Secretarial Audit Applicability, Objectives, and Benefits

Secretarial Audit Applicability, Objectives, and Benefits. Secretarial Audit is an important compliance tool that ensures companies adhere to the legal and procedural requirements prescribed under various corporate laws. It is a part of an organization’s total compliance management system and plays a significant role in identifying non-compliance issues and suggesting corrective measures. Conducted by an independent professional, specifically a Company Secretary in Practice, this audit provides an independent verification of the company’s compliance with applicable laws, secretarial standards, and internal policies.
This audit is not just about verifying compliance but also about improving the governance structure, internal processes, and overall risk management systems of a company. It is conducted based on a systematic review of various records, procedures, and filings.
Secretarial Audit Applicability
As per Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, Secretarial Audit is mandatory for the following categories of companies:

Every Listed Company: All companies whose securities are listed on a recognized stock exchange in India are required to obtain a secretarial audit report.

Every Public Company meeting any of the following financial thresholds:

Paid-up share capital of Rs. 50 crore or more

Turnover of Rs. 250 crore or more

If either of the above criteria is met, secretarial audit becomes mandatory.

Every Company having outstanding loans or borrowings from banks or public financial institutions amounting to Rs. 100 crore or more.

It is important to note that the above thresholds are to be considered as per the latest audited financial statement.

Private Companies: Although private companies are generally exempt from mandatory secretarial audits, it becomes applicable if the private company is a subsidiary of a public company that meets the prescribed thresholds mentioned above.

Who Can Conduct Secretarial Audit?
Secretarial Audit must be conducted only by a Company Secretary in Practice who holds a valid Certificate of Practice issued by the Institute of Company Secretaries of India (ICSI). The report must be provided in the format prescribed under Form MR-3 and should be annexed with the company’s Board Report.
Objectives of Secretarial Audit
The primary objective of a Secretarial Audit is to ensure that the company has complied with the required statutory and regulatory framework. Its other objectives include:

To verify the compliance of various applicable laws and Secretarial Standards.

To point out instances of non-compliance or inadequate compliance.

To ensure the protection of stakeholder interests, including shareholders, employees, regulators, and society.

To help companies avoid penalties and legal actions by ensuring timely compliance.

Scope of Secretarial Audit
The scope of Secretarial Audit is quite extensive and includes the verification of compliance with the following laws and regulations:

Companies Act, 2013 and Rules made thereunder: Includes all filings, maintenance of statutory registers, Board and general meetings, and resolutions.

Securities Contracts (Regulation) Act, 1956 and rules: Compliance for listed companies with respect to dealing in securities.

Depositories Act, 1996 and regulations: Related to the depository system for dematerialization of shares and related procedures.

Foreign Exchange Management Act, 1999 (FEMA): In respect of Foreign Direct Investment (FDI), Overseas Direct Investment (ODI), and External Commercial Borrowings (ECB).

SEBI Act, 1992 and its Regulations and Guidelines: This includes compliance with regulations such as SEBI (LODR), SEBI (SAST), SEBI (PIT), and other guidelines applicable to listed companies.

Secretarial Standards: Issued by the ICSI and applicable to Board and General Meetings.

Listing Agreements: For listed companies, compliance with the requirements of stock exchanges under listing agreements.

Industry-specific laws: Based on the nature of business such as Banking Regulation Act for banks, Insurance Act for insurance companies, and industry-specific laws for pharmaceuticals, petroleum, cement, etc.

Other General Laws: Environmental laws, labour laws, competition law, and other central or state laws applicable to the business.

Board Structure and Processes: The secretarial audit also involves examination of the composition and functioning of the Board, its committees, frequency of meetings, and adherence to proper procedures.

Process of Secretarial Audit

Appointment of Secretarial Auditor:

The Board of Directors must appoint the Secretarial Auditor in a duly convened Board Meeting.

Obtain consent from the practicing Company Secretary.

Pass a resolution in the Board Meeting.

File MGT-14 with a certified copy of the resolution with the Registrar of Companies.

Preparation for Audit:

The auditor will request a list of required documents, registers, and records.

The company must provide access to all relevant documentation including minutes books, statutory registers, agreements, filings, and policies.

Execution of Audit:

The secretarial auditor will analyze the records to verify compliance with applicable laws and standards.

Interaction with senior management and KMPs may be required to gather necessary information.

Audit Report (Form MR-3):

The secretarial auditor will prepare the audit report as per the format prescribed under Form MR-3.

