The secretarial audit, as stated under the Companies Act of 2013, has emerged as an essential component of corporate governance. This aspect of it moves from its earlier definition of a check-list requirement to a position that works towards changing the attitude of these bodies towards greater accountability.
Due to the increased government regulations, the digital monitoring process on the part of the Ministry of Corporate Affairs (MCA), and the enforcement regime, the concept of secretarial audit is of utmost importance today. However, what is to be given importance is the fact that it is not only relevant in the context of a listed company. It is also applicable to large unlisted companies, large borrowing private companies, and the subsidiaries in the context of a public company.
It is common for many companies to find themselves violating the requirements of the secretarial audit at the time of due diligence, funding, and/or IPO and during the visits conducted by the regulatory authority. The cost, therefore, becomes significant, hence the need for the boards and promoters to comprehend the application framework and the importance of the secretarial audit.
Understanding the Framework and Purpose of Secretarial Audit
The history of secretarial audit dates back to the broader scope of secretarial law, which involves a set of laws that deal with the establishment, functioning, and control of businesses using various corporate legislations. The entire scope of corporate activities, like calling meetings and maintaining statutory records, comes within corporate legislations.
Where the end goal of the financial audit basically concentrates on verifying the historical financial statements of the company, the secretarial audit is more process and system-centric. It checks the company for the following:
- Effective internal mechanisms to address compliance
- Effective processes for Legal and Regulatory Obligations Monitoring Systems efficiency, and
- Corrective actions taken for previous violations.
This Forward-Looking Approach Secretarial audit stands apart in this regard, as it has a forward-looking approach in comparison to other audits. Secretarial audit focuses on developing a culture of compliance rather than just identifying non-compliance in the past. As businesses have grown in size and complexities related to transactions have increased, cases of corporate governance failures can emerge in terms of improper systems and processes, which are removed by secretarial audits.
- Foreign Exchange Management Act (FEMA),
- SEBI acts & regulation (as applicable),
- Secretarial Standards,
- Other corporations or economic laws pertaining to governance.
Within the context of the scenario where the regulatory risk incurred has a direct effect on the value of the enterprise, the secretarial audit has proven to be a significant part of the risk management mechanism for the enterprise.
Secretarial Audit: Legal Framework and Levels of Application
The first common mistake that could happen during the carrying out of this audit is that it is applicable to listed companies only. Category of Company
The statutory limits of applicability are as follows:
|
Category of Company |
Applicability Criteria |
|
Listed Companies |
Mandatory, irrespective of size |
|
Unlisted Public Companies |
Paid-up share capital ≥ ₹50 crore or turnover ≥ ₹250 crore |
|
Any Company (Public or Private) |
Outstanding loans/borrowings ≥ ₹100 crore from banks or financial institutions |
|
Private Subsidiary of Public Company |
Covered due to group governance structure |
These are an indication of the regulator’s vision to standardize the principles of governance in significant economic businesses to be similar to that which applies to publicly-listed businesses. On the back of rising venture debt investments in businesses, some businesses find themselves exceeding this threshold without even realizing it.
Applicability of CASE to Private and Unlisted Companies: A Practical Perspective
1. Private Companies with High Borrowing
The private company further believes that their “closeness in ownership pattern qualifies them to remain exempted regarding the improved provisions concerning their administration.” In addition, “if the outstanding/borrows exceeding ₹100 crores is surpassed, then as a private/public company, secretarial audit is required.”
This makes sure that the companies with high financial obligations are identified as a systemic risk; therefore, they require proper governance, compliance, and transparency. However, most scale-up companies will violate the lending limit thresholds beforehand than complying with the law for a couple of years before being detected during a lender audit.
2. Private Subsidiaries of Public Companies
Under the governance structure, the private bodies that function on the basis of the subsidiary powers of the public company come within the purview of the governance structure of the public company. Even if the law does not specifically re-emphasize the application of the law on the subsidiary bodies, the application or interpretation of the concerned law requires the functioning of the entities on the basis of the regulatory framework established by the concerned law on the public bodies.
