Mastering Secretarial Audit Compliance for Robust Governance

Secretarial Audit Compliance is a critical aspect of ensuring robust corporate governance for specified companies in India. For many organisations, navigating the intricacies of secretarial audits can present significant challenges, from identifying applicable provisions to meticulous documentation and reporting. A lapse in this area not only attracts penalties but also erodes stakeholder trust and weakens the overall corporate governance framework. Understanding the ‘what’, ‘why’, and ‘how’ of Secretarial Audit Compliance is therefore paramount for company secretaries, CFOs, and boards alike.

What is Secretarial Audit & Its Applicability?

Secretarial Audit Compliance stands as a cornerstone of corporate regulatory oversight in India. Mandated under Section 204 of the Companies Act, 2013, read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, this audit provides an independent check on a company’s adherence to the plethora of laws, rules, regulations, and standards applicable to it. Beyond the Companies Act, the scope of a Secretarial Audit extends to compliance under various other acts, rules, and regulations. For listed entities, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) further amplify the importance and scope of this audit, requiring listed companies and their material unlisted subsidiaries incorporated in India to annex the Secretarial Audit Report with the Board’s Report.

The applicability of Secretarial Audit is triggered by specific thresholds for public companies and is mandatory for all listed companies. A public company needs to obtain a Secretarial Audit Report if it has:

a paid-up share capital of ten crore rupees or more; or
turnover of fifty crore rupees or more; or
outstanding loans or borrowings from public financial institutions or banks of twenty-five crore rupees or more.

These thresholds ensure that companies with significant public interface or financial leverage are subjected to stringent compliance checks. The primary purpose is not merely to identify non-compliance but to instill a culture of compliance, enhance transparency, and strengthen the overall corporate governance framework. A successful Secretarial Audit Compliance exercise is a testament to a company’s commitment to ethical conduct and regulatory adherence, fostering trust among shareholders, investors, and other stakeholders.

The Role of the Company Secretary in Secretarial Audit

The Company Secretary (CS), whether internal or engaged through external company secretary services like Vivek Hegde & Co, plays a pivotal role in the Secretarial Audit process. They are the custodians of corporate records and the frontline managers of secretarial compliance. The internal CS is responsible for maintaining meticulous records, minutes of meetings, registers, and filings required under various laws. Their preparedness and ability to provide accurate and complete information significantly impact the efficiency and outcome of the audit.

When an external practicing Company Secretary is appointed as the Secretarial Auditor, the internal CS acts as the primary point of contact and facilitator. They coordinate the provision of documents, explain internal processes, and assist the auditor in their verification procedures. Companies often engage external firms like Vivek Hegde & Co not only for the audit itself but also for ongoing compliance monitoring and preparation throughout the year. Such proactive engagement ensures that potential compliance gaps are identified and rectified well before the formal audit commences. Vivek Hegde & Co offers comprehensive board support, helping companies maintain flawless records and adhere to board meeting best practices, which are crucial inputs for the Secretarial Audit.

The auditor relies heavily on the integrity and completeness of the information provided. Therefore, the internal CS must ensure that all ROC filing requirements are met timely and accurately, statutory registers are updated, and minutes of board and shareholder meetings are properly recorded and signed. This meticulous groundwork, often supported by external experts in company secretary services, lays a solid foundation for a smooth and effective Secretarial Audit Compliance process. Companies that invest in strengthening their internal secretarial function and leverage external expertise find the audit process to be less stressful and more value-adding.

