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1 Secretarial Audit on Wed 10 Aug 2011 - 16:45

Divyaajith


SECRETARIAL AUDIT
Secretarial audit is an effective mechanism to ensure the compliance of the multifarious requirements by the corporate enterprises under a host of legislations.

The two fold objective of Secretarial Audit is:
(a) To protect the interest of all the stakeholders;
(b) To avoid any legal action against the company and its management.

SECRETARIAL AUDIT – COMPLY OR EXPLAIN?

Sub-clause I(c)(iii) of Clause 49 of the Listing Agreement provides-

“The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.”

Thus, a need for Legal Compliance Reporting System (LCRS) arises to ensure compliances under various laws, rules and regulations.

Secretarial audit does not come under the ambit of Companies Act 1956.

Though Section 161(1) of the Companies Act, 1956 requires every company to file a copy of the annual return, signed both by a director and the Company Secretary, or where there is no Company Secretary, by a Company Secretary in whole-time practice, with the registrar.

Section 161 (1) also requires, the annual return of a company whose shares are listed on a recognised stock exchange, to be also signed by a Company Secretary in whole-time practice certifying that the annual return states the facts correctly and adequately and that the company has complied with all the provisions of the Companies Act.


However, under Regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996, the circular no D&CC/FITTC/CIR – 16/2002, dated December 31, 2002 required all the issuer companies to subject themselves to a secretarial audit to be undertaken by a qualified Chartered Accountant or a Company Secretary, for the purposes of reconciliation of the total admitted capital with both the depositories and the total issued and listed capital. The report is required to be submitted on a quarterly basis, within 30 days of the end of each quarter. This report is also required to be placed before the Board of Directors of the issuer company.

Later, upon examination, it was decided to modify the terminology ‘Secretarial Audit’ as mentioned in the circular No. D&CC/FITTC/Cir-16/2002 dated December 31, 2002 to ‘Reconciliation of Share Capital Audit’ via the circular No. CIR/MRD/DP/ 30 /2010 dated September 6, 2010.

The Ministry of Corporate Affairs, Government of India, released Corporate Governance Voluntary Guidelines, 2009. Para V of the Guidelines states that:

“Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its report to the shareholders.”

Though these Guidelines recommending Secretarial Audit are named voluntary, but they are not absolutely voluntary in nature in as much as they require the Board of Directors of the company to give its comments on Secretarial Audit in Directors’ Report to Shareholders.

The above facts reflect that Secretarial Audit is not mandatory. Nor is there any mandatory provision for attachment of Secretarial Audit to the annual report.

Having said so, in this dynamic environment, where laws, rules and regulations are continuously undergoing constant transitions, companies need to be on their toes ready to meet any such change.

One such foreseeable change on the horizon that the companies need to be on lookout for is - The Companies Bill 2011.

The Companies Bill 2011 is proposed to be introduced in the session of the Parliament after obtaining due approvals.

The bill is a revised version of The Companies Bill, 2009, prepared in consultation with Ministry of Law, based on the recommendation of Parliamentary Standing Committee on Finance.

The Bill may provide for requirement of conduct of secretarial audit by at least bigger companies by a company secretary in practice as is apparent from the draft Companies Bill, 2009 and the recommendation of the Standing Committee on Finance.

The Bill may also require the Board of Directors to explain in full any qualification or observation or other remarks made by company secretary in practice in his secretarial audit report to the shareholders in their report, to provide necessary assurance to the investors that the affairs of the Company are being conducted in accordance with the legal requirements.





BENEFITS

MANAGEMENT
Assures them that the company is conducting its affairs in accordance with requirements of laws, and that is not being exposed to undue risk. It gives them assurance that those who are charged with the duty and responsibility of compliance with the requirements of law are performing their duties competently, effectively and efficiently, so that the people in-charge of the day-to-day management of the company are not exposed to penal or other liability (and consequential risk and embarrassment) on account of non-compliance with law.

LEGAL COMPLIANCE OFFICERS
Ensures them that, they have done everything required under law.

INDEPENDENT DIRECTORS
Ensures them that the company has complied with the laws and, therefore, they are not likely to be exposed to action by law enforcement agencies for non-compliance by the company.

INVESTORS
In this era of Corporate Governance, Secretarial Audit will provide comfort to shareholders about the compliance as also to feel secure about their investments.

The benefits accruing to the company on account of Secretarial Audit are:

• Check and report on compliances;
• Points out non-compliances and inadequate compliances;
• Protects the interests of directors and officers.
• Avoidance of legal actions by the law-enforcing agencies and others.


CLOSING REMARK

The answer to the question of ‘whether to take up Secretarial Audit or not?’ depends on the outcome of the Parliament Session.

