Why Secretarial Audit is needed?
The objective of Secretarial Audit is to assure various stakeholders and regulators that the affairs of the company are being carried out in accordance with the laws, rules and regulations applicable to the Company.
Applicability of Secretarial Audit
As per Section 204(1) read with Rule 9 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following companies shall be required to conduct the Secretarial Audit:
- Every Listed Company
- Every Public Company having paid up share capital of INR 50 crores or more
- Every Public Company having turnover of INR 200 crores or more
Before the Companies Act, 2013 became effective, the Secretarial Audit was not mandatory to any company. It was being complied voluntarily by the companies. Now, the new Act requires the Secretarial Audit mandatory for certain public companies satisfying the above threshold limit. However, there is no restriction on the Private Companies to conduct Secretarial Audit, they may do so voluntarily.
Secretarial Audit is right step towards good Corporate Governance
- Comprehensive Secretarial Audit can prove to be an effective due diligence exercise leading to good corporate governance.
- It provides an assurance to the management that the affairs of the company are being conducted in a right manner and the owner’s stake is not exposed to unwarranted risk.
- This will also provide a level of comfort to the regulators that all the compliances of the applicable laws has been complied with and company has taken corrective measures to mitigate the risks associated due to non-compliances.
- All observations alongwith adverse remarks of Secretarial Auditor have to be reported in Board Report with management explanations.
- Since Board Report is available on public domains, Stakeholders and Regulators can easily access the legal compliance status of the Company in addition to financial compliance status.
- Thus, a comprehensive and honest Secretarial Audit with its mitigation strategy will keep the stakeholders interest protected.
Secretarial Audit is inevitable to even Private Companies
Although Section 204(1) applies to Public Companies only but Section 134 (5)(f) requires Board of every company, whether Public or Private, to device a proper and effective system to ensure compliance with the provisions of all applicable laws and that such systems are adequately monitored for its effectiveness. Thus, comprehensive Secretarial Audit or any Compliance Monitoring Tool covering all laws can provide such assurance to the Board.
Compliance Monitoring Tool from BlueLotus has been giving such assurance to large corporates for past 5 years. The Board is updated on compliance status on real-time basis, thus they are assured of controls mitigating the risk without manual intervention. The tool also assists in providing relevant inputs for completing Secretarial Audit.
Reporting of Secretarial Audit observations in Board Report
As per Section 204(1) the Secretarial Audit Report given by the Company Secretary in Practice, in MR-3 shall be annexed to the Board Report of the Company.
As per Section 134 (3)(f)(ii) and Section 204(3), all qualifications, reservations and adverse remarks, if any as expressed by the Secretarial Auditor, in the Secretarial Audit Report, has to be responded by the Directors in the Board’s Report.
Simply relying on the internal compliance status (manual MIS) can be a great risk to the Company, therefore the company is left to rely on third party verification of certain applicable laws. Thus, Secretarial Audit becomes a good choice to comply with regulatory needs.
Expected Deliverables from Secretarial Auditor
The Companies Act, 2013 has not specifically defined the “coverage of Secretarial Audit”. Although the Institute of Company Secretaries of India (ICSI) attempted to provide some clarity on the scope of Secretarial Audit, but fact remains, the comprehensiveness of the scope will have to be defined by the Auditor himself, to keep the interest of all the stakeholders protected.
Consequences of compliance gaps and risk exposure
Since the Secretarial Audit involves compliances of various laws, hence the non-compliance associated with such laws is varied and could lead to heavy penalties and/ or closure of establishment and/ or imprisonment of executives from Top Management.
As per Section 204(4), any contravention of the relevant provisions, the Company, every officer of the Company or the Company Secretary in Practice, who is in default shall be punishable with fine which may extend to INR 5,00,000.
Further, as per Section 134(8), every officer in default shall be punishable with imprisonment for a term which may extend to three years or fine which may extend to INR 5,00,000 or with both.
How BlueLotus could be helpful here?
We, at BlueLotus, have developed a customizable web based “Compliance Ecosystem” that provides complete compliance solution, across all laws and geographies. This tool covers ALL Central laws and State laws. For law’s specific to your industry, we have a team that will research and add to the data base and keep updated of respective amendments.
In case you like to see the detailed information, please visit our website link: http://www.bluelotusstrategy.com/consulting/compliance-management/
You may get back to us for any more details on above provisions or any other matter related to Companies Act, 2013 at below mentioned contact details-
Malavika Bhatia | <malavika.bhatia@bluelotusstrategy.com>
Monika Bhardwaj | <monika.bhardwaj@bluelotusstrategy.com>
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