Key Areas Covered by a Secretarial Audit

The scope of a secretarial audit is extensive and multi-faceted, covering compliance under numerous statutes and regulations. The auditor is required to verify compliance not just with the Companies Act, 2013, but also with:

Securities Contracts (Regulation) Act, 1956 (SCRA), and the rules made thereunder;
Depositories Act, 1996, and the rules made thereunder;
Foreign Exchange Management Act, 1999 (FEMA), and the rules and regulations made thereunder, specifically for FEMA compliance as applicable to various transactions like foreign investments, external commercial borrowings, etc.;
Regulations and Guidelines issued under the Securities and Exchange Board of India Act, 1992 (SEBI Act). This is particularly critical for listed companies and includes SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT), SEBI (Share Based Employee Benefits and Digital Platforms) Regulations, 2021 (covering ESOP compliance), and others relevant to capital markets and investor protection.
Other laws specifically applicable to the company, such as environmental laws, labour laws, competition law (Competition Act, 2002), etc. Identification of these “other laws” requires careful consideration of the company’s industry, operations, and location.
Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI), such as SS-1 (Meetings of the Board of Directors) and SS-2 (General Meetings). Adherence to these standards is mandatory under the Companies Act, 2013, and forms a significant part of the Secretarial Audit Compliance review.

The auditor examines various documents, including statutory registers, minutes books of board and committee meetings, shareholder meetings, annual returns, financial statements, agreements, and other relevant records. They assess whether the company has obtained necessary approvals from the Central Government, NCLT, RBI, SEBI, or other authorities. The audit also looks at corporate actions such as changes in capital structure, borrowings, related party transactions, and compliance with conditions mentioned in various agreements or approvals. A thorough understanding of these diverse legal frameworks is essential for effective governance risk management and forms the bedrock of a robust Secretarial Audit Compliance process.

Steps in the Secretarial Audit Process

The Secretarial Audit process is a structured engagement designed to systematically review a company’s compliance posture. The key steps involved are:

1. Appointment of Secretarial Auditor: The company’s board appoints a Company Secretary in whole-time practice as the Secretarial Auditor. This appointment is usually made in the Board Meeting and intimated to the Registrar of Companies (ROC).
2. Acceptance of Appointment: The appointed auditor formally accepts the engagement, defining the scope, terms, and conditions.
3. Planning the Audit: The auditor develops an audit plan, understanding the company’s business, structure, and the laws applicable to it. This involves identifying the key compliance areas to be reviewed.
4. Information Gathering & Documentation: The company, primarily through its Company Secretary, provides the auditor with access to all necessary records, documents, and information. This includes:
  - Constitutional documents (Memorandum and Articles of Association)
  - Statutory Registers (Register of Members, Directors, Charges, etc.)
  - Minutes books of Board Meetings, Committee Meetings, and General Meetings
  - Annual Returns and Financial Statements
  - Copies of ROC filings & registrations – Learn more about ROC Filing Requirements
  - Agreements and Contracts (Joint Ventures, Collaborations, Loan Agreements, etc.)
  - Permissions and approvals from government or regulatory authorities
  - Details of share capital changes, transfers, and share certificates
  - Information related to loans, borrowings, investments
  - Details of related party transactions
  - Compliance certificates filed during the year

Vivek Hegde & Co assists companies in maintaining and organizing these documents efficiently, streamlining the information-gathering phase.

Verification and Testing: The auditor examines the provided documents, performs tests, and makes inquiries to verify the company’s compliance with applicable laws and regulations. This involves checking if proper procedures were followed for corporate actions, if filings were made within prescribed timelines, and if statutory registers are correctly maintained.
Identifying Non-Compliances: Based on the verification, the auditor identifies instances of non-compliance, deviations from Secretarial Standards, or inadequate processes.
Reporting (MR-3 Format): The auditor prepares the Secretarial Audit Report in the prescribed Form MR-3. This report provides an opinion on whether the company has complied with the provisions of specified Acts, Rules, Regulations, and Standards. Any observations, qualifications, or adverse remarks are highlighted in the report. Vivek Hegde & Co ensures the Secretarial Audit Report is drafted meticulously, adhering strictly to the MR-3 format and providing clear, actionable observations.
Submission to the Board: The Secretarial Audit Report is submitted to the Board of Directors. The Board is required to explain in its Board’s Report any qualifications or observations made by the Secretarial Auditor.
Annexure to Board’s Report & Filing: The Secretarial Audit Report is annexed to the Board’s Report and filed with the Registrar of Companies as part of the company’s Annual Return. For listed companies, it is also submitted to the stock exchanges.

