Chapter 9 Secretarial Audit – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Secretarial Audit – Secretarial Audit, Compliance Management and Due Diligence Study Material
Question 1.
Write a note on the following:
(i) Secretarial audit (Dec 2012, 4 marks)
Answer:
Secretarial Audit [Section 204]
Section 204(1) of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company and companies belonging to other prescribed class of companies. Such companies are required to annex a secretarial audit report with its Board’s report. As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013 secretarial auditor is required to be appointed by means of a resolution at a duly convened board meeting.
Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, has prescribed the following class of companies for the purposes of the above said section:
(a) every public company having a paid-up share capital of fifty crore rupees or more; or
(b) every public company having a turnover of two hundred fifty crore . rupees or more.
(c) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
Company Secretary in practice has been exclusively recognised for conducting secretarial audit. This section further provides that Secretarial Audit Report is to be submitted in a format prescribed under rules. As per sub-rule (2) of Rule 9, the format of the Secretarial Audit Report shall be in Form No. MR.3.
Section 134 and Sub-section (3) of Section 204 provides that the Board of Directors, in their report, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in the secretarial audit report.
Penalty: 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 liable to a penalty of two lakh rupees.
Question 2.
Mr. Ravi, a practicing chartered accountant who js also a qualified company secretary, desires to take up the work of practicing company secretary, in addition to the audit of the accounts of the companies. Discuss the legal position.
Answer:
Reg. 168, prohibits a company secretary in practice from engaging in any business or profession other than the profession of the company secretary unless it is permitted by a general or specific resolution of the Council.
However, he may act as a secretary, trustee, executor, administrator, arbitrator, receiver, appraiser, valuer, internal auditor, management auditor (but not financial auditor), management consultant, or as a representative on financial matters including taxation and may take up an appointment that may be made by the Central or any State Government, Courts of Law, Labour Tribunals, or any other statutory authority.
Question 3.
Write a note on the following:
Overseas investment by proprietorship concern/unregistered partnership. (Dec 2014, 4 marks)
Answer:
Overseas Direct Investments by proprietorship concern / unregistered partnership firm in India
The following terms and conditions are required to be complied with for considering the proposal of ODI, by a proprietorship concern / unregistered partnership firm in India, by the Reserve Bank under the approval route:
(a) The proprietorship concern / unregistered partnership firm in India is classified as ‘Status Holder’ as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Govt, of India from time to time.
(b) The proprietorship concern / unregistered partnership firm in India has a proven track record, i.e., the export outstanding does not exceed 10% of the average export realisation of the preceding 3 years and a consistently high export performance.
(c) The Authorised Dealer bank is satisfied that the proprietorship concern /unregistered partnership firm in India is KYC (Know Your Customer) compliant, engaged in the proposed business and has turnover as indicated.
(d) The proprietorship concern / unregistered partnership firm in India has not come under the adverse notice of any Government agency like the Directorate of Enforcement, Central Bureau of Investigation, Income Tax Department, etc. and does not appear in the exporters’ caution list of the Reserve Bank or in the list of defaulters to the banking system in India and
(e) The amount of proposed investment (or financial commitment) outside India does not exceed 10 per cent of the average of last 3 years’ export realisation or 200 per cent of the net owned funds of the proprietorship concern / unregistered partnership firm in India, whichever is lower.
Question 4.
Write short notes on:
Qualified and Unqualified Secretarial Audit Report GO Reliance of Secretarial Auditor on the reports of other designated auditors. (Dec 2018, 5 marks)
Answer:
1. Unqualified Secretarial Audit Report is one which indicates a clean report mentioning that company has complied with relevant law and procedural aspects of Secretarial Records and other relevant records with respect to the company law and other relevant industry specific laws applicable to the Company.
Qualified Report is one which indicates the non-compliances, with the provisions of law and procedures. Deviations from secretarial standards and frauds if any, are also reported. Qualifications, reservations and/or adverse remarks, if any, should be stated by the secretarial auditor at the relevant places in his report in bold type and italics.
2. Reliance of Secretarial Auditors on the Reports of the other designated Auditors
The mandatory audit areas to be covered during Secretarial audit include finance and taxation areas. The audit of finance is done by the Statutory Auditors of the Company and the details are covered in the Statutory Audit Report provided by him. Tax Audit is done by the Statutory auditor or any other designated auditor who provides the Tax Audit Report covering the areas of Taxation.
The Secretarial Auditor may rely on the Reports given by these professionals on their respective areas while performing his audit duties.
However, Secretarial Auditor is expected to report on the Board Processes, Secretarial Compliances as well as the laws covered in Form MR-3 along with the other applicable laws.
