SECRETARIAL AUDIT A brief history of Audit The history of audit dates back to ancient times, in ancient times the auditors in Britain would hear accounts read out to them to check the accuracy of the accounts prepared manually. The auditors were known as the ‘King’s Ears’. In 1844, the British Parliament passed the ‘Joint Stock Companies Act’ which required the Directors of a company to report to the shareholders via a written report about the affairs of the company. The word Audit - derived from a Latin term ‘Audire’- which means “to hear”. This concept developed further over the years to verification of records, preparation of a written report, verification of statutory compliances to examination of records of the Company to derive the evidence which can be used in legal proceedings. With the expansion of trade and commerce and the development of the society as a whole, this role extended to audit of various aspects like:- ü Secretarial audit ü Information technology audit ü Performance audit ü Project audit ü Forensic audit, etc. Due to rise in corporate frauds such as Satyam scam, PNB Scam, on one side the Securities and Exchange Board of India (SEBI) is more vigilant about the compliances by the corporates and introducing various new requirements w.r.t. Corporate Compliances to ensure prevention of such corporate frauds, the corporates these days are also desirous of being compliant with various laws, rules and regulations applicable to them as a preventive measure against legal and penal consequences and to increase their goodwill. The Indian Economy is a diverse combination of various types of businesses. Today’s business is not restricted within the country. With businesses going international, there is great responsibility upon these companies to maintain the goodwill of the country on international level by being compliant to the laws. The Kotak Committee on Corporate Governance constituted under the Chairmanship of Sh. Uday Kotak in 2017, conducted a detailed study on this subject and gave its recommendations to the Government on 5 October, 2017. This led to the development of the concept of Good Corporate Governance. The Securities and Exchange Board of India accepted many of the proposed recommendations and implemented the same with regard to the development of Good Corporate Governance in Listed Companies. In light of the above, the role and responsibilities of a Company Secretary have become manifold. Where a Company Secretary steps in With the initiatives taken by the Government and the corporates to practice good corporate governance it has become the prime duty of a Company Secretary to be aware of his role and to fulfil his responsibilities with efficiency. More specifically the role of a Practicing Company Secretary has gained importance with regard to the audit operations. The efficiency shown by a Company Secretary while doing a compliance check of a company will clearly bring about the compliance level of the company which works as groundwork for improving the quality of compliance management with respect to a company. In this article, we will discuss in depth the role of a Practicing Company Secretary in terms of secretarial audit. SECRETARIAL AUDIT It involves audit of various laws applicable on a company like the Companies Act and other corporate and economic laws. The basic aim behind conducting a Secretarial Audit is to express an opinion on whether the company’s secretarial records and compliances of applicable laws are free of material misstatements, whether due to fraud or error which can attract fines and penalties. As per Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 ü Every listed company; ü Every public company having a paid-up share capital of fifty crore rupees or more ; or ü Every public company having a turnover of two hundred fifty crore rupees or more. Is required to obtain a Secretarial Audit Report from a Practicing Company Secretary in Form MR-3 which shall be annexed to the Board Report made in terms of Section 134(3) of The Companies Act, 2013. The Board of Directors of a company shall appoint a Secretarial Auditor (usually on yearly basis) and fix the remuneration in accordance with the powers conferred on them under Section 179(3) of The Companies Act,2013 and file such resolution with the Registrar of Companies in accordance with the provisions of Section 177 of The Companies Act,2013. The Board of Directors of the company shall explain qualifications or observations made by the Company Secretary in Practice in his report. This ensures that a thorough check has been conducted with regard to the secretarial compliances of the corporate entity and that the Board of Directors are aware of non-compliances or frauds, if any. It helps to fix a responsibility upon the Board of the company to take actions regarding any non-compliance occurring in the company. The scope of Secretarial Audit is extremely wide and is not just restricted to the above mentioned points, instead, it extends to various other laws, rules and regulations that are applicable to the Company undergoing Secretarial Audit. The Secretarial Auditor must be aware of all the applicable laws and regulations that apply to the Company undergoing Secretarial Audit and prepare an effective audit plan for conducting the Secretarial Audit. The findings of the Secretarial Audit help in detecting non-compliances and frauds and helps in taking corrective actions. It is a measure of effectiveness of internal control and Compliance management system of a company. An overall check helps prevent frauds, make good any non-compliances which in turn leads to Good Corporate Governance. COMPLIANCE CERTIFICATE (MGT-8) As per the provisions of Section 92 of the Companies Act, 2013 read with Rule 11 of the Companies (Management And Administration) Rules,2014 The Annual Return (MGT-7) filed by: - A Listed company;
