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Insight on Secretarial Audit Report

Meaning

It is a process of verification of records and documents to check compliance with the provisions of various laws and rules/procedures, maintenance of books, records etc. by an independent professional to ensure that the company has complied with the legal and procedural requirements and also followed due processes.

Initiatives by MCA/History

The Ministry of Corporate Affairs, Government of India has issued CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009. The Guidelines, amongst other things, recommended the introduction of Secretarial Audit.

Section 204 of The Companies Act, 2013 & 2nd phase draft rules

Every listed company and a company belonging to other class of companies {having paid up share capital Rs.100 crores or more – 2nd phase draft rules from chapter XIII} as may be prescribed shall annex with its Board’s report a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed.

Company shall give all assistance and facilities to the company secretary in practice, for auditing the secretarial and related records of the company.

The Board of Directors, in their report shall explain in full, any qualification or observation or other remarks [based on popular doctrine of “Comply or Explain] made by the company secretary in practice in his report.

If a company or any officer of the company or the company secretary in practice contravenes the provisions of this section, 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 one lakh rupees but which may extend to five lakh rupees.

Need
  • Today, in India, the Corporate Sector is governed by a complex web of laws, rules and regulations viz., Company Law, Competition Law, Economic Laws, Securities and Capital Market Laws, Consumer Protection Laws, Industrial and Labour laws, Pollution Control Laws, Foreign Exchange Legislation, etc. Desired results cannot be achieved unless their implementation is geared up. In fact, lack of implementation of laws, with no mechanism of audit to check their compliances have resulted in various frauds/scams.

  • There have also been a large number of cases of mismanagement and misuse of public funds by several listed companies. Government, multilateral institutions, Banks and companies all have realized that the eye of the storm lies not in the adequacy of legislation but in its implementation and compliance.

  • The law enforcement agencies have not been able to tackle these problems and ensure effective enforcement of laws. Several companies that have fallen sick had committed violations of various statutory compliances.

  • Clause 49 Sub-clause I(C) (iii) of the Listing Agreement provides that “The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.” Accordingly, all listed companies have to have a system for reporting to the Board compliances with laws applicable to them. Hence, a Legal Compliance Reporting System is necessary.

Hence, Secretarial Audit is an effective tool for corporate compliance management. It helps ensure timely corrective measures when non-compliance is detected.

Beneficiaries
  1. Promoters
  2. Conduct company affairs in accordance with requirements of laws.

  3. Management
  4. Perform the delegated duties and responsibility competently, effectively and efficiently.

  5. Non-executive directors
  6. 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.

  7. Government authorities / regulators
  8. Reduce the burden of the law-enforcement authorities and enhance governance and level of compliance.

  9. Investors
  10. Assures that the company affairs are conducted within the applicable legal framework.

  11. Other Stakeholders

Financial Institutions, Banks, Creditors and Consumers are enabled to measure the law abiding nature of Company management.

Scope Comprises the following:
  1. the Companies Act, 2013 and the rules made under the Act;

  2. The Memorandum and Articles of Association of the Company;

  3. the Securities and Exchange Board of India Act, 1992 and the rules/regulations made under that Act;

  4. the Reserve Bank of India Act, 1934 and the rules/regulations/directions made under that Act;

  5. The Securities Contracts (Regulation) Act, 1956 and the rules made under that Act;

  6. The Depositories Act, 1996 and the regulations and bye-laws framed under that Act;

  7. The Foreign Exchange Management Act, 1999 and the rules and regulations made under that Act;

  8. Competition Act, 2002 and the rules and regulations made under that Act;

  9. The Listing Agreement;

  10. any other law specifically applicable to the Company.

Secretarial Audit Report shall be signed by the Practicing Company Secretary, who acts as the Secretarial Auditor in his individual capacity (and not as a partner or sole proprietor of a firm) by mentioning his CP Number.

Secretarial Audit-Periodicity

Proactive Secretarial Audit on a continuous basis would help the company in initiating corrective measures and strengthening its compliance mechanism and processes. It is advisable that the Secretarial Audit be carried out periodically (quarterly / half yearly/annually) and adverse findings if any, be reported to the Board immediately.

Reporting with Qualification

The qualification, reservation or adverse remarks, if any, shall be stated by the PCS at the relevant places in his/her report. It is recommended that the qualifications, reservations or adverse remarks of PCS, if any, should be stated in Bold or Italic format in the Secretarial Audit Report.

If the PCS is unable to form any opinion on any matter, he / she shall state that he/she is unable to form an opinion on that matter and the reasons thereof. If the scope of work required to be performed, is restricted on account of limitations imposed by the company or on account of circumstantial limitations (like certain books or papers being in custody of another person or Government Authority) the Report shall indicate such limitations. If such limitations are so material as to render the PCS incapable of expressing any opinion, the PCS should state that:

“In the absence of necessary information and records, he / she is unable to report compliance(s) by the Company”.

Professional Responsibility and Penalty for Incorrect Audit Report

Any failure or lapse on the part of PCS in issuing a Secretarial Audit Report may not only attract penalty for incorrect report and disciplinary action for professional or other misconduct under the provisions of the Company Secretaries Act, 1980 but also make him liable for any injury caused to any person due to his / her negligence in issuing the Secretarial Audit Report.

Pre-requisites to Secretarial Audit

Appointment

Appointment of Secretarial Auditor and remuneration payable to him should be preferably made by the members and at the least by the Board of Directors of the Company. As a prudent corporate practice, it is advisable that changes in the office of Secretarial Auditor are reported to the members in the Director’s Report.

Communication to earlier incumbent

Whenever a new Secretarial Auditor is appointed in place of the existing Secretarial Auditor, he/she should communicate the appointment to the earlier incumbent in writing by registered post, in view of the gist of relevant pronounced judgments apart from the provisions of clause (8) of Part I of the First Schedule to the Company Secretaries Act, 1980,

Assignment

After the appointment is carried out in the manner suggested, a letter of engagement shall be issued by the Company. Practicing Company Secretary should formally accept the letter of engagement.

It would be in the interest of the new Secretarial Auditor to attempt to procure at appropriate stage, authentic information about the remuneration paid to the earlier incumbent in view of the provisions under clause (11) of Part I of the First Schedule to the Company Secretaries Act, 1980.

In India a number of statutes contain under the heading “Offences by Companies” an identical provision regarding vicarious liability of Key Managerial Personnel [Section 2(51) of the Companies Act, 2013] for company’s offences. In Girdhari Lal Gupta v. D.N. Mehta AIR 1971 SC 2162, the Supreme Court has construed the expression ‘a person in charge and responsible for the conduct of the business of the company’ as to mean the person in overall control of the day-to-day business of the company. This ruling has been followed in a number of subsequent decisions.

 
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Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

 
  • By CS P. Surya Prakash  0 Comments   

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