Question 5.
2014 – June [1A] (Or) (iii) Explain the objects, scope and benefits of Secretarial Audit. (5 marks)
Answer:
The Objectives of Secretarial Audit
The Objectives of Secretarial Audit may be briefed as under.
- To Check and Report on Compliances
- To Point out Non-Compliances and Inadequate Compliances
- To Protect the interest of the Customers, Employees, Society etc.
- To avoid any unwarranted legal actions by law enforcing agencies and other persons as well.
Scope of Secretarial Audit
The Scope of Secretarial Audit comprises verification of the compliances under the enactments, rules, regulations, notifications and guidelines.
The Benefits:
The benefits of secretarial audit includes the following:
(a) It can be an effective due diligence exercise for the prospective acquirer of a company or controlling interest or a joint venture partner.
(b) It assures the owners that management and 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.
(c) Secretarial Audit being proactive measure for compliance with a plethora of laws, it will have a salutary effect of substantially lessening the burden of the law-enforcement authorities.
(d) Instilling professional discipline and self-regulations.
Question 6.
Bright Vision Ltd. wishes to appoint a secretarial auditor. Prepare a brief note for the Chairman of the company about the prerequisites for carrying out a secretarial audit. (Dec 2014, 5 marks)
Answer:
To
The Chairman Bright Vision Ltd.
Subject: Prerequisites for carrying out a Secretarial Audit
Dear Sir,
Section 204 of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company and companies belonging to other prescribed class of companies.
Such companies are required to annex a secretarial audit report with its Board’s report.
As per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the prescribed class of companies is as under:
(a) every public company having a paid-up share capital of ₹ 50 Crores or more; or
(b) every public company having a turnover of ₹ 250 crores or more.
(c) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
Company Secretary in practice has been exclusively recognised for conducting secretarial audit. The section further provides that Secretarial Audit Report is to be submitted in a format prescribed under rules. As per sub-rule (2) of Rule 9, the format of the Secretarial Audit Report shall be in Form No. MR. 3.
Section 134 and sub-section (3) of Section 204 provides that the Board of Directors, in its report, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in the Secretarial
Secretarial Audit report.
Yours’ faithfully
XYZ
Question 7.
Mention the pre-requisites to secretarial audit. (Dec 2014, 4 marks)
Answer:
The following are the perquisites for carrying out a secretarial audit:
As per Rule 8 (4) of the Companies (Meetings of Board and its powers) Rules, 2014, read with section 179 of the Companies Act, 2013 secretarial auditor is required to be appointed only by means of resolution at a duly convened board meeting.
Whenever a company secretary in practice is engaged as a secretarial auditor in. place of an earlier incumbent, he shall communicate to the earlier incumbent about the proposed engagement in writing which should be sent by registered/speed post or any other mode of delivery, as may be recognised by the Institute of Company Secretaries of India.
A formal letter for appointment should be issued by the company to the secretarial auditor along with the copy of the board resolution for appointment. The secretarial auditor shall confirm acceptance of appointment in writing.
The secretarial auditor is expected to take general overview of the operations of the company and interact with the personnel involved to know about the nature of the business.
Preliminary meeting with the senior management and the administrative staff involved in the audit will give a fair idea of what is expected and the manner in which audit activities are to be undertaken. At this stage a time frame of the secretarial audit should be determined and finalized.
Question 8.
“Secretarial audit is prevention rather than post-mortem.”
In the light of this statement explain the need of secretarial audit particularly with reference to corporate law compliances. (June 2015, 5 marks)
Answer:
Secretarial Audit is the process of independent verification, examination of level of compliance of applicable Corporate Laws to a company. The audit process if properly devised ensures timely compliance and eliminates any un-intended non compliance of various applicable rules and regulations. An action plan of the Corporate Secretarial Department is to be designed so as to ensure that all event based and time based compliances are considered and acted upon. Secretarial Audit is to be on the principle of “Prevention is better than cure” rather than post mortem exercise and to find faults. Broadly, the need for Secretarial Audit is:
- Effective mechanism to ensure that the legal and’ procedural requirements are duly complied with.
- Provides a level Of confidence to the directors, officers in default, Key Managerial Personnel etc.
- Directors can concentrate on important business matters as Secretarial Audit ensures legal and procedural requirements.
- Strengthen the image and goodwill of a company in the minds of regulators and stakeholders.
- Secretarial Audit is an effective compliance risk management tool.
- It helps the investor in analyzing the compliance level of companies, thereby increases the reputation.
- Secretarial Audit is an effective governance tool.
Question 9.
You are the Secretarial Auditor of Admire Ltd. State the matters to be considered by you while preparing the audit report. (June 2016, 5 marks)
Answer:
- Periodical Secretarial Audit Report is submitted to the Board of Directors for corrective action, the audit report is prepared in MR-3.
- The report is addressed to the members but is to be submitted to the board.
- The report shall contain the opinion of the statutory compliance examined by the auditor and shall state whether in his opinion the company is carrying out due compliance of the applicable provisions.
- Qualifications/reservation or adverse remarks, if any, should be stated by the Secretarial Auditor at the relevant places in his report in bold type and in italics.
- If the Secretarial Auditor is unable to express an opinion on any matter, he must mention it. If the scope of work required to be performed is restricted on account of restriction imposed by the company, the report should mention such limitation.
Question 10.
The Director (HR) of ABC Ltd. has desired for renovation and modernization of Admin Building situated at Brie Complex, New Delhi. There was special instruction for transfer/destroy of bulky records to facilitate more space. The Secretarial Department of the Company keeps and maintains all Secretarial Records permanently which has occupied huge space. As a Secretarial officer, prepare a check list for Preservation of Secretarial Records. (June 2017, 5 marks)
Answer:
Preservation of Secretarial Records
- Minutes of all meetings are preserved permanently in physical or in electronic form with Timestamp in the custody of company secretary or any director duly authorised by the Board.
- Office copies of Notices, Agenda, Notes on Agenda and other related papers are duly preserved in good order in physical or electronic form for the stipulated period.
- In case of a scheme of arrangement, Minutes of all Meetings of the transferor company, as handed over to the transferee company, are being duly preserved.
- Office copies of Notices, Agenda, Notes on Agenda and other related papers of the transferor company, as handed over to the transferee company, are being duly preserved for the stipulated period.
- All Forms, MOA & AOA and other related papers of the company required, as per Companies Act, 2013, being duly preserved for the stipulated period.
- Necessary approval had been taken, where any records had been destroyed.
Question 11.
How would you identify, check and verify the compliance of applicable statutory provisions adherence to good corporate governance during the Secretarial Audit of S.S. Telecom Company Ltd., an unlisted public company. (Dec 2017, 5 marks)
Answer:
Secretarial Audit is a process to check compliance with the provisions of all laws applicable specifically to the company and rules/regulations/ procedures; adherence to good governance practices with regard to the systems and processes of seeking and obtaining approvals of the Board , and/or shareholders, as may be necessary, for the business and other activities of the company, carrying out activities in a lawful manner and the maintenance of minutes and records relating to such approvals or decisions and implementation.
Secretarial Auditor shall examine the books, papers, minute books, forms and returns filed and other records maintained by S.S. Telecom Company Ltd. According to the provisions of:
- The JSompanies 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;
- The 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; - Other laws as may be applicable specifically to the company, these may be
- TRAI Act, 1997, Rules, regulations and Bye-laws framed there under;
- India Telegraph Act,
- The Indian Wireless Telegraph Act, 1933 (if applicable)
- Other applicable laws
- Secretarial Standards, issued by ICSI
- Constitution of Board of Directors with proper balance of Executive Directors, Non-Executive Directors and Independent Directors.
- Recording of the Majority decision is carried through while the dissenting members’ views are captured and recorded as part of the minutes.
- Reporting on adequate systems and processes in the company.
Question 12.
What are the guiding criteria for identifying the applicable laws while conducting the Secretarial Audit? (June 2019, 3 marks)
Answer:
Guiding Criteria for Segregation of Specific Laws and General Laws:
Segregation of laws applicable on the Company into the industry specific and general is essential for Secretarial Audit. After considering the following factors, the auditor should make the segregation of the same based on the laws applicable on the Company:
- Key financial parameters such as Turnover, Paid-up shakq capital, Net worth, Borrowings etc.
- Geographic location of registered office, units/divisions/plants/branches, etc.
- Status of company such as listed/unlisted.
- Type/Class of company such as Private. Public, Holding, Subsidiary, Foreign, Nidhi, Producer, Section 8 Company, etc.
- Registration with various authorities such as SEZ. Sectorial Regulators, etc.
- Segment such as Manufacturing Trading Service/e-commerce and Industry classification thereof.
- Agreements governing rights obligations of shareholders such as Joint venture, shareholders’ agreements.
- Number, class and category employees workers such as women, contractual employees, etc.
The auditor should comprehensively verify all laws, rules, regulations made for regulation of specific Industry and should assess the adequacy of systems and process for other General laws applicable to the Company other than Industry Specific Laws and laws specifically covered under Form MR-3.
Question 13.
During the Secretarial Audit of the Company, auditors found various reports of expert. Some reports comprise technical details about the plant and project including assessment. Write the note on the reliability of the said reports. (June 2019, 5 marks)
Answer:
Dependence on the Report of Other Expert by the Secretarial Auditor:
Where the Secretarial auditor is planning to use the work of an expert, the auditor should evaluate the professional competence of the expert, This will involve considering the expert’s professional certification or licensing by, or membership in, an appropriate professional body and experience and reputation in the field in which the auditor is seeking audit evidence. For example, for building structure related compliance, a civil engineer is considered as the expert; for aviation related compliance, the aeronautical engineer is considered as expert and so on.
The auditor should evaluate the objectivity of the expert. The risk that an expert’s objectivity will be impaired increases when the expert is employed by the entity; or is related in some other manner to the entity.
Question 14.
2019 – Dec [6A] (Or) (ii) What are the penal provisions under the Companies Act, 2013 for giving incorrect Secretarial Audit Report or making false statements therein. (Dec 2019, 5 marks)
Answer:
Section 448 of Companies Act, 2013 deals with penalty for false statements. The section provides that if in any return, report certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement-
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material, he shall be liable under Section 447.
Penalty for incorrect Secretarial Audit Report:
Section 447 deals with punishment for fraud which provides that any person who is found to be guilty of fraud, involving an amount of at least ten lakh rupees or one percent of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. In case, the fraud in question involves public interest, the term of imprisonment shall not bo less than three years.
In case where the fraud involves an amount less than ten lakh rupees or one per cent, of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to Fifty lakh rupees or with both.
In view of this, a company secretary in practice will be attracting the penal provisions of Section 448, for any false statement in any material particular or omission of any material fact in the Secretarial Audit Report. However, a person will be penalised under Section 448 in case he makes a statement, which is false in any material particular, knowing it to be false, or which omits any material fact knowing it to be material.
It is pertinent to note that Section 448 applies to “any person”. In view of this, a company secretary in practice, who is an independent professional, will be attracting the penalty, as prescribed in Section 448 in case his observations in the secretarial audit report turns out to be false or he omits any material fact, knowing it to be false or material.
Question 15.
Explain compliances specified in the Regulation 24A regarding applicability of secretarial audit underthe Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. Also state the exemptions provided from this Regulation. (Dec 2020, 5 marks)
Answer:
Regulation 24A of SEBI (Listing Obligation and Disclosure Requirement) Regulation, 2015 specifies the provisions related to Secretarial Audit as under:
Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed with effect from the year ended March 31,2019. The terms “listed entity” means an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s).
Material subsidiary mean a subsidiary, whose income or net worth exceeds ten percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
Exemptions from Regulation 24A:
Regulation 15 of SEBI (LODR) Regulations, 2015 provides for applicability of these regulations to chapter IV (Obligation of Listed Entity which has Listed its specified securities). Regulation 15(2) of the said regulations exempts few entities from the applicability of regulation 24A.
As per regulation 15 of the said regulations, the compliance specified in regulations 24A, shall not apply, in respect of –
(a) the listed entity having paid up equity share capital not exceeding rupees ten crore and net worth not exceeding rupees twenty five crore, as on the last day of the previous financial year
(b) the listed entity which has listed its specified securities on the SME Exchange. However, in case of other listed entities, which are not companies, but body corporate or are subject to regulations under other statues, the provisions of regulation 24A shall apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant authorities. ,
Question 16.
Mehar, a Chartered Accountant was working as a Manager in Finance team of Sita Mining Ltd. Mehar was curious to know about the Secretarial Auditor comments on compliance with applicable laws and regulations. In the preliminary meeting, he asked Rohan, the Secretarial Auditor about the process of identification of applicable laws to the Company. Explain the process. (Aug 2021, 5 marks)
Answer:
The identification of the compliance requirements under applicable laws is just one part of the auditor, but for the management of the company it is necessary to make sure there is sufficient evidence that the company is compliant with each and every one of them. For ensuring the compliance of the applicable laws the company:
- should have a documented inventory of every applicable law, regulation, contractual obligation and any other form of compliance requirement which needs to comply;
- should publish its compliance policy which should be supported by standards, procedures, and guidelines;
- should exchange emails with legal\compliance team, functional heads, compliance officers and others with information on compliance obligations and skills (e.g., Privacy, Procurement, HR, Finance, IT) concerning compliance matters in the information security context;
- should share related agendas, minutes or notes of meetings with those people on related matters;
- should place Internal reports concerning applicable compliance objigations, ideally with evidence that management is actively engaged in assessing the extent to which compliance is needed and aware of the risks of non-compliance;
- should conduct Compliance assessment\review\audit reports, noting the content, form, distribution, status,
For an auditor and the company, it is required to identify the applicable legal requirement of act, regulation but should also identify the sections applicable under such regulation.
Further, the legal compliance for a holding company/ subsidiary company/ joint venture company with diverse operations, the compliance requirement will vary from operation to operation based on the nature of the operations and the locations of the different operation and also based on the applicable legal instruments, and the applicable sections of the relevant laws referred in those legal instruments. The diverse operation and different geographical location may create a complexity in compliance.
Dealing with the amendment in the laws is another concern in fulfilling compliance requirement, which requires that the company should keep up to date information on the compliance requirement with an information of the Changes in the laws and regulations. Further, the legal team of the company should continuously communicate the effect of such changes on the Company, its holding, subsidiary, Joint Venture Company or any of the geographical area where the company operates.
Some of the regulators like MCA, RBI, SEBI, from time to time issue the Master Circulars, and Master Direction, Removal of Difficulties Order etc. which helps in identifying and figuring out the actual requirement of the law which needs to be complied with.
Question 17.
‘The Secretarial Audit lays the groundwork for the establishment of an ongoing Secretarial and Legal Compliances.” Being a practicing Company Secretary what would you do while;
(i) Communicating to the earlier incumbent and
(ii) Submission of Secretarial Audit Report. (Dec 2021, 5 marks)
Answer:
(i) Communication to earlier Incumbent
Whenever a company secretary in practice is engaged as a secretarial auditor in place of an earlier incumbent, he shall communicate to the earlier incumbent about the proposed engagement in writing to be sent by registered/ speed post or any other mode of delivery, as may be recognised by the Institute of Company Secretaries of India.
The Council of ICSI at its meeting held on 16th March, 2019 has made amendments in Guidelines wherein for Practice Company Secretaries, communication to previous incumbent would be mandatory before accepting the assignment, in terms of Clause (8) of Part I of the First Schedule to the Company Secretaries Act, 1980. The Council has approved the some services in respect of which it shall be mandatory to communicate to the previous incumbent (Company Secretary) before accepting the assignment in terms of terms of clause (8) of part I of the First Schedule to the Company Secretaries Act, 1980, which includes the Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013 and Issue of Secretarial Audit Report to material unlisted subsidiaries of Listed entities (whose equity shares are listed) under Regulation 24A of SEBI (LODR) Regulations, 2015.
(ii) Submission of Secretarial Audit Report
After considering the clarifications/replies of the management, the secretarial auditor shall prepare the secretarial audit report in Form No. MR.3 under section 204 of the Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The report is addressed to the members but is to be submitted to the Board. The report shall contain the opinion on the statutory compliances examined by the auditor and shall state whether in his opinion the Company is carrying out/not carrying out due compliances of the applicable provisions of the various laws. The report shall be provided with or without qualifications.
Question 18.
Define what are designated securities for the purpose of Listed entity and Material unlisted subsidiaries as defined by SEBI in LODR Regulation. (Dec 2021, 3 marks)
Answer:
The term “listed entity” means an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchangers).
‘Designated securities’ includes the equity shares, convertible securities, non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares, Indian depository receipts, securitised debt instruments, security receipts, units issued by mutual funds and any other securities as may be specified by the Board.
Material subsidiary mean a subsidiary, whose income or net worth exceeds ten percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
Whereas the Regulations provides that ‘subsidiary’ means a subsidiary as defined under sub-section (87) of section 2 of the Companies Act, 2013 which provides that:
“Subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company:
- controls the composition of the Board of Directors; or
- exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Question 19.
Explain reporting of specific event under Secretarial Audit Report. (June 2022, 3 marks)
Question 20.
Indicate the scope of secretarial audit, which should be taken into consideration by a Practicing Company Secretary, to examine and report the compliance of various laws/regulations as specified in the form MR-3, for submission in Secretarial Audit Report. (June 2022, 5 marks)
Question 21.
Top Ltd. is having a paid-up capital of X 40 crore and turnover of ? 300 crore during the financial year 2014-15. The company decided to. appoint a Company Secretary in Practice for conducting its secretarial audit. Mention the requirements of the secretarial audit report as per the provisions of the Companies Act, 2013. Examine whether it is mandatory for the company to have such a secretarial audit. (Dec 2015, 5 marks)
Answer:
Secretarial Audit [Section 204]:
Section 204(1) of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company and companies belonging to other prescribed class of companies. Such companies are required to annex a secretarial audit report with its Board’s Report. As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013 secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting. Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, has prescribed the following class of companies for the purposes of the above said section:
(a) every public company having a paid-up share capital of fifty crore rupees or more; or
(b) every public company having a turnover of two hundred fifty crore rupees or more.