In a multi-layered structure of groups of companies, there is a tendency to overlook the relevance of secretarial audits due to decentralized day-to-day business operations of the business entities. This overlook creates a risk of governance in grouping when there is a need to restructure or conduct M&As.
3. Companies Involved in Complex Transactions
Currently, there are a number of non-listed and private companies that carry out business transactions thus exposing these companies to a substantial level of compliance risk, which includes:
- ESOP issuances,
- preferential allotments and rights issues,
- Issue of convertible instruments,
- Foreign direct investment (FD
- Foreign investments & guarantees,
- Intercompany loans and transactions involving related parties.
These activities require a complex system of compliance regime governed by the Companies Act, FEMA, and other specific sector laws. In those circumstances wherein the secretarial audit is not strictly mandatory, companies are nowadays opting for voluntary secretarial audits to instill governance maturity.
4. IPO-Bound and Fundraising Companies
For companies making IPOs, and also those seeking institutional placements, secretarial audit has ceased to remain an option; on the other hand, it has become a sine qua non. The fact is that currently, there is intense scrutiny of the compliance record by investment stakeholders, merchant bankers, and the regulator. And if previous non-compliances remain pending, there could be:
- Delay transactions
- Increase transaction costs,
- Activate conditional approvals, or
- have valuation discount effects.
Also, regular secretarial audits help companies clean up “legacy” issues substantially before entering a high scrutiny environment.
Execution of Secretarial Audit: Scope & Methodology
Implementation of secretarial audits requires an evaluation of governance and compliance records consisting of the following:
- Statutory registers and records,
- Minutes of the board and general meetings,
- Resolutions adopted and disclosures made,
- ROC filings and Event Based Compliances
- Alterations to Share Capital and Ownership,
- Formation, alteration, and satisfaction of charges,
- Related party transactions and approvals.
The focus is not just whether filings have and have not occurred, but also whether there is an internal methodology that allows for compliance to occur in a timely, accurate, and consistent manner. The internal methodology approach allows management to identify gaps within an internal structure, as opposed to viewing it as a one-time occurrence.
Reporting and Compliance Significance
Finally, the last output of the procedure is the Report on the Secretarial Audit in Form MR-3, which forms part of the Report at the Board level. The Report highlights:
- Observations and qualifications
- Examples of Non-com
- Governance gaps,
- Recommendations on Enhancing Compliance Systems.
The trend in this instance is that this particular report has become increasingly adopted by management for the purpose of governance, following the guide that the report stipulates. The document is obviously a resource full of intelligence that addresses risks, which helps the boards show they are proactive about the compliance challenges they face.
|
Area of Non-Compliance |
Potential Impact |
|
Failure to conduct secretarial audit |
Monetary penalties on company and officers |
|
Repeated or continuing defaults |
Increased regulatory scrutiny and adjudication |
|
Weak compliance track record |
Adverse impact on funding, IPOs, and due diligence |
|
MCA enforcement actions |
Reputational and operational risk |
By virtue of the highly advanced surveillance capabilities now available through MCA, it appears that the day has arrived when no ambiguity or assumptions can be tolerated in corporate matters pertaining to applicability whatsoever.
Conclusion
The secretarial audit has been proven to be an integral part of the governance structure that has been adopted by the system prevalent in a regulated market environment, especially in the Indian scenario. The widened ambit of its applicability is a proof in itself that it is mandatory and has been enforced by the regulatory body to make the unlisted and private companies, being of prime economic significance, accountable as well.
It is essential to know the thresholds of applicability, closely monitor exposure to non-compliance, and improve the internal governance structure. The secretary's audit, regardless of whether mandatory or voluntary, has long-term implications pertaining to the improvement of transparency, risk reduction to law and regulation, and increased confidence of stakeholders.
In the modern business environment, the aspect of secretarial audit has grown from being a mere procedural requirement to a strategic resource aimed at facilitating sustainable growth.