The report should mention compliance status, observations, qualifications, or adverse remarks, if any.

The report must be annexed to the Board’s Report in the Annual Report of the company.

Duties of the Board Regarding Audit Observations
If the secretarial audit report contains any qualification, observation, or adverse remark, it is the duty of the Board to provide explanations or clarifications in their Board Report. The Board is also expected to take necessary corrective action to rectify the non-compliance mentioned in the report.
Documents Required for Secretarial Audit
A checklist is usually provided by the secretarial auditor which may include:

Memorandum and Articles of Association

Shareholders and Board Meeting Minutes

Statutory Registers

Filings with ROC (MCA Forms)

Annual Reports

Listing Compliances (if applicable)

FEMA compliance documents (if applicable)

Agreements and Contracts

Registers under Labour Laws

Internal Policies (Code of Conduct, Insider Trading Policy, etc.)

Penalty for Non-Compliance
If a company or its officers or the practicing Company Secretary fails to comply with the provisions relating to secretarial audit, they shall be liable for penalties. As per the Act:

Minimum Fine: Rs. 1,00,000

Maximum Fine: Rs. 5,00,000

This penalty can be imposed on the company, its officers in default, or the company secretary in practice responsible for the audit.
Benefits of Secretarial Audit
Secretarial Audit offers numerous benefits, including:

Early Detection of Non-Compliance: Identifies potential legal issues before they become serious.

Enhanced Governance: Improves the corporate governance framework.

Stakeholder Confidence: Enhances trust among investors, lenders, and regulators.

Support to Board and Management: Helps management focus on business while compliance is monitored by an expert.

Transparency and Accountability: Promotes ethical practices and accountability.

Risk Management: Helps mitigate legal and regulatory risks.

Conclusion
Secretarial Audit is a structured and independent compliance review process that enhances the overall governance and legal health of a company. It is especially relevant in today's regulatory environment where transparency, accountability, and good governance are the cornerstones of business success. While the audit is mandatory only for certain companies as per the Act, it is highly advisable even for other entities to voluntarily undergo a secretarial audit to ensure they remain on the right side of the law.
By adopting Secretarial Audit as a regular practice, companies can avoid penalties, ensure stakeholder trust, and create a strong compliance culture. Ultimately, it supports the long-term sustainability and reputation of the business in the eyes of investors, regulators, and the public at large.
FAQs
Q1. What is the purpose of Secretarial Audit?
Ans. Secretarial Audit is conducted to verify whether a company is complying with applicable legal and procedural requirements. It aims to detect non-compliances, recommend corrective measures, and strengthen governance systems to protect the interest of stakeholders.
Q2. Which companies are mandatorily required to conduct Secretarial Audit?
Ans. As per Section 204 of the Companies Act, 2013, secretarial audit is mandatory for every listed company, every public company with a paid-up share capital of Rs.50 crore or more, turnover of Rs.250 crore or more, or having outstanding loans or borrowings of Rs.100 crore or more. It is also applicable to private companies that are subsidiaries of public companies falling under these criteria.
Q3. Who can conduct a Secretarial Audit?
Ans. Only a Company Secretary in Practice, registered with the Institute of Company Secretaries of India (ICSI) and holding a valid Certificate of Practice, is authorized to conduct Secretarial Audit and issue the audit report in Form MR-3.
Q4. What is the format of the Secretarial Audit Report?
Ans. The Secretarial Audit Report is prepared in Form MR-3 as prescribed under the Companies Act, 2013. It is submitted by the secretarial auditor and must be annexed to the Board’s Report in the Annual Report.
Q5. What areas are covered in the scope of Secretarial Audit?
Ans. The audit covers compliance with the Companies Act, SEBI Regulations, SCRA, Depositories Act, FEMA (for FDI, ODI, ECB), Secretarial Standards, Listing Agreements, industry-specific laws, and general laws such as labor, environment, and competition law. It also reviews the Board’s structure and governance practices.
Q6. What penalties apply for non-compliance with Secretarial Audit provisions?
Ans. If a company, its officers, or the company secretary in practice fails to comply with the audit provisions, they are liable to a fine ranging from Rs.1,00,000 to Rs.5,00,000 under the Companies Act, 2013.
Q7. What are the key benefits of conducting a Secretarial Audit?
Ans. Secretarial Audit helps in early detection of legal non-compliances, enhances corporate governance, improves stakeholder confidence, supports board decision-making, and reduces compliance-related risks. It is a valuable tool for regulatory assurance and reputation building.

Secretarial Audit is an important compliance tool that ensures companies adhere to the legal and procedural requirements prescribed under various corporate laws. It is a part of an organization’s total compliance management system and plays a significant role in identifying non-compliance issues and suggesting corrective measures. Conducted by an independent professional, specifically a Company Secretary in Practice, this audit provides an independent verification of the company’s compliance with applicable laws, secretarial standards, and internal policies.

This audit is not just about verifying compliance but also about improving the governance structure, internal processes, and overall risk management systems of a company. It is conducted based on a systematic review of various records, procedures, and filings.

Secretarial Audit Applicability

As per Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, Secretarial Audit is mandatory for the following categories of companies:

Every Listed Company: All companies whose securities are listed on a recognized stock exchange in India are required to obtain a secretarial audit report.
Every Public Company meeting any of the following financial thresholds:

Paid-up share capital of Rs. 50 crore or more
Turnover of Rs. 250 crore or more

If either of the above criteria is met, secretarial audit becomes mandatory.

Every Company having outstanding loans or borrowings from banks or public financial institutions amounting to Rs. 100 crore or more.

It is important to note that the above thresholds are to be considered as per the latest audited financial statement.

Private Companies: Although private companies are generally exempt from mandatory secretarial audits, it becomes applicable if the private company is a subsidiary of a public company that meets the prescribed thresholds mentioned above.

Who Can Conduct Secretarial Audit?

Secretarial Audit must be conducted only by a Company Secretary in Practice who holds a valid Certificate of Practice issued by the Institute of Company Secretaries of India (ICSI). The report must be provided in the format prescribed under Form MR-3 and should be annexed with the company’s Board Report.

Objectives of Secretarial Audit

The primary objective of a Secretarial Audit is to ensure that the company has complied with the required statutory and regulatory framework. Its other objectives include:

To verify the compliance of various applicable laws and Secretarial Standards.
To point out instances of non-compliance or inadequate compliance.
To ensure the protection of stakeholder interests, including shareholders, employees, regulators, and society.
To help companies avoid penalties and legal actions by ensuring timely compliance.

Scope of Secretarial Audit

The scope of Secretarial Audit is quite extensive and includes the verification of compliance with the following laws and regulations:

Companies Act, 2013 and Rules made thereunder: Includes all filings, maintenance of statutory registers, Board and general meetings, and resolutions.
Securities Contracts (Regulation) Act, 1956 and rules: Compliance for listed companies with respect to dealing in securities.
Depositories Act, 1996 and regulations: Related to the depository system for dematerialization of shares and related procedures.
Foreign Exchange Management Act, 1999 (FEMA): In respect of Foreign Direct Investment (FDI), Overseas Direct Investment (ODI), and External Commercial Borrowings (ECB).
SEBI Act, 1992 and its Regulations and Guidelines: This includes compliance with regulations such as SEBI (LODR), SEBI (SAST), SEBI (PIT), and other guidelines applicable to listed companies.
Secretarial Standards: Issued by the ICSI and applicable to Board and General Meetings.
Listing Agreements: For listed companies, compliance with the requirements of stock exchanges under listing agreements.
Industry-specific laws: Based on the nature of business such as Banking Regulation Act for banks, Insurance Act for insurance companies, and industry-specific laws for pharmaceuticals, petroleum, cement, etc.
Other General Laws: Environmental laws, labour laws, competition law, and other central or state laws applicable to the business.
Board Structure and Processes: The secretarial audit also involves examination of the composition and functioning of the Board, its committees, frequency of meetings, and adherence to proper procedures.

Process of Secretarial Audit

Appointment of Secretarial Auditor:

The Board of Directors must appoint the Secretarial Auditor in a duly convened Board Meeting.
Obtain consent from the practicing Company Secretary.
Pass a resolution in the Board Meeting.
File MGT-14 with a certified copy of the resolution with the Registrar of Companies.

Preparation for Audit:

The auditor will request a list of required documents, registers, and records.
The company must provide access to all relevant documentation including minutes books, statutory registers, agreements, filings, and policies.

Execution of Audit:

The secretarial auditor will analyze the records to verify compliance with applicable laws and standards.
Interaction with senior management and KMPs may be required to gather necessary information.

Audit Report (Form MR-3):

The secretarial auditor will prepare the audit report as per the format prescribed under Form MR-3.
The report should mention compliance status, observations, qualifications, or adverse remarks, if any.
The report must be annexed to the Board’s Report in the Annual Report of the company.