(c) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
Company Secretary in practice has been exclusively recognised for conducting secretarial audit. The section further provides that Secretarial Audit Report is to be submitted in a format prescribed under rules. As per sub-rule (2) of Rule 9, the format of the Secretarial Audit Report shall be in Form No. MR. 3.
Section 134 and Sub-section (3) of Section 204 provides that the Board of Directors, in its report, shall explain in full any qualification or observation or other remarks made by the Company Secretary in practice in the secretarial audit report.
Hence, in the given case, it is mandatory for Top Ltd. to have such Secretarial Audit.
Question 22.
Keshav Ltd. is an unlisted company with a paid-up share capital of T35 crore and turnover of ? 100 crore. Advise Keshav Ltd., whether it is required to annex to its Board’s report, a secretarial audit report by the Company Secretary in Practice. Justify your answer. (Dec 2016, 5 marks)
Answer:
Secretarial Audit [Section 204]:
Section 204 of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company and companies belonging to other prescribed class of companies. Such companies are required to annex a secretarial audit report with its Board’s Report.. As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013 secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting.
Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, has prescribed the following class of companies for the purposes of the above said section:
(a) every public company having a paid-up share capital of fifty crore rupees or more; or
(b) every public company having a turnover of two hundred fifty crore rupees or more.
(c) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
Company Secretary in practice has been exclusively recognised for conducting secretarial audit. The section further provides that Secretarial Audit Report is to be submitted in a format prescribed under rules. As p£r sub-rule (2) of Rule 9, the format of the Secretarial Audit Report shall be in Form No. MR. 3.
Section 134 and Sub-section (3) of Section 204 provides that the Board of Directors, in its report, shall explain iri full any qualification or observation or other remarks made by the Company Secretary in practice in the secretarial audit report.
Hence, In the given case, Keshav Ltd. is not mandatory to have such a secretarial audit.
Question 23.
You are recently appointed as Secretarial Auditor of Alloy Tools Limited, an unlisted public company for Secretarial Audit for financial year 2017-18. What are the specific events / actions having major bearing on the company’s affairs in pursuance of the applicable laws, rules, regulations, guidelines, standards etc. are required to be reported while preparing Secretarial Audit Report. (Dec 2017, 5 marks)
Answer:
Specific events/actions having a major bearing on the company’s affairs in pursuance of the applicable laws, rules, regulations, guidelines, standards, etc. are required to be reported while preparing Secretarial Audit Report are given below:
- Public/Right/Preferential issue of shares/debentures/sweat equity, etc.
- Redemption/buy-back of securities.
- Major decisions taken by the members in pursuance to Section 180 of the Companies Act, 2013.
- Merger/amalgamation/reconstruction, etc.
- Foreign technical collaborations.
Question 24.
X & Co. Practicing Company Secretary, was appointed as Secretarial Auditor of a Company. During the audit certain irregularities were found. However, before the finalisation of the Report, the Company Secretary of the Company suggested a communication on the subject. Brief the stages involved for communication and discussion to finalise the Final Report of Secretarial Auditor. (June 2019, 3 marks)
Answer:
The stages involved for communication and discussion to finalise the Secretarial Audit report are as under:
- Submission of the Preliminary Draft: At the conclusion of fieldwork, the auditor should draft the report and present it to the entity’s management for auditee’s comments.
- Exit Meeting: The auditor should discuss with the management the findings, observations, recommendations, and text of draft and obtain their comment on the draft, achieve consensus and reach an agreement on the audit findings.
- Formal Draft: The auditor should prepare a formal draft, in view of the outcome of the exit meeting and other discussions. Upon review of such changes by the auditor and the management, the final report should be issued.
- Final Report : The report should be submitted to the appointing authority or such members of management, as directed.
Question 25.
2019 – June [6] (c) FKZ Ltd. is a public limited company carrying business of manufacturing the electric products having a paid up capital of ₹ 75 crore and turnover of ₹ 250 crore as per latest audited financial statement. Answer the following:
(i) Explain the applicability of Secretarial Audit to this company.
(ii) Define ‘Turnover’ as per section 2(91) of the Companies Act, 2013.
(iii) Explain the provision regarding appointment of the Secretarial Auditor.
(iv) In case, ‘S’ a Secretarial Auditor, is found involved in the fraud amounting of ₹ 3 lakh (does not involve any public interest), then state the penalty for such action. (June 2019, 5 marks)
Answer:
(i) Section 204(1) of the Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that-
1. every listed company.
