The Explanation to Section 205 provides that for the purpose of Section 205, the expression ‘Secretarial Standard’ means secretarial standards issued by the Institute of Company Secretaries of India constituted under Section 3 of the Company Secretaries Act, 1980 and approved by the Central Government.
Section 108 (10) of the Act provides that every company shall observe Secretarial Standards with respect to all general and Board meetings specified by the Institute of Company Secretaries of India.
The Institute has already issued the following Secretarial Standards:
- SS-1 – Secretarial Standards on Meeting of the Board of Directors
- SS-2 – Secretarial Standards on General Meetings
- SS-3 – Secretarial Standards on Dividend
- SS-4 – Secretarial Standards on Registers and Records
- SS-5 – Secretarial Standards on Minutes
- SS-6 – Secretarial Standards on Transmission of Shares and Debentures
- SS-7 – Secretarial Standards on Passing of Resolutions by Circulation
- SS-8 – Secretarial Standards on Affixing of Common Seal
- SS-9 – Secretarial Standards on Forfeiture of Shares
- SS-10 – Secretarial Standards on Board’s Report.
The Institute has constituted Secretarial Standards Board – 2014 including among others representatives of SEBI, NSE, ICAI, ASSOCHAM, CII and FICCI as its members.
Process of Secretarial Audit
The following are the steps involved in performing the Secretarial Audit:
- Preliminary discussions with the concerned Officers of the company
- Identification of the scope and objectives of the Secretarial Audit
- Meetings with teams/persons involved
- Informal discussions and understanding processes
- Applicable laws, rules and regulations to the company
- Considering the period of audit
- Analysis of data and understand the facts and circumstances
- Chronological events
- Preparation of check list
- Collection of data – identifying the areas to be collected
- Analysis of data, interpretation, findings and conclusion
- Identification of grey areas such as
- Ultra vires
- Donation to charities
- Belated allotment to foreign investors
- Transfer of shares
- Contravention of articles and agreement;
- Management representations, legal opinion, judicial decisions and articles relied on
- Preparation of working papers
- Observations and summary and findings
- Secretarial Audit Report.
Documents Required For Audit
- Memorandum of Association of the Company
- Articles of Association
- Certificate of incorporation
- Audited balance sheet
- Share Capital Account Ledger
- Register of Members
- Return of Allotment
- Name of Depositors, if any
- Minutes of Board Meetings;
- Documents related to loans obtained by the company;
- Register of Contracts, companies and Firms in which Directors are interested;
- Contracts made between the company and any of the related parties. Etc.
Obligation of the Company
Section 204 (2) provides that it shall be the duty of the company to give all assistance and facilities to the Company Secretary in practice, for auditing the secretarial and related records of the company.
Section 204(3) provides that the Board of Directors, in their report made in terms of Section 134 (3), shall explain in full any qualification or observation or other remarks made by Company Secretary in Practice in his report under this section.
Secretarial Audit Report
The Secretarial Audit report shall be in Form No. MR-3. The Secretarial Audit report is addressed to the members of the particular company. The following are to be contained in the Secretarial Audit:
- The name of the Company Secretary in practice who conducted the secretarial audit of the compliance of applicable provisions and the adherence to good Corporate Governance of the company. It needs to be stated that the Secretarial audit was conducted in a manner that provided him a reasonable basis for evaluating the corporate conducts/statutory compliances and expressing any options thereon.
- The audit should be based on his verification of the company’s books, papers, minute books, forms and returns filed and other records maintained by the company and also the information provided by the company, its officers, agents and authorized representatives during the conduct of Secretarial audit.
- The Company Secretary is to give a report as to whether the company has during the audit period covering the particular financial year complied with the statutory provisions applicable to the company and also the company has proper board processes and compliance mechanism in place to the extent. The Company Secretary has to give report that he has examined the books, papers, minute books, forms and returns filed and other records maintained by the company for the particular financial year according to the provisions of the Companies Act, 2013 and the rules made there under; The Securities Contracts (Regulation) Act, 1956 and the rules made there under; The Depositories Act, 1996 and the Regulations and Bye-laws framed there under; 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; The regulations and guidelines prescribed under SEBI Act, 1992 like the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;The SEBI (Prohibition of Insider Trading) Regulations,1992;The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009;The SEBI (Employee Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999;The SEBI (Issue and Listing of Debt Securities) Regulations, 2008;The SEBI (Registrars to an issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act dealing with client;The SEBI (Buy Back of Securities) Regulations, 1998 and any other laws specifically applicable to the company.
- The Company Secretary is to give report that he has also examined compliance with the applicable clauses of the Secretarial Standards issued by the Institute of Company Secretaries of India and The Listing Agreements entered into by the Company with stock exchange, if applicable.
- The Company Secretary is also to report that during the period under review the company has complied with the provisions of the Act, Regulations, Guidelines, Standards etc., mentioned above subject to his observations.
- The Company Secretary is to further report that the Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non Executive Directors and Independent Directors; the changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of this Act; adequate notice is given to all Directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least 7 days in advance, and a system for seeking and obtaining further information and clarification on the agenda items before the meeting and for meaning participation at the meeting; majority decision is carried through while the dissenting members’ view are captured and recorded as per the minutes.
- The Company Secretary is also required to report that there were adequate systems and processes in the company commensurate with the size and operation of the company to monitor and ensure compliance with the applicable laws, rules, regulations and guidelines.
- The Company Secretary is to give further details of specific events/actions having a major impact on the company’s affairs in pursuance of the laws, rules, For example-Public/Right/Preferential issue of shares/debentures/sweat equity etc.; Redemption/buyback of securities; Major decisions taken by the members in pursuance to Section 180 of the Companies Act, 2013; Merger/ amalgamation/reconstruction etc.,Foreign technical collaborationregulations, guidelines, standards etc., during the audit period.
Benefits of Secretarial Audit
- Secretarial Audit can be an effective due diligence exercise for the prospective acquirer of a company or controlling interest or a joint venture partner.
- It assures the owners and the management that the affairs of the company are being conducted in accordance with requirements of laws and that the owners stake is not being exposed to undue risk.
- It ensures the management of a company that those who are charged with the duty and responsibility of compliance with the requirements of law are performing their duties competently, effectively and efficiently, so that the people in charge of the day-to-day management of the company are not likely to be exposed to penal or other liability (and consequential risk and embarrassment) on account of non compliance with law.
- It ensures them that they have done everything required under law and that the company had complied with the laws and therefore, they are not likely to be exposed to action by law enforcement agencies for non compliance by the company.
- The Secretarial audit can assist bodies like SEBI, Stock Exchange, Financial Institutions, banks etc., to gauge or measure the levels of compliance and non compliance by the companies with whom they are concerned.
- Provides comfort to investors that the company has been conducting its affairs in accordance with laws and, therefore, their investments is safe and being taken due care.
- Secretarial audit will help to unearth and check these practices and also enable law enforcing agencies to take timely corrective action by bringing to book the guilty.
- In the era of Corporate Governance, Secretarial Audit will provide comfort to shareholders about the compliance as also to feel secure about their investments.
Section 204(4) provides that 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 Rs.1 lakhs but which may extend to Rs.5 lakhs.