Who is required to undergo a secretarial audit under current regulations?
Is your company’s legal and regulatory compliance on solid ground? How can you be sure? For many growing businesses in India, the answer lies in a crucial, yet often misunderstood, process. Understanding the secretarial audit requirements is not just about ticking a box; it’s a fundamental aspect of good corporate governance that protects your business, builds stakeholder trust, and helps you avoid significant financial penalties. Think of a secretarial audit as a comprehensive ‘health check’ for your company’s compliance with a wide array of laws and regulations. This guide will break down the secretarial audit requirements in India in an easy-to-understand format, specifically for directors and business owners who need clarity on this vital subject.
What is a Secretarial Audit? A Deep Dive into Corporate Compliance
A secretarial audit is a systematic and independent verification of a company’s records, processes, and systems to ensure it complies with the provisions of various corporate and economic laws. Its purpose extends far beyond a simple checklist; it is an effective tool for corporate governance that provides the Board of Directors and management with peace of mind. The audit scrutinizes whether the company has been adhering to the legal and procedural requirements laid down by different statutes, thereby strengthening its compliance framework. It acts as a diagnostic tool, identifying areas of non-compliance early on so that corrective actions can be taken before they escalate into serious legal or financial issues.
Key Areas Covered in a Secretarial Audit
The scope of a secretarial audit is extensive, designed to provide a holistic view of a company’s adherence to the law. The auditor meticulously examines compliance with a broad range of statutes. The core of this verification process involves checking compliance with:
- The Companies Act, 2013 and the rules made thereunder. This includes everything from the proper maintenance of statutory registers and minutes to the timely filing of forms with the Registrar of Companies.
- The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder, which is critical for listed entities.
- Regulations and Guidelines prescribed by the Securities and Exchange Board of India (SEBI), such as the Listing Obligations and Disclosure Requirements (LODR), which are mandatory for companies whose shares are traded on stock exchanges.
- The Foreign Exchange Management Act, 1999 (FEMA) and the rules and regulations made thereunder, which is crucial for companies dealing with foreign investment or transactions.
- Other specific laws that may be applicable to the company depending on its industry, such as banking regulations, insurance laws, or environmental laws.
Furthermore, the audit also confirms that the company is operating within the powers defined by its foundational documents—the Memorandum of Association (MOA) and the Articles of Association (AOA).
Who is Qualified to Conduct This Audit?
The responsibility of conducting such a thorough and critical audit is placed on highly qualified professionals. According to the Companies Act, 2013, only a member of the Institute of Company Secretaries of India (ICSI) who holds a certificate of practice, known as a Practicing Company Secretary (PCS), is authorized to conduct a secretarial audit and furnish the report. This ensures that the audit is performed by an expert with specialized knowledge in corporate law and governance, maintaining the integrity and quality of the compliance check. The PCS must be independent and cannot be the company’s internal or statutory auditor to avoid any conflict of interest.
The Final Report: Understanding Form MR-3
The culmination of the audit process is the Secretarial Audit Report, which is prepared in a prescribed format, Form MR-3. This is not just an internal document; it is a formal report that must be submitted to the company’s stakeholders. The report provides observations, qualifications, or adverse remarks, if any, on the company’s compliance status. As per the regulations, this Form MR-3 report is a mandatory annexure to the Board’s Report, which itself is a part of the company’s Annual Report. This public disclosure ensures transparency and holds the management accountable for the company’s compliance practices.
The Core Question: Who Needs a Secretarial Audit in India?
This is the central question for many company directors. The applicability of a secretarial audit is not universal; it is determined by the type of company and certain financial thresholds defined by law. Understanding secretarial audit requirements for firms begins with identifying which category your company falls into. The rules are laid out clearly under Section 204 of the Companies Act, 2013, read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. For the most up-to-date regulations, it is always advisable to refer to the official MCA portal.
The Mandatory Rule for Listed Companies
The regulations are simplest for companies trading on a stock exchange. If your company is a listed entity, the requirement is straightforward and absolute. Every listed company in India is mandatorily required to undergo a secretarial audit each financial year. This rule is in place to protect the interests of the public shareholders and ensure the highest standards of governance and transparency in companies that raise capital from the public market. There are no turnover or capital-based exemptions for listed companies.
Mandatory Secretarial Audit Guidelines for Public Companies
For unlisted public companies, the requirement is based on their financial size. These mandatory secretarial audit guidelines India aim to bring larger, systemically important companies under the scanner to ensure their compliance frameworks are robust. A secretarial audit is mandatory for a public company if it meets EITHER of the following criteria as on the last day of the audited financial year:
- Its paid-up share capital is Fifty Crore Rupees or more.
- Its turnover is Two Hundred Fifty Crore Rupees or more.
It’s crucial to note that only one of these conditions needs to be met. For instance, a public company with a turnover of ₹300 Crore but a paid-up capital of only ₹10 Crore would still be required to conduct a secretarial audit.
What About Private Companies?
This is a common point of confusion for many business owners. Generally, a standalone private limited company is NOT required to undergo a secretarial audit, regardless of its turnover or paid-up share capital. The law currently exempts private companies from this specific compliance requirement.
