Secretarial Audit: Who Needs One and What Happens If You Don't Comply

Secretarial audit was introduced in India by Section 204 of the Companies Act, 2013, as a mechanism to ensure that companies comply with the laws, rules, and regulations applicable to them, beyond just the financial reporting obligations covered by a statutory audit. Many companies do not fully understand who is required to conduct a secretarial audit, what it covers, and what the consequences of non-compliance are.

Who Must Conduct a Secretarial Audit

The requirement to conduct a secretarial audit applies to listed companies, public companies with a paid-up share capital of Rs. 50 crore or more, public companies with a turnover of Rs. 250 crore or more, companies that have outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore, and every company that is a material subsidiary of a listed company.

The threshold conditions apply on the basis of the figures in the previous financial year. A company that crosses the threshold in one year is required to conduct a secretarial audit for the following financial year.

A secretarial audit must be conducted by a Company Secretary in Practice, being a member of the Institute of Company Secretaries of India holding a certificate of practice. The audit report must be in Form MR-3 and must be annexed to the Board's report.

What a Secretarial Audit Covers

The secretarial auditor examines the company's compliance with the Companies Act, 2013 and the rules made thereunder, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996, FEMA provisions relating to FDI, foreign borrowings, and overseas investments, SEBI regulations applicable to listed companies, and other laws specifically applicable to the company based on its industry and operations.

The audit covers the maintenance of statutory registers, the conduct of board and general meetings, the filing of returns and forms with the MCA, SEBI, and other regulators, the issue and transfer of securities, and compliance with secretarial standards issued by the ICSI.

The Secretarial Compliance Report for Listed Companies

SEBI introduced an additional requirement for listed entities by way of a Circular in 2019, requiring listed companies to submit an annual secretarial compliance report to the stock exchanges, in addition to the secretarial audit report annexed to the Board's report. This report covers compliance with SEBI regulations, circulars, and guidelines, and must be submitted within 60 days of the end of the financial year.

The secretarial compliance report is a separate exercise from the secretarial audit under the Companies Act and involves a more detailed examination of SEBI-specific compliance.

Consequences of Non-Compliance

A company that is required to conduct a secretarial audit but fails to do so is subject to penalties under Section 204(4) of the Companies Act. The company and every officer in default can be fined. The penalty can be significant for repeat defaults.

Beyond the financial penalties, the absence of a secretarial audit report or a heavily qualified report can attract regulatory scrutiny from the Registrar of Companies and SEBI, can affect the company's ability to raise funds, and can create difficulties in M&A transactions where buyers examine the compliance history of the target as part of due diligence.

Companies that are approaching the threshold criteria should begin planning for secretarial audit well in advance, including reviewing their statutory records, ensuring that all forms have been filed on time, and engaging a Company Secretary in Practice who has experience with companies of their size and sector.