……………………………………………………………………………………………
APPENDIX
Relevant Extract from Standing Committee Report:
Clause 82 - Annual Return

7.1 This clause seeks to provide that every company shall prepare an annual return containing certain particulars such as registered office, principal business activities, particulars of holding, subsidiary and associate companies, its shares, debentures and other securities, members, promoters, etc.

7.2 Clause 82(1) reads as under:
―Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture holders along with changes therein since the close of the last financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the last financial year;
(f) meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalties or punishments imposed on the company, its directors or officers and details of compounding of offences;
(i) matters related to certification of compliances, disclosures; and
(j) such other matters as may be prescribed,

and signed both by a director and the Company Secretary, or where there is no Company Secretary, by a Company Secretary in whole-time practice:

Provided that the annual return, filed by a company having such paid-up capital and turnover as may be prescribed, or a company whose shares are listed on a recognised stock exchange, shall also be signed by a Company Secretary in whole-time practice certifying that the annual return states the facts correctly and adequately and that the company has complied with all the provisions of this Act, in the prescribed form.

Provided further that in relation to a One Person Company and small company, the annual return shall be signed by the Company Secretary, or where there is no Company Secretary, by one director of the company.

7.3 On this clause, ICSI in their written memorandum suggested as follows:-

(I) In sub-clause (1)(i), the words ―as may be prescribed may be added.
(II) (i) This clause should be made applicable to every listed company and a company having such paid-up capital or turnover instead of such paid-up capital and turnover so as to cover all large companies in terms of paid-up capital or turnover.
(ii) For the words ―a company whose shares are listed on a recognized stock exchange, the words ―listed company may be substituted
(iii) Also with a view to ensure independence of Company Secretary in whole-time practice, the provisions contained in Chapter X in respect of appointment, duties and powers of an auditor should mutatis mutandis be made applicable to the Company Secretary in whole-time practice for compliance with this section.

7.4 The Ministry noted the suggestion at (I) above to be addressed with legislative vetting.

7.5 With regard to the suggestion at (II) above the Ministry stated as follows:-
(i) Under the existing Act, the certification of annual return by a practicing company secretary has been provided for listed companies only. The Bill seeks to provide that besides listed companies, bigger companies having such paid up capital and turnover, as may be prescribed, shall be required to get certification of annual return done. Since the provisions appear to be reasonable, the suggestion may not be considered.

(ii) It is a suggestion for improving the drafting and may be considered.

(iii) The role of Company Secretary in context of certification of annual return may not be similar to the role of auditor in context of audit of books of accounts of the company. In view of this, the suggestion may not be considered. However, a provision may be considered putting an obligation on the company management to provide every assistance to the company secretary in whole time practice to enable him to verify any record or information etc in connection with certification of annual return of such company.

(iv)Secretarial Audit gives a necessary comfort to the investors that the affairs of the company are being conducted in accordance with the legal requirements and also protects the companies from the consequences of non compliance of the provisions of the Companies Act and other important corporate laws.

It is, accordingly, felt and suggested that the Bill may provide for requirement of conduct of secretarial audit by at least bigger companies by a company secretary in practice.

The Board of Directors shall, in their Report to shareholders, explain in full any qualification or observation or other remarks made by company secretary in practice in his secretarial audit report.

7.6 In response to a suggestion by the Committee, the Ministry proposed to include an alternate clause to clause 82(1), which is given as under:-

82 (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) to (i) (no change proposed)
(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses/countries of incorporation/registration and percentage of shareholding held by them.

7.7 While endorsing the re-drafting of the clause and the inclusion of an additional sub-clause relating to disclosure of details in respect of shares held by or on behalf of Foreign Institutional Investors, the Committee desire that the provision contained in the residual sub clause 82(1)(j) may be retained and serialized as 82(1)(k) after the inclusion of the afore-mentioned new provision as 82(1)(j).

7.8 Further, the suggestion for placing an obligation on the Company to provide every assistance to the Company Secretary in whole time practice to enable him to verify any record or information etc. in connection with certification of annual return of the company may be considered for inclusion in the clause. Besides, Secretarial Audit may also be mandated for bigger companies, including all listed companies; as it inter-alia provides necessary assurance to the investors that the affairs of the Company are being conducted in accordance with the legal requirements.

7.9 Clause 82(2) reads as under:
―Clause 82(2) provides that an extract of the annual return in such form as may be prescribed shall form part of the Board‘s Report.

7.10 The Suggestions received from the ICSI on this clause are given as under:-

Sub-section (2) of section 82 requires that an extract of the annual return in such form as may be prescribed shall form part of the Board‘s Report. The Company Secretary in whole-time practice may while certifying annual return of listed companies or other companies having such paid-up capital or turnover as may be prescribed under first proviso to sub-section (1), may make qualifications or adverse remