Queries on Secretarial Audit

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Customer Care No. 91-11-45562222
Queries on Secretarial Audit
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• The present paper elaborates five most common
  queries relating to the Secretarial Audit. It
  relates to the applicability, number of audits, a
  PCS may undertake, scope of the audit and penal
  provisions.
• 1. ABC Pvt Ltd. was incorporated in the year 2010
  as Private Company. Its paid up capital is Rs 35
  crore, but the annual turnover for the financial
  year ended on 31stMarch, 2016, first time crossed
  from Rs 240 crores to Rs 300 crores. XVY Ltd, a
  public company, controls the composition of the
  Board of Directors of ABC Pvt Ltd, hence in terms
  of Section 2(87) of Companies Act, 2013, ABC Pvt
  Ltd is treated as subsidiary company of XYZ Ltd.
  A newly appointed Company Secretary of ABC Pvt
  Ltd suggested the Board of Directors to get the
  Secretarial Audit of this company. Whether the
  Secretarial Audit of a Private Limited Company is
  mandatory as per the provisions of the Companies
  Act, 2013.
• Section 204(1) of the Companies Act, 2013 (CA
  2013) provides secretarial audit for bigger
  companies. In terms this section, "Every listed
  company and a company belonging to other class of
  companies as may be prescribed shall annex with
  its Board's report made in terms of sub-section
  (3) of section 134, a secretarial audit report
  given by a company secretary in practice, in such
  form as may be prescribed'.
• Further, Rule 9(1) of Companies (Appointment and
  Remuneration of Managerial Personnel) Rules, 2014
  (Rules) provides that for the purposes of
  sub-section (1) of section 204, the other class
  of companies shall be as under
• a. every public company having a paid up share
  capital of Rs. 50 crore or more or
• b. every public company having a turnover of Rs.
  250 crores or more.

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• Sub-section (2) provides that the format of the
  Secretarial Audit Report shall be in Form No.
  MR-3.
• Paid-up share capital In terms of Section 2(64)
  states that 'paid-up share capital' or 'share
  capital paid-up' means such aggregate amount of
  money credited as paid-up as is equivalent to the
  amount received as paid-up in respect of shares
  issued and also includes any amount credited as
  paid-up in respect of shares issued and also
  includes any amount credited as paid-up in
  respect of shares of the company, but does not
  include any other amount received in respect of
  such shares, by whatever name called
• Turnover In terms of section 2(91) 'turnover'
  means as the aggregate value of the realization
  of amount made from the sale, supply or
  distribution of goods or on account of services
  rendered, or both, by the company during a
  financial year.
• Hence, from the plain reading of section 204(1)
  read with relevant Rules, the Secretarial Audit
  is mandatory only for the public companies which
  are listed on the bourses and such other public
  companies having paid-up capital of Rs 50 crores
  or more or turnover of Rs 250 crores or more.
• In the above case the ABC Pvt Ltd is a Private
  Limited Company, so one can say that it is not
  mandatory, but as mentioned in the question that
  ABC Pvt Ltd is enjoying the status of a
  subsidiary company in terms of section 2(87). Now
  taking reference to the provisions contained in
  section 2(71) relating to 'public company', which
  reads as under
• 'public company' means a company which (a) is not
  a private company (b) has a minimum paid-up
  xxx1 share capital as may be prescribed
• PROVIDED that a company which is a subsidiary of
  a company, not being a private company, shall be
  deemed to be public company for the purposes of
  this Act even where such subsidiary company
  continues to be a private company in its
  articles.

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• Hence, by this definition, it can be inferred
  that Secretarial Audit would be applicable to a
  private company which is a subsidiary of a public
  company, and which falls under the prescribed
  class of companies.
• Further looking to the inherent advantages of the
  Secretarial Audit, it can be got done even for
  the companies which are not mandatorily required
  to do so.
• 2. Whether there is ceiling on the part of the
  Practicing Company Secretary to undertake the
  number of companies for the purpose of issue of
  Secretarial Audit Reports?
• Neither the Companies Act, 2013 nor any of the
  Rules framed there under provides the upper limit
  / ceiling of number of companies for the purpose
  of Secretarial Audit.
• However, the Council of the Institute of Company
  Secretaries of India (ICSI) at its 235th meeting
  held on February 11, 2016 reviewed the existing
  limits for the issue of Secretarial Audit Reports
  and decided as below
• 10 Secretarial Audits per partner/ PCS, and
• an additional limit of 5 secretarial audits per
  partner/PCS in case the unit is peer reviewed.
• These limits will be applicable for the
  Secretarial Audit Reports to be issued for the
  financial year 2016-17 onwards.

