Secretarial Compliance

Section 204 of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company
and companies belonging to other prescribed class of companies.
Such companies are required to annex a secretarial audit report with its Board’s report.
As per rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the
prescribed class of companies is as under:
(a) every public company having a paid-up share capital of fifty crore rupees or more; or
(b) every public company having a turnover of two hundred fifty crore rupees or more.
Company secretary in practice has been exclusively recognised for conducting secretarial audit. The section
further provides that Secretarial Audit Report is to be submitted in a format prescribed under rules. As per
sub-rule (2) of Rule 9, the format of the Secretarial Audit Report shall be in Form No. MR.3 (Annexure A).
Section 134 and Sub-section (3) of section 204 provides that the Board of Directors, in its report, shall
explain in full any qualification or observation or other remarks made by the company secretary in practice in
the secretarial audit report.

NEED FOR SECRETARIAL AUDIT
Secretarial Audit is the process of independent verification, examination of level of compliance of applicable
Corporate Laws to a company. The audit process if properly devised ensures timely compliance and eliminates
any un-intended non compliance of various applicable rules and regulations. An action plan of the Corporate
Secretarial Department is to be designed so as to ensure that all event based and time based compliances are
considered and acted upon. Secretarial Audit is to be on the principle of “Prevention is better than cure” rather
than post mortem exercise and to find faults. Broadly, the need for Secretarial Audit is:
• Effective mechanism to ensure that the legal and procedural requirements are duly complied with.
• Provides a level of confidence to the directors, officers in default, 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 compliance risk management tool.
• It helps the investor in analyzing the compliance level of companies, thereby increases the
reputation.
• Secretarial Audit is an effective governance tool.

Benefits and Beneficiaries of Secretarial Audit
The Benefits
The benefits of secretarial audit includes the following:
(a) It can be an effective due diligence exercise for the prospective acquirer of a company or controlling
interest or a joint venture partner.
(b) It assures the owners that management and affairs of the company are being conducted in
accordance with requirements of laws, and that the owners stake is not being exposed to undue
risk.
(c) It ensures the Management of a company that those who are charged with the duty and
responsibility of compliance with the requirements of law are performing their duties competently,
effectively and efficiently.
(d) It ensures the Management that the company has complied with the laws and, therefore, they are
not likely to be exposed to penal or other liability or to action by law enforcement agencies for noncompliance
by the company.
(e) Secretarial Audit being proactive measure for compliance with a plethora of laws, it will have a
salutary effect of substantially lessening the burden of the law-enforcement authorities.
(f) Instilling professional discipline and self-regulations.

The beneficiaries
The major beneficiaries of Secretarial Audit include:
(a) Promoters
Secretarial Audit will assure the Promoters of a company that those in-charge of its management
are conducting its affairs in accordance with requirements of laws.
(b) Management
Secretarial Audit will assure the Management of a company that those who are entrusted with the
duty and responsibility of compliance are performing their role effectively and efficiently. This also
helps the management to establish benchmarks for the compliance mechanism, review and
improve the compliances on a continuing basis.
(c) Non-executive directors
Secretarial Audit will provide comfort to the Non-executive Directors that appropriate mechanisms
and processes are in place to ensure compliance with laws applicable to the company, thus
mitigating any risk from a regulatory or governance perspective; so that the Directors not in-charge
of the day-to-day management of the company are not likely to be exposed to penal or other liability
on account of non-compliance with law.
(d) Government authorities/regulators
Being a pro-active measure, Secretarial Audit facilitates reducing the burden of the law-enforcement
authorities and promotes governance and the level of compliance.
(e) Investors
Secretarial Audit will inform the investors whether the company is conducting its affairs within the
applicable legal framework.
(f) Other Stakeholders
Financial Institutions, Banks, Creditors and Consumers are enabled to measure the law abiding
nature of Company management.

Professional Responsibility and Penalty for Incorrect Audit Report
While the Companies Act, 2013 provides a new and significant area of practice for Company Secretaries it
casts immense responsibility on the practicing company secretaries. Company Secretaries must take care
while conducting such audits. Any failure or lapse on the part of secretarial auditor may attract penalty for
incorrect report and disciplinary action for professional or other misconduct under the provisions of the
Company Secretaries Act, 1980. Further 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 view of this, a company secretary in practice will be attracting the penal provisions of section 448, for any
false statement in any material particulars or omission of any material fact in the Secretarial Audit Report.
However, a person will be penalised under section 448 in case he makes a statement, which is false in any
material particulars, knowing it to be false, or which omits any material fact knowing it to be material.
It is pertinent to note that 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) 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.

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