Secretarial Audit in India – Process & Benefits

Ashish M. Shaji

08 Dec, 2020

Secretarial Audit is a compliance audit. It is a part of total compliance management in an organization. It is an effective tool when it comes to corporate compliance management. In this article we shall know more about Secretarial audit in India, including its process and benefits.

What is the use of Secretarial Audit in India?

It is a process to check compliance to the provisions of the law, rules, and regulations, maintenance of books, etc. by an independent professional to make sure that the company complies with the legal requirements and procedural needs and also follows the due process. It’s a mechanism to monitor compliance with the requirements of the stated law. 

The objective of Secretarial Audit can be summarized as:

• To check and report on compliances of applicable laws & secretarial standards;
• To point out the non-compliances and inadequate compliances;
• To safeguard the interest of stakeholders that includes the customers, employees, etc.
• To avoid any unwarranted legal actions or penalties by law enforcing agencies and by other persons.

Applicability of Secretarial Audit in India

The mandatory provisions regarding applicability of secretarial audit are:

• Every listed company;
• Every public company having a paid up share capital of Rs. 50 crore or more and having turnover of Rs. 250 crore or more;
• Company having outstanding loans or borrowing from banks or public financial institutions of Rs.100 crore or more.

Scope of Secretarial Audit

 The scope comprises verification of the compliances under the following:

• Companies Act, 2013 and the rules made there under;
• Securities Contracts (Regulation) Act, 1956 and the rules made there under;
• Depositories Act of 1996 and the rules made there under;
• Foreign Exchange Management Act of 1999^[1];
• Regulations and guidelines provided under the Securities and Exchange Board of India, Act 1992;
• Reporting on the compliance of secretarial standards issued by Institute of Company Secretaries of India; and
• Other laws as applicable specifically to the company that means all the laws that are applicable to specific industry.

Appointment of Secretarial Auditor

The appointment of the secretarial auditor is made by following the below mentioned steps:

• Firstly, obtain the consent of the secretarial auditor;
• Thereafter file a certified true copy of the resolution passed in the Board meeting with the Registrar of Companies in MGT-14;
• Make the appointment of such auditor in Board Meeting and fix the remuneration in the meeting.

Process of Secretarial Audit in India

The process of such audit is as given below:

• Appointment of Secretarial Auditor;
• Communication to earlier incumbent;
• Secretarial Auditor accepts the appointment;
• There after preliminary discussion takes place about the company with Secretarial Auditor;
•  A preliminary meeting takes place with the auditor;
• The audit plan is finalized and the staff is briefed;
• Testing, interview and analysis;
• The working papers are prepared;
• Audit summary for discussions; and
• Finally the secretarial audit report is submitted.

It may be noted that while preparing the audit report, the secretarial auditor shall consider:

• Instances of non-compliance during the audit period;
• Significant litigation or litigations initiated by the company or filed against company with case details.

Documents required for Secretarial audit

The following documents are required:

• Charter documents and statutory registers;
• Board and general meeting minutes and notices;
• The audited financial statements as well as last years’ secretarial audit report;
• Annual performance reports, lease deed, bonds and return;
• Registers maintained under the labour laws;
• Details of Remuneration and sitting fees paid to directors;
• Details of CSR amount;
• Details of bank account for dividend;
• ECB returns details.

Penalty on contravention of secretarial audit provisions

 In case where a company or an officer of such company or the company secretary in practice, breaches the provisions then the company or every officer of the company or the company secretary in practice who makes such breach, shall be punished with fine of minimum 1 lakh rupees and maximum of 5 lakh rupees.

Benefits of Secretarial Audit

The benefits of secretarial audit in India can be summed as under:

• It’s an effective mechanism to ensure the compliance with the procedural and legal requirements;
• It promotes the level of confidence to directors and key managerial personnel etc.
• It ensures that legal and procedural requirements are met that in turn allows the directors to concentrate on crucial business dealings;
• It strengthens the goodwill of the company for their regulators as well for their stakeholders;
• It is also an effective governance and compliance risk management tool;
• It, further, helps an investor in analyzing the compliance level of companies thereby increasing the reputation also;
• It administers professional discipline and also self-regulation;
• It may be an effective due diligence performance for the prospective acquirer of the company or a partner of a joint venture; and
• It helps to detect any non-compliance and helps in taking corrective action.

Future of Secretarial Audit in India

At present, secretarial audit in India is mandatory for listed companies and large public companies in terms of their paid up capital and turnover. The move is to take it to private companies also. Private limited companies have less disclosure requirements as compared to a public limited companies. This audit is applicable on private companies that’s subsidiary of listed entities.

Experts have welcomed this move as they expect it will improve compliance. The spate of failures of corporate governance in important entities in the past has necessitated the need to tighten the rules and beef up the oversight of the auditing and rating agencies while addressing the liquidity issues of the business.

Conclusion

Read our article:Why Secretarial Audit is Mandatory for Companies?