- A company having paid-up share capital of ten crore rupees or more; or turnover of fifty crore rupees or more
shall be certified by a Company Secretary in Practice and the certificate shall be in Form MGT-8 stating that the annual return discloses the facts correctly and adequately and that the company has complied with all the provisions of The Companies Act. This report is focussed on the compliances of the Companies Act, 2013 and the rules made thereunder. SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS), 2015 Regulation 24A This is a new Regulation inserted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018. The Kotak Committee on Corporate Governance, constituted under the Chairmanship of Shri Uday Kotak, in its report dated October 05 2017, recommended Secretarial Audit to be made compulsory for every listed entity and its material unlisted subsidiaries incorporated in India who shall undertake secretarial audit and annex with its Annual Report (MGT-7), a Secretarial Audit Report, given by a Company Secretary in Practice with effect from the year ended March 31, 2019. Subsequently, SEBI in its Circular vide CIR/CFD/CMD1/27/2019 dated 8th February 2019, had prescribed the format for issuance of annual secretarial audit report. The Companies covered under this circular are: ü Listed Companies; ü Their Material Unlisted Subsidiaries Regulation16(1)(c) of SEBI(Listing Obligations and Disclosure Requirements) 2015 defines the term Material Subsidiary. It shall mean a subsidiary, whose income or net worth exceeds ten percent (earlier 20%) of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. It must be noted that Regulation 15 of SEBI (LODR) exempts SME Listed companies for complying with the regulations regarding Corporate Governance. Although Secretarial Audit for Listed companies is mandatory under the Companies Act2013, but the applicability of this exemption with regard to Regulation 24A of SEBI (LODR) on the material unlisted subsidiaries of the SME Listed companies is a grey area as no clarification regarding the same has been given by SEBI. The idea behind the introduction of this Regulation is to keep a better check on the activities of Listed Entities and their Material Subsidiaries which are their profit centres and through which the listed entities carry out their various business operations. The change in the definition of Material Subsidiary also reflects the intention of the Government to take the important profit centres of a listed entity into the ambit of a compliance check to ensure that all the applicable laws are being complied with. In order to avoid duplication, the listed entity and its unlisted material subsidiaries shall continue to use the same Form No. MR-3 as required under Companies Act, 2013 and the rules made thereunder for the purpose of compliance with Regulation 24A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as well. ANNUAL SECRETARIAL COMPLIANCE REPORT Listed entities are additionally required to submit a Secretarial Compliance Report to the Stock Exchange within Sixty days of end of Financial Year w.e.f. financial year ended 31st March 2019. Annual Secretarial Audit is a broad check on compliance with all laws applicable to a company like SEBI Act, Companies Act, Depositors Act, FEMA, SCRA and other industry specific laws ; whereas Secretarial Compliance Report is focused on the compliance of Regulations, Circulars and Guidelines of SEBI. Features of Secretarial Compliance Report: - The Secretarial Compliance report restricts itself to only SEBI Act and its regulations, circulars issued thereunder.
- It is an Exception report –
This report requires listing of compliances with the provisions of various regulations and circulars/ guidelines issued by SEBI, and explicitly mention matters that have not been complied with. - It will include a statement regarding the maintenance of proper records by the listed entity.
- It will include details of actions taken against the listed entity, its promoters/ directors/ material subsidiaries either by SEBI or by Stock Exchanges under the aforesaid Acts/Regulations and circulars/ guidelines issued thereunder.
- It will include actions taken by listed entity for compliance of observations in previous reports.
REASONS FOR BRINGING PROVISONS OF ANNUAL SECRETARIAL COMPLIANCE REPORT - The format of secretarial audit is not very transparent, it does not give details regarding what documents were examined and what was the extent of non-compliance.
- It has become a general practice to follow a standard format for Secretarial Audit Report and not many changes are being made to make the report adaptable to the specific company undergoing the secretarial audit.
In order to overcome the above mentioned challenges an Annual Secretarial Compliance Report will be prepared by the Listed Entities so as to present a transparent and detailed view of their compliance status regarding the rules and regulations made by SEBI. It must be noted that only the Listed Entities are required to submit a Secretarial Compliance Report and not their Material Unlisted Subsidiaries unlike Regulation 24A of the SEBI (LODR), 2015. Illustrative List of Areas to be kept in mind while developing Audit Plan v The Companies Act, 2013 and the rules made thereunder: - Maintenance of registers/records & making entries therein within the time prescribed therefor
- Whether the mandatory registers like register of members, register of debenture holders, etc. are maintained and updated or not.