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• 3. A public limited company's turnover for the
  financial year ended on 31st March, 2013 was Rs
  300 crores. However, due to some sluggish market
  conditions, the turnover for the financial year
  ended on 31st March, 2014 was Rs 240 crores. The
  turnover increased to Rs 275 crores for the
  financial year ended on 31st March, 2015. Whether
  the company is required to under go Secretarial
  Audit?
• The Rule 9(1) of the Companies (Appointment and
  Remuneration of Managerial Personnel) Rules, 2014
  came into force w.e.f. from April 1, 2014.
• Further as per MCA Circular No.08/2014 dated 4th
  April, 2014, the financial statement (and
  documents required to be attached thereto),
  Auditor's Report and Board's Report in respect of
  financial years that commenced earlier than 1st
  April, 2014 shall be governed by the relevant
  provisions/ Schedules/ Rules of the Companies
  Act, 1956 and that in respect of financial years
  commencing on or after 1st April, 2014, the
  provisions of the new Act shall apply.
• Hence as per the rules and the circular shows
  that in case of prescribed companies, the
  financial year of which closed on 31st March,
  2014, Secretarial Audit is not applicable for
  that year.

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• 4. What are the penal provisions relating to the
  Secretarial Audit?
• The penal provisions relating to the Secretarial
  Audit under the Companies Act, 2013 are contained
  in Section 204, 447 and 448. These are appended
  as under
• Section 204(4) - Punishment for Contravention 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
  punishable with fine which shall not be less than
  one lakh rupees but which may extend to five lakh
  rupees.
• Section 447- Punishment for fraud Without
  prejudice to any liability including repayment of
  any debt under this Act or any other law for the
  time being in force, any person who is found to
  be guilty of fraud, 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. PROVIDED that where the
  fraud in question involves public interest, the
  term of imprisonment shall not be less than three
  years.
• Section 448 - Punishment for false statement
  Save as otherwise provided in this Act, 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.

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• Professional misconduct as per Company
  Secretaries Act, 1980 In addition to the penal
  provisions contained in the Companies Act, 2013,
  the Institute of Company Secretaries of India
  (ICSI), has also made penal provision which are
  contained in Part I of First and Second Schedule
  of Company Secretaries Act, 1980 which provides
  the professional misconduct in relation to
  Company Secretaries in Practice. Section 21C of
  the Act provides that where the Disciplinary
  Committee is of the opinion that a member is
  guilty of a professional or other misconduct
  mentioned in the Second Schedule or both the
  First Schedule and the Second Schedule, it shall
  afford to the member an opportunity of being
  heard before making any order against him and may
  thereafter take any one or more of the following
  actions, namely (a) Reprimand the member (b)
  Remover the name of the member from the Register
  permanently or for such period, as it thinks fit
  (c) impose such fine as it may think fit, which
  may extend to Rs 5 lacs.
• 5. What is the area of coverage of Secretarial
  Audit?
• Rule 9 of the Companies (Appointment and
  Remuneration Personnel) Rules 2014prescribes that
  the Secretarial Audit Report should be given in
  Form MR-3. The report shall cover the adherence
  of compliance of the provisions, inter alia of
  the followings

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• i. The Companies Act, 2013 and the rules made
  there under,
• ii. The Securities Contracts (Regulations) Act
  1956 and the rules made there under
• iii. The Depositories Act, 1996 and the
  Regulations and Bye-laws framed there under
• iv. Foreign Exchange Management Act, 1999 and the
  rules made there under.
• v. The following Regulations and Guidelines
  prescribed under the Securities and Exchange
  Board of India Act, 1992 ('SEBI Act')
• The Securities and Exchange Board of India
  (Substantial Acquisition of Shares and Takeovers)
  Regulations, 2011
• The Securities and Exchange Board of India
  (Prohibition of Insider Trading) Regulations,
  1992
• The Securities and Exchange Board of India
  (Issue of Capital and Disclosure Requirements)
  Regulations, 2009
• The Securities and Exchange Board of India
  (Employee Stock Option Scheme and Employee Stock
  Purchase Scheme) Guidelines, 1999
• The Securities and Exchange Board of India
  (Issue and Listing of Debt Securities)
  Regulations, 2008
• The Securities and Exchange Board of India
  (Registrars to an Issue and Share Transfer
  Agents) Regulations, 1993 regarding the Companies
  Act and dealing with client
• The Securities and Exchange Board of India
  (Delisting of Equity Shares) Regulations, 2009
  and
• The Securities and Exchange Board of India
  (Buyback of Securities) Regulations, 1998
• vi. Any other law specifically applicable to such
  company

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