2. every public company having a paid-up share capital of fifty crore rupees or more; or
3. every public company having a turnover of two hundred fifty crore rupees or more.
4. every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more. shall annex with its Board’s Report made in terms 0, sub-section (3) of section 134, a Secretarial Audit Report, giver) by a Company Secretary in practice, in form MR- 3.
In the instant caser FKZ Ltd. meets the criteria of paid up capital and the Turnover, hence the company is required to annex secretarial Audit report with its Boards Report.
(ii) As per section 2(91) of the Companies Act, 2013, Turnover” meaiff the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year
.
(iii) As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013, secretarial auditor company secretary in practice is required to be appointed by means of resolution at a duly convened board meeting.
(iv) In the instant case since the fraud is of Rupees 3 Lakh which is less than Rupees 10 Lakh and does not involve public interest, the Secretarial Auditor ‘s’ shall be liable to punishable with fine which shall not be less than one lakh rupees but which may extent to five lakh rupees.
Question 26.
XYZ Limited has 9 directors on its Board. Registered office of the company is situated in Mumbai. 4 directors of the company reside outside Mumbai. The company held 7 board meetings during the financial year 2018-19. In all the meetings video conferencing facility was provided.
Prepare – check list for verifying the compliances relating to video conferencing in relation to Notice, Quorum and the Matters not allowed through video conferencing. (Dec 2020, 5 marks)
Answer:
Checklist:
1. If the company provides audio-visual facility, check that the notice of the meeting informs that the directors regarding the option available to them to participate through video conferencing mode or other audio visual means, and also provide necessary information enable the directors to participate through video conferencing mode or other audio visual means.
2. The video conferencing is recorded and kept under safe custody
Quorum:
1. The quorum for a meeting of the Board of Directors of a company was . present i.e. one third of its total strength or two directors, whichever is
higher.
2. The participation of the directors by video conferencing or by other audio visual means was also counted for the purpose of quorum.
Provided that where there is quorum in a meeting through physical
presence of directors, any other director may participate conferencing through video or other audio visual means.
That following matters were not dealt through video conferencing or other audio visual means in board meeting:
(a) the approval of the annual financial statements;
(b) the approval of the Board’s report;
(c) the approval of the prospectus;
(d) the Audit Committee Meetings for consideration of financial statement including consolidated financial statement if any, to be approved by the board under sub-section (1) of section 134 of the Act; and
(e) the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.
However, if physical quorum is present then company can take above matters also through video conferencing and allow other directors to participate in meeting.
Due to COVID19, up to 30th June 2021, following restricted matters can be dealt in Board meetings held through video conferencing or other audio-visual means by duly ensuring compliance of Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014.
Question 27.
Enumerate the various step of process of the Secretarial Audit.
Answer:
Step of process of the Secretarial Audit
- 1. Appointment of Secretarial Auditor
- Communication to earlier Incumbent
- Acceptance of Appointment
- Preliminary discussions/ surveys
- Preliminary Meeting
- Finalizing of audit plan and briefing
- Testing, Interviews and Analysis
- Working Papers
- Audit Summary for discussions
- Submission of Secretarial Audit Report.
Question 28.
Define the Guiding criteria for the verification of Compliances under the Companies Act, 2013.
Answer:
Guiding criteria for the verification of Compliances under the Companies Act, 2013:
Verification of Events and Compliances under Companies Act, 2013:
- Documents relating to Boards and its committee meeting which includes
- Notice of Board Meeting, Agenda, Notes on Agenda, Minutes
- Notice of Committees Meetings Agenda, Notes on Agenda, Minutes
- Terms of References of the Committees
- Documents Relating to Members Meeting which includes
- Annual General Meeting Notice, Agenda, Attendance, Minutes
- Extra Ordinary General Meetings Notice, Agenda, Attendance, Minutes
- Postal Ballot Notice, Agenda, Attendance, Minutes
- Documents relating to Appointment, Resignation removal which includes
- Appointment of Auditors
- Appointment of Directors, Independent Directors
- Appointment of Company Secretary
- Resignation / Removal of Directors
- Documents relating to Securities including shares, Debentures, Deposit which includes
- Shareholding Pattern
- Issue of Securities
- Buy back of Securities
- Conversion of Securities
- Acceptance and payment of Deposits
- Documents relating to Managerial Remuneration
- Documents relating to Registration, Modification and satisfaction of Charges
- Documents relating to related party transactions
- Statement on Transaction with Director and Loan to Directors
- Statutory Register and other Registers
- Disclosures submitted by Directors
- Annual Return, Financial Statement
- Filing of forms with the Registrar and attachment thereof
- Information of the Regulatory action, order, pending cases
- Information of the various filing to stock exchanges
Question 29.
Segregation of laws applicable on the Company into the Industry specific and general is essential for Secretarial Audit. Comment
Answer:
Segregation of laws applicable on the Company into the Industry specific and general is essential for Secretarial Audit. After considering the following factors the auditor should make the segregation of the same based on the laws being applicable on the Company:
- Key financial parameters such as Turnover, Paid-up share capital, Net worth, Borrowings, etc.
- Geographic location of registered office, units/divisions/plants/branches, etc.
- Status of company such as listed/unlisted
- Type/Class of company such as Private, Public, Holding, Subsidiary, Foreign, Nidhi, Producer, Section 8, etc.
- Registration with various authorities such as SEZ, Sectoral Regulators, etc.
- Segment such as Manufacturing/Trading/Service/e-commerce and Industry classification thereof
- Agreements governing rights, obligations of shareholders such as Joint venture, shareholders’ agreements.
- Number, class and category of employees/workers such as women, contractual employees, etc.
The auditor should comprehensively verify all laws, rules, regulations made for regulation of specific Industry and should assess the adequacy Of systems and process for Other General laws applicable to the Company other than Industry Specific Laws and laws specifically covered under Form MR-3.
Question 30.
What are the benefits of Secretarial Audit to the Stakeholders?
Answer:
Benefits of Secretarial Audit to the Stakeholders
(a) Promoters:
Secretarial Audit assures the promoters of a company that those in-charge of its management are conducting its affairs in accordance with the requirements of laws and the owner’s stake is not being exposed to unintended risks.
(b) Non-executive/lndependent directors:
Secretarial Audit provides comfort to the Non-executive/lndependent Directors that appropriate mechanisms and processes are in place to ensure compliance with laws applicable to the company, thus mitigating any risk from a regulatory or governance perspective.
(c) Government authorities/regulators:
It also facilitates reducing the burden of the regulators in ensuring compliances and they can take timely actions against the offenders.
(d) Investors:
Secretarial Audit helps the investors in taking informed investment decision, as it evaluates the company in terms of compliance and governance norms being followed by the company.
(e) Other Stakeholders:
It is an effective due diligence exercise for the prospective investors or joint venture partners. Further Financial Institutions, Banks, Creditors and Consumers can measure the law abiding nature of company management.
Secretarial Audit Notes
Secretarial Audit:
The term “Secretarial Audit” is a mechanism which is connected with the audit of the non-financial aspects of the company. It gives necessary comfort to the management, regulators and the stakeholders, as to the compliance by the company of applicable laws and the existence of proper and adequate systems and processes in the company.
Need for Secretarial Audit:
- Effective mechanism to ensure that the legal and procedural requirements are duly complied with.
- Provides a level of confidence to the directors and Key Managerial Personnel etc.
- Directors can concentrate on important business matters as Secretarial Audit ensures legal and procedural requirements.
- Strengthen the image and goodwill of a company in the minds of regulators and stakeholders.
- Secretarial Audit is an effective governance and compliance risk management tool.
- It helps the investor in analyzing the compliance level of companies, thereby increases the reputation.
Secretarial Audit Report:
The Secretarial Audit Report should be signed by the Secretarial Auditor who has been engaged by the company to conduct the Secretarial Audit and in case of a firm of Company Secretaries, by the partner under whose supervision the Secretarial Audit was conducted.
Benefits of a Secretarial Audit:
A Secretarial non-compliance, a legal suit or other legal, ethical and governance problems can give rise to catastrophic effects on the continuing viability of the company. The Statute prescribes mandatory Secretarial Audits of bigger companies to provide necessary comfort to the Stakeholders. Many companies voluntarily conduct Secretarial Audit to minimize the possibility of various issues which may disrupt their companies’ progress.
The Secretarial Audit lays the groundwork for the establishment of an ongoing Secretarial and Legal compliances and a prevention program to ensure the company’s goals, structure and ongoing operations are consistent with the latest developments in business and the law governing the Corporate Entities.
A Comprehensive Secretarial Audit would examine a wide range of issues which may be as important as whether or not the company is qualified to do business in various jurisdictions or as complex as an analysis of the Company’s Board Compliances in order to ensure consistency with applicable requirement under the Companies Act, 2013 and the all the events/ Corporate action occurred during the year are in compliance with the Companies Act, 2013.
Appointment of Secretarial Auditor:
As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013, Secretarial Auditor is required to be appointed by means of resolution at a duly convened board meeting.