Duties of the Board Regarding Audit Observations

If the secretarial audit report contains any qualification, observation, or adverse remark, it is the duty of the Board to provide explanations or clarifications in their Board Report. The Board is also expected to take necessary corrective action to rectify the non-compliance mentioned in the report.

Documents Required for Secretarial Audit

A checklist is usually provided by the secretarial auditor which may include:

Memorandum and Articles of Association
Shareholders and Board Meeting Minutes
Statutory Registers
Filings with ROC (MCA Forms)
Annual Reports
Listing Compliances (if applicable)
FEMA compliance documents (if applicable)
Agreements and Contracts
Registers under Labour Laws
Internal Policies (Code of Conduct, Insider Trading Policy, etc.)

Penalty for Non-Compliance

If a company or its officers or the practicing Company Secretary fails to comply with the provisions relating to secretarial audit, they shall be liable for penalties. As per the Act:

Minimum Fine: Rs. 1,00,000
Maximum Fine: Rs. 5,00,000

This penalty can be imposed on the company, its officers in default, or the company secretary in practice responsible for the audit.

Benefits of Secretarial Audit

Secretarial Audit offers numerous benefits, including:

Early Detection of Non-Compliance: Identifies potential legal issues before they become serious.
Enhanced Governance: Improves the corporate governance framework.
Stakeholder Confidence: Enhances trust among investors, lenders, and regulators.
Support to Board and Management: Helps management focus on business while compliance is monitored by an expert.
Transparency and Accountability: Promotes ethical practices and accountability.
Risk Management: Helps mitigate legal and regulatory risks.

Conclusion

Secretarial Audit is a structured and independent compliance review process that enhances the overall governance and legal health of a company. It is especially relevant in today's regulatory environment where transparency, accountability, and good governance are the cornerstones of business success. While the audit is mandatory only for certain companies as per the Act, it is highly advisable even for other entities to voluntarily undergo a secretarial audit to ensure they remain on the right side of the law.

By adopting Secretarial Audit as a regular practice, companies can avoid penalties, ensure stakeholder trust, and create a strong compliance culture. Ultimately, it supports the long-term sustainability and reputation of the business in the eyes of investors, regulators, and the public at large.

FAQs

Q1. What is the purpose of Secretarial Audit?

Ans. Secretarial Audit is conducted to verify whether a company is complying with applicable legal and procedural requirements. It aims to detect non-compliances, recommend corrective measures, and strengthen governance systems to protect the interest of stakeholders.

Q2. Which companies are mandatorily required to conduct Secretarial Audit?

Ans. As per Section 204 of the Companies Act, 2013, secretarial audit is mandatory for every listed company, every public company with a paid-up share capital of Rs.50 crore or more, turnover of Rs.250 crore or more, or having outstanding loans or borrowings of Rs.100 crore or more. It is also applicable to private companies that are subsidiaries of public companies falling under these criteria.

Q3. Who can conduct a Secretarial Audit?

Ans. Only a Company Secretary in Practice, registered with the Institute of Company Secretaries of India (ICSI) and holding a valid Certificate of Practice, is authorized to conduct Secretarial Audit and issue the audit report in Form MR-3.

Q4. What is the format of the Secretarial Audit Report?

Ans. The Secretarial Audit Report is prepared in Form MR-3 as prescribed under the Companies Act, 2013. It is submitted by the secretarial auditor and must be annexed to the Board’s Report in the Annual Report.

Q5. What areas are covered in the scope of Secretarial Audit?

Ans. The audit covers compliance with the Companies Act, SEBI Regulations, SCRA, Depositories Act, FEMA (for FDI, ODI, ECB), Secretarial Standards, Listing Agreements, industry-specific laws, and general laws such as labor, environment, and competition law. It also reviews the Board’s structure and governance practices.

Q6. What penalties apply for non-compliance with Secretarial Audit provisions?

Ans. If a company, its officers, or the company secretary in practice fails to comply with the audit provisions, they are liable to a fine ranging from Rs.1,00,000 to Rs.5,00,000 under the Companies Act, 2013.

Q7. What are the key benefits of conducting a Secretarial Audit?

Ans. Secretarial Audit helps in early detection of legal non-compliances, enhances corporate governance, improves stakeholder confidence, supports board decision-making, and reduces compliance-related risks. It is a valuable tool for regulatory assurance and reputation building.