The business models in India are incorporated under one or another form of an organization governed by various Acts and rules and every organization has to ensure that it has complied with the statutory and regulatory compliance.
All these laws are to ensure the business enterprise carries on business in a just and equitable manner and protects its interest of its various stakeholders. Thus not only the financial aspects also those of non-financial and compliance aspects also to comply in order with the Laws.
These laws impose accountability to the persons who are responsible for compliance and liable for punishment for non-compliance including Key Managerial Personnel and officers who have been designated to ensure compliance with applicable laws, rules, and regulations applicable to the company.
Under Companies Act, 2013
Secretarial Audit is one of the vital ingredients that the Companies Act, 2013 has given birth to. Section 204 of the Companies Act deals with the applicability of secretarial audit and the obligation of the company to undergo the secretarial audit.
A Secretarial Audit aims at bringing in a mechanism to ensure the compliance of all laws, rules, regulations, etc that are applicable to the company for the time being in force. In the ever-changing compliance environment, the perspective of the lawmakers to ensure transparency and governance we come across statutory updates every other day. In every such complex update, the accountability and responsibility of the promoters, directors, key managerial personnel, and officers in management keep growing. The more intriguing aspect is, it does a loop in the Practicing Professionals into this circle and hold them responsible for the compliance audit they performed.
The Company Secretary in Practice is entrusted to perform this Audit. Ensuring proper compliance mechanism, whether all legal and procedural requirements of the law are met. Any observation/default needs to be highlighted to the management for their corrective action. Ensuring compliance is not a one-time activity, it’s a continuous process.
Section 204 sets out the applicability of the provision to certain companies, namely
i. Every listed company
ii. A public company with paid-up capital greater than 50 crores or more
iii. A public company with a turnover greater than 250 crores or more
iv. Every company having outstanding loans or borrowings from banks or public financial institutions of 100 crore rupees or more.
These companies are mandated to annex Secretarial Audit Report issued by a Company Secretary in Practice to its Board Report. The format of such Report shall be in Form MR 3.
The act also states that only the Company Secretary in Practice, who is a member of the Institute of Company Secretaries of India (ICSI) can perform/ carry out a secretarial audit of these companies.
The obligation of the Company:
The company has to comply with the aforesaid compliance. Firstly during the Audit, the company shall provide all assistance, support, documentation, secretarial records, or relevant information to the Company Secretary in Practice.
In case of any non-compliance or adverse remarks that the Company Secretary in Practice has reported as an observation/ qualification, the Board of Directors of the company shall provide a detailed explanation for the same in the Boards Report.
Contravention of provisions of this section by the company or Company Secretary in practice, the company, it’s every officer 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.
Scope of the Secretarial Audit:
Secretarial Audit is a process of verifying compliance with applicable laws, regulations, and guidelines mainly covering the non-financial aspects. This exercise helps to evaluate the business impact and true compliance position of the company particularly to enhance the capabilities of the management and also mitigates risk both business & reputation risks to a great extent.
The Secretarial Audit tends to be independent verification of the records, books, papers, and documents by a Company Secretary in Practice to check the compliance status of the company according to the provisions of various statutes, laws and rules & regulations and also to ensure the compliance of legal and procedural requirements and processes followed by the company.
Coming to the Scope of Secretarial Audit, the coverage area is growing day by day. On part of the companies, to ensure better compliance and to be on top of governance Companies come forward and extend the scope of the laws that are subjected to audit.
Similarly, the Company Secretary in Practice also has brought in their extended interest to ensure the companies have exhaustive and complete compliance with overall applicable laws in force that are relevant to the business and structure of the company.
In current practice, we can come across the common set of laws under which the examination of books, papers, minute books, forms or returns filed, and other records maintained by the Company are carried out as part of Secretarial Audit. The audit substantially covers the below laws namely:
A. The Companies Act, 2013 and the rules made there under;
B. The Securities Contracts (Regulation) Act, 1956 and the rules made there under;
C. The Depositories Act, 1996 and the Regulations and Bye-laws framed there under;
D. The 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;
E. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-
i. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
ii. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
iii. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
iv. The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and Securities And Exchange Board Of India (Share Based Employee Benefits) Regulations, 2014;
v. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;
vi. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
vii. 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;
viii. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
F. Other Applicable Laws
i. Factories Act, 1948
ii. Payment of Wages Act, 1936
iii. The Minimum Wages Act, 1948
iv. Employees’ State Insurance Act, 1948
v. Provident Fund Act 1952 & Employees’ Pension Scheme 1995
vi. The Payment of Bonus Act, 1965,
vii. Payment of Gratuity Act, 1972,
viii. The Water (Prevention & Control of Pollution) Act, 1974, Read with Water (Prevention &Control of Pollution) Rules, 1975,
On par with the best practices in the profession, the Audit widely ensures the coverage of the below standards and regulations as well, which are applicable to the company:
i. Secretarial Standards issued by The Institute of Company Secretaries of India.
ii. SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
Browse the related Secretarial Audit Compliance Management video lecture
Detection of Fraud and Reporting
Detection of fraud and reporting in a Secretarial Audit not only about having a limited set of laws and verifying its compliance. It also requires the company secretary in practice to focus beyond it.
For the first time in the history of Company Law, the Companies Act, 2013 has been defined in the Act. It states that “fraud” in relation to affairs of a company, includes any act, omission, concealment of any fact or abuse of position committed with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
i. “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;
ii. “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.
Therefore the general parlance and wider view is a necessity in Secretarial Audit
Fraud Detection & Reporting:
Fraud may have adversely impacted the organization in monetary or non-monetary terms as well. The essence of the audit is to unravel the potential fraud observations and examine the same with the utmost importance.
In here the Auditor can exercise his freedom to look into the internal policies say for example whether the company has any anti-corruption and/or anti-bribery policy
On the course of the audit, if the auditor detects/ suspects any commission of fraud, he shall endeavor to collect further evidence for the same. The suspicion may arise on the perusal of internal control systems, a perusal of any complaints under the whistleblower mechanism, reports of the other auditors, etc. However, the auditor has to independently examine its validity and existence on his own analysis.
Before reporting the fraud, he shall ensure to collect sufficient evidence which substantiates his suspicion of the commission of the fraud against the Company by the employees and officers of the company. The auditor shall ensure that he has sufficient cause and reason to believe that there is a commission of fraud and should have justifiable grounds for proving its’ existence/ past existence and impact suffered or to be suffered by the company.
On detection of such fraud, the Auditor may communicate directly with the internal auditors and statutory auditors to verify whether they have suspected/identified any fraud during the course of their respective audit.
The Auditor shall report and highlight the fraud to Audit Committee/Central Government as per the process laid down in the Companies Act, 2013 and include the same in the Secretarial Audit Report. He shall also ensure that if the Audit Committee has given any comments on such suspected fraud, the Board of Directors have included the details of the same in their report
It is important that include the same in the Secretarial Audit Report as it forms as Annexure to Directors Report to the members of the Company
Similarly, if a fraud has been detected by management, which is not required to be reported by the Auditor to the Audit Committee/Central Government in terms of the provisions of section 143(12) of the Companies Act, 2013, it shall be included in the Secretarial Audit Report.
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