Executing these steps requires expertise and attention to detail. Vivek Hegde & Co specializes in providing comprehensive secretarial audit services, guiding companies through each phase and ensuring that the process is smooth, thorough, and compliant.

Challenges in Secretarial Audit Compliance

Despite the clear mandate, achieving seamless Secretarial Audit Compliance can be challenging for many organizations. Some common hurdles include:

Keeping Pace with Regulatory Changes: Corporate laws and regulations in India are dynamic, with frequent amendments and new pronouncements from MCA, SEBI, RBI, and other bodies. Staying updated with these changes and implementing them across all corporate functions is a significant challenge.
Maintaining Comprehensive and Accurate Records: The audit requires access to a vast array of documents, spanning several years. Ensuring that all minutes are signed, registers are updated, and filings are properly recorded and retrievable can be an administrative burden, particularly for companies with complex structures or high transaction volumes. Timely and accurate ROC filing requirements are often a bottleneck.
Coordination Across Departments: Compliance is not just the responsibility of the secretarial department; it involves finance, legal, HR, operations, and the board. Effective coordination and information flow across these departments are essential but often difficult to achieve.
Interpreting Complex Provisions: Many legal and regulatory provisions can be open to interpretation. Ensuring consistent and compliant application across all corporate actions requires deep legal and secretarial expertise.
Time Constraints: Secretarial audit is often conducted concurrently with financial audits and annual reporting processes, placing significant time pressure on internal teams.

Addressing these challenges proactively is key to ensuring successful Secretarial Audit Compliance. This is where leveraging specialized external expertise becomes invaluable. Firms like Vivek Hegde & Co provide the necessary knowledge, structure, and support to overcome these obstacles.

Best Practices for Smooth Secretarial Audit

Companies can adopt several best practices to not only ease the Secretarial Audit process but also strengthen their overall corporate governance framework. These include:

Proactive Compliance Monitoring: Don’t wait for the audit to check compliance. Implement a robust internal compliance calendar and conduct periodic checks throughout the year. This helps identify and rectify issues early. Vivek Hegge & Co offers tailored corporate compliance monitoring services to keep companies on track.
Implement a Strong Corporate Governance Framework: A well-defined framework ensures clarity on roles, responsibilities, and processes. It promotes ethical conduct, transparency, and accountability. A strong corporate governance framework simplifies compliance across the organization. Vivek Hegde & Co specializes in governance framework development.
Maintain Meticulous Records: Treat every corporate document – minutes, registers, filings, agreements – with utmost importance. Ensure they are accurate, complete, and easily accessible. Digital record-keeping systems can be highly beneficial.
Ensure Board and Committee Effectiveness: Follow board meeting best practices, including proper notice, agenda setting, quorum, discussions, and minute recording. Effective committees (Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee) are crucial for robust oversight. Vivek Hegde & Co provides expert board support.
Conduct Internal Reviews and Audits: Periodically subject key compliance areas to internal reviews or mini-audits. This helps identify weaknesses in processes before the external Secretarial Audit. Creating a comprehensive secretarial compliance checklist can aid this process.
Invest in Training: Ensure that relevant personnel, including board members and key managerial personnel, are aware of their compliance obligations.
Leverage Technology: Utilize compliance management software to track deadlines, manage documents, and monitor changes in regulations.
Engage Expert Company Secretary Services: Partnering with seasoned professionals like Vivek Hegde & Co provides access to specialized knowledge, helps navigate complex legal provisions, and ensures that best practices are embedded in your operations. Their expertise in areas like ROC filing requirements, board support, and secretarial audit preparation is invaluable. They also offer support in areas like fundraising advisory and ESOP compliance, which have compliance implications reviewed during the audit.

