 of Section 204 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 section 204 of the Act, 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 1 lakh rupees but which may extend to 5 lakh rupees.
Moreover as per sub section (15) of section 143 of the Companies Act, 2013, if a secretarial auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. Failure to do so shall attract a fine which shall not be less than 1 lakh rupees but which may extend to 25 lakh rupees.
PROFESSIONAL RESPONSIBILITY AND PENALTY FOR INCORRECT AUDIT REPORT
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 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,
he 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.
In terms of Section 448, a Company Secretary in Practice is liable to attract penal provision if, he makes statement in the Secretarial Audit Report which is false is any material particulars, knowing it be false or omits any material fact knowing it to be material.
Besides, the 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:
(i) where found guilty of professional or other misconduct mentioned in the First Schedule:
(b) removal of name from the register of members upto a period of three months;
(c) fine which may extend to one lakh rupees.
(ii) where found guilty of professional or other misconduct mentioned in the Second Schedule:
(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.