However, there is a very important exception to this rule. The secretarial audit under current regulations in India extends to certain private companies based on their relationship with public companies.
- Important Caveat: A private company that is a subsidiary of a public company which meets the financial thresholds mentioned above (paid-up capital of ₹50 Crore or more, or turnover of ₹250 Crore or more) is required to undergo a secretarial audit. The law treats such a subsidiary as an extension of the parent public company for compliance purposes, ensuring that the entire corporate group adheres to the same high standards of governance.
Why Secretarial Audit Compliance for Companies is a Strategic Advantage
Viewing a secretarial audit merely as a legal obligation is a missed opportunity. Proactive companies understand that robust secretarial audit compliance for companies is a powerful strategic tool that offers significant advantages beyond just avoiding penalties. It reinforces the ethical and legal foundation of the business, which is essential for long-term sustainability and growth. Embracing the audit process can transform it from a perceived burden into a value-adding activity that strengthens the organization from within and enhances its reputation externally.
Benefits for Directors and Management
For the people at the helm, a secretarial audit provides immense value and protection. It offers an independent and expert assurance that the company has established and is maintaining strong compliance mechanisms. This report acts as a confirmation to the Board that their responsibilities concerning legal adherence are being met. It helps in the early detection of non-compliance, allowing the management to rectify issues before they attract regulatory scrutiny or heavy fines. Most importantly, a clean audit report serves as a protective measure for Directors, demonstrating that they have exercised due diligence in overseeing the company’s affairs, which can be crucial in the event of any legal challenges.
Building Trust with Investors and Stakeholders
In today’s business environment, trust is the most valuable currency. A positive secretarial audit report is a powerful signal to investors, lenders, and other stakeholders that the company is well-governed and transparent. It significantly boosts investor confidence, as it shows that an independent professional has verified the company’s compliance practices, reducing the perceived risk of investment. This assurance extends to other stakeholders as well; lenders are more comfortable providing credit, and customers and suppliers feel more secure dealing with a company that is demonstrably committed to ethical and legal conduct.
The High Cost of Non-Compliance: Penalties Explained
Failing to comply with the mandatory secretarial audit requirements comes with steep financial consequences. The Companies Act, 2013, does not take non-compliance lightly. Specifically, Section 204(4) outlines the penalties for any contravention. If a company or any officer of the company or the Practicing Company Secretary in default fails to comply, they shall be liable for a significant penalty. The fine is set at a minimum of one lakh rupees and can extend up to five lakh rupees. This penalty is not just on the company; it applies to every officer of the company who is in default, as well as the PCS, making everyone in the chain of command accountable.
Conclusion
Navigating the landscape of corporate law in India requires diligence and a clear understanding of your obligations. For listed companies and large public companies, a secretarial audit is a non-negotiable annual exercise. The thresholds are clear: all listed entities, and any public company with a paid-up share capital of ₹50 Crore or more, or a turnover of ₹250 Crore or more, must comply. This extends to private companies that are subsidiaries of such public companies. Far from being a mere formality, fulfilling the secretarial audit requirements is a hallmark of a responsible, transparent, and well-managed organization that prioritizes good governance and long-term stakeholder value over short-term convenience.
Is your company approaching these thresholds? Are you unsure about your compliance status? Don’t leave it to chance. Contact the experts at TaxRobo today for a comprehensive compliance check and professional TaxRobo Audit Service.
Frequently Asked Questions (FAQs)
1. Is a secretarial audit mandatory for a private limited company in India?
Answer: No, a secretarial audit is generally not mandatory for a standalone private limited company, irrespective of its turnover or paid-up capital. However, there is a crucial exception: if the private company is a subsidiary of a public company that meets the prescribed thresholds (paid-up capital ≥ ₹50 Crore or turnover ≥ ₹250 Crore), then the secretarial audit becomes mandatory for that private subsidiary as well.
2. What is the deadline for submitting the Secretarial Audit Report?
Answer: There is no separate, specific deadline for the Secretarial Audit Report itself. The report, in Form MR-3, is required by law to be annexed to the Board’s Report. The Board’s Report is a part of the company’s Annual Report, which is circulated to shareholders before the Annual General Meeting (AGM). Therefore, the secretarial audit must be completed and the report must be ready before the date on which the Board of Directors signs off on the Board’s Report.
3. What happens if the audit report contains negative remarks?
Answer: If the Practicing Company Secretary (PCS) includes any qualification, reservation, adverse remark, or disclaimer in the Secretarial Audit Report, the Board of Directors cannot simply ignore it. The law mandates that the Board must provide a full and comprehensive explanation for that remark in their own report (the Board’s Report). This ensures transparency and forces the management to address and explain any areas of non-compliance to the shareholders.
4. Can our company’s statutory auditor also conduct the secretarial audit?
Answer: No. To ensure independence and prevent any potential conflict of interest, the roles must be performed by different professionals. The statutory audit, which focuses on financial statements, is conducted by a Chartered Accountant. The secretarial audit, which focuses on legal and procedural compliance, must be conducted by a Practicing Company Secretary. The same professional or firm cannot hold both positions for a company.