- Whether the books of accounts are kept at the registered office of the company, if not whether form AOC-5 has been filed with the ROC or not.
- Filing of forms and returns as stated in the annual return, with the various authorities
- Whether Form MGT-14, DIR-12, MBP-1 etc have been filed as and when required under the Act or not.
- Whether form MGT-7 contains correct details regarding the
- Registered office of the company - Particulars of holding, subsidiary and associate companies - Shareholding pattern - Details regarding its Promoters, Directors, Key Managerial Persons and the changes made thereunder - Number of Meetings of the Board of Directors - Remuneration of key managerial personnel - Penalties or punishment imposed on the company - Whether the Annual Return states the facts as at the close of the aforesaid financial year correctly and adequately.
- Meetings of the Board of Directors or Committees and General Meetings of shareholders
- Whether proper notice and agenda was sent as stipulated under the Act.
- Whether the proof of sending the notice and agenda is preserved by the company.
- Whether a minimum of four Board Meetings have been conducted in a year or not and the gap between two Board Meetings does not exceed 120 days.
- Whether proper quorum was present or not.
- Whether the business transacted in the meeting of the Board was within its power and was not explicitly reserved to be exercised by the members in their meeting.
- Whether facility for attending the Board Meeting through Video Conferencing has been provided by the company or not.
- Whether any director attended the meeting through Video Conferencing, if yes, check whether they participated in any matter regarding discussion or voting that is not allowed to be discussed or voted upon through video conferencing.
- Whether E-voting has been conducted as per the provisions of the Act, if required.
- Whether disclosure of interest in Form MBP-1 has been recorded by the directors in the first Meeting of the Board in a Financial Year and whether any subsequent change regarding the same has been recorded or not.
- Whether Related Party Transactions have been recorded and proper approvals have been obtained for the same or not.
- Whether the draft minutes of the Board Meetings have been circulated within 7 days of the meeting or not.
- Whether such minutes have been approved by the Board or not.
- Whether the proceedings of the meetings of the Board, shareholders have been recorded in the minute book within 30 days of the meeting or not.
- Other matters to be checked:
- Whether company has filed form INC 22A (ACTIVE Form) or not.
- Whether DIR-3 – Director KYC has been filed before 30th April or not.
- Closure of Register of Members / Security holders, as the case may be;
- Advances/loans to its directors and/or persons or firms or companies referred in section 185 of the Act;
- Issue or allotment or transfer or transmission or buy back of securities/ redemption of preference shares or debentures/ alteration or reduction of share capital/ conversion of shares/ securities and issue of security certificates in all instances;
- Keeping in abeyance the rights to dividend, rights shares and bonus shares pending registration of transfer of shares in compliance with the provisions of the Act;
- Declaration/ payment of dividend; transfer of unpaid/ unclaimed dividend/other amounts as applicable to the Investor Education and Protection Fund in accordance with section 125 of the Act;
- Signing of audited financial statement as per the provisions of section 134 of the Act and report of directors in accordance with the Act;
- Constitution/ appointment/ re-appointments/ retirement/ filling up casual vacancies/ disclosures of the Directors, Key Managerial Personnel and the remuneration paid to them;
- Appointment/ reappointment/ filling up casual vacancies of auditors as per the provisions of section 139 of the Act;
- Approvals required to be taken from the Central Government, Tribunal, Regional Director, Registrar, Court or such other authorities under the various provisions of the Act;
- Acceptance/ renewal/ repayment of deposits;
- Borrowings from its directors, members, public financial institutions, banks and others and creation/ modification/ satisfaction of charges;
- Loans and investments or guarantees given or providing of securities to other bodies corporate or persons falling under the provisions of section 186 of the Act ;
- Alteration of the provisions of the Memorandum and/ or Articles of Association of the Company;
v Other Acts that come within the ambit of Secretarial Audit - The Securities Contracts (Regulation) Act, 1956 and the rules made thereunder;
- The Depositories Act, 1996 and the Regulations and Bye-laws framed 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;
- Competition Laws;
- Environment Laws;
- Reporting of compliances with the Listing Agreement;
- Examination and reporting of adequacy and efficiency of a Company’s systems and processes;
- Other Industry specific laws applicable on the company.
WAY FORWARD Secretarial Auditor’s role in Governance is vital. As organizations address the growing array of risks created by new technology, geopolitics, cyber security, and disruptive innovation, a vibrant and agile Secretarial audit function can be an indispensable resource supporting sound corporate governance.
CS Suresh Pandey Ms. Prerna Arora
Managing Partner, SPG & Associates Associate, SPG & Associates
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