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A Complete Guide to Secretarial Compliance and Secretarial Audit

Various provisions have been incorporated under the Companies Act, 2013 and various SEBI regulations to ensure compliance with various governmental and regulatory requirements. Therefore, to identify instances of non-compliance and take corrective measures to safeguard the interest of various stakeholders, secretarial audits have been mandated for a certain class of companies. Let’s have a profound understanding of the same.

A. Secretarial Audit: Applicability

As per the provisions Section 204 of the Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2020, the secretarial audit is applicable for the following classes of companies

  1. Every listed company and
  2. Every public company having paid-up share capital of Rs. 50 crores or more or
  3. Every public company having a turnover of Rs. 250 crores or more or
  4. Every company having borrowings or outstanding loans from public financial institutions or banks of Rs. 100 crores or more.

The above-specified companies shall annex a secretarial audit report in Form MR-3 as provided by the company secretary in practice along with their board report. The above-mentioned figures i.e., share capital, turnover and outstanding loans and borrowings shall be taken as on the last date of the audited financial statements. The company shall provide all facilities and assistance to the CS in practice for the conduct of the secretarial audit.

[Implication: As most of the applicability criteria apply to public companies, secretarial audit applicability for the private company primarily gets triggered when its outstanding loans or borrowings exceed Rs. 100 crores or more.]

The objectives of the secretarial audit are:

1)    To ensure compliance with the applicable laws and secretarial standards
2)    To identify non-compliances or inadequate compliances
3)    To ensure the protection of various stakeholders and safeguarding their interests
4)    To protect the company against any legal and penal actions by various regulatory authorities and the government.

Penal Provision

In case of non-compliance with the above provisions, penal action under section 204 of the Companies Act, 2013 is attracted which states that the company, any officer of the company, and the CS in practice who is in default and contravenes the provisions of this section shall be liable to a penalty of Rs. 2 lakhs.

Secretarial Audit Report Format

Click Here to know the format of the Secretarial Audit Report in Form MR-3.

Secretarial Audit Checklist

As the secretarial audit is primarily concerned with ensuring compliances with various laws applicable to the companies, the following areas are covered under the secretarial audit:

1)    Companies Act, 2013 (Incl. rules thereunder)
2)    Securities Contract (Regulation) Act, 1956 (Incl. rules thereunder)
3)    The Depositories Act, 1996 (Incl. regulations and bye-laws thereunder)
4)    Foreign Exchange Management Act, 1999 (Incl. rules and regulations to the extent of Foreign Direct Investment (FDI), External Commercial Borrowings (ECB) and Overseas Direct Investment (ODI))
5)    The following Regulations and Guidelines of Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):

  • The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
  • The SEBI (Prohibition of Insider Trading) Regulations, 1992;
  • The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009;
  • The SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
  • The SEBI (Issue and Listing of Debt Securities) Regulations, 2008;
  • The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993;
  • The SEBI (Delisting of Equity Shares) Regulations, 2009; and
  • The SEBI (Buyback of Securities) Regulations, 1998;

6)    Specific laws applicable to the company
7)    Secretarial standards issued by the Institute of Company Secretaries of India (ICSI)
8)    Listing agreements between stock exchanges and the concerned company.

To verify compliances with the above, the secretarial auditor shall conduct an examination and verification of books, returns, papers, minute books, forms, and other records of the company. Any instance of non-compliance, qualifications, reservations, observations, and adverse remarks shall be reported.

B. Secretarial Compliance Report

Apart from the Companies Act, 2013, SEBI (LODR) Regulations, 2015 also puts a check on the compliance level of every listed entity and its material unlisted subsidiary incorporated in India.

[‘Material subsidiary’ means a subsidiary company having income and net worth exceeding 10% of the consolidated income and net worth of the holding company and all its subsidiaries in the immediately preceding financial year.]

Secretarial Compliance Report was introduced to overcome the shortcomings of the secretarial audit including non-inclusion of the extent of non-compliance and the issues examined.

As per Regulation 24A of the SEBI (LODR) Regulations, all listed companies and their material unlisted subsidiaries are required to submit a Secretarial Compliance Report to the stock exchanges where the securities of the companies are listed within 60 days after the end of the Financial Year. The secretarial compliance report is limited to the SEBI Act, its regulations, circulars, orders, and guidelines which itself are a comprehensive set of laws having a broad coverage over the capital market.

Relaxation has been provided whereby the listed entities and material unlisted subsidiaries shall use the Form MR-3 (as stated under the Companies Act, 2013) to comply with the requirements of Regulation 24A of the SEBI (LODR) Regulations to avoid duplication of work.

Therefore, the above secretarial compliances are one of the most important tools for ensuring compliance with legal requirements and safeguarding the interests of the various stakeholders of the companies and the capital markets.

 

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