By integrating these practices, companies can transform the Secretarial Audit from a daunting annual exercise into a confirmation of their ongoing commitment to excellent Secretarial Audit Compliance and corporate governance.

Actionable Tips for Corporate Secretaries

Here are 5 actionable tips for improving your Secretarial Audit Compliance:

Establish a clear, detailed calendar for all compliance events and ROC filing requirements throughout the year.
Conduct periodic internal reviews using a comprehensive secretarial compliance checklist to identify and address gaps early.
Ensure all board and committee meetings strictly follow board meeting best practices and maintain impeccable minutes and attendance records.
Implement and actively manage a robust governance risk management system to proactively identify and mitigate compliance risks.
Partner with experienced external company secretary services like Vivek Hegge & Co for ongoing support, expertise, and validation of your internal processes.

Why Secretarial Audit Compliance Matters

Ensuring diligent Secretarial Audit Compliance extends far beyond meeting statutory obligations. Operationally, it provides the board and management with confidence that the company’s affairs are conducted in accordance with the law, reducing the risk of legal disputes, penalties, and business disruption. It forces internal discipline in maintaining records and following procedures, leading to smoother day-to-day operations and more efficient decision-making processes. Adherence to the compliance framework builds a strong internal control environment.

Financially, non-compliance can lead to substantial fines and penalties imposed by regulatory bodies, which directly impact the bottom line. Furthermore, non-compliance and poor corporate governance framework can damage a company’s reputation among investors, lenders, and partners, making it difficult to raise funds, secure loans, or enter into joint ventures. A strong track record of Secretarial Audit Compliance signals to all stakeholders that the company is well-managed, transparent, and committed to long-term sustainability, thereby enhancing shareholder value and facilitating smoother financial transactions.

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Key steps for Secretarial Audit Compliance:

Appoint a qualified Company Secretary in Whole-time Practice as Secretarial Auditor.
Prepare and provide access to all corporate records, registers, and documents.
Facilitate the auditor’s verification process against applicable laws and standards.
Review and address findings presented in the Secretarial Audit Report (Form MR-3).
Annex the report to the Board’s Report and file it with the ROC and Stock Exchanges (for listed companies).

FAQs on Secretarial Audit Compliance

Who is required to get a Secretarial Audit done?

Listed companies and certain public companies exceeding specified paid-up share capital or turnover thresholds must get a Secretarial Audit annually as per the Companies Act, 2013.

What is the primary objective of a Secretarial Audit?

Its main goal is to check and report on the company’s compliance with various corporate laws, rules, regulations, and secretarial standards applicable during the financial year.

What document is issued after the Secretarial Audit?

The appointed Secretarial Auditor issues a Secretarial Audit Report in the prescribed Form MR-3, which details their findings and opinion on the company’s compliance status.

Can an internal professional conduct the Secretarial Audit?

No, the Secretarial Audit must be conducted by an independent professional – a Company Secretary holding a Certificate of Practice issued by ICSI.

What laws does a Secretarial Audit primarily cover?

It covers the Companies Act, SEBI laws, FEMA, Depositories Act, Competition Act, labour laws, environmental laws (if applicable), and Secretarial Standards issued by ICSI.

Resources for Secretarial Audit Compliance

For more information on Secretarial Audit Compliance and related topics:

Conclusion

Mastering Secretarial Audit Compliance is not just a regulatory burden, but a strategic imperative for building trust and ensuring long-term sustainability. By focusing on proactive compliance, robust record-keeping, and leveraging expert guidance, companies can navigate the complexities effectively. Ensuring thorough Secretarial Audit Compliance strengthens your corporate governance framework and protects your business, enhancing credibility with stakeholders.

Vivek Hegde & Co

Navigating Secretarial Audit Compliance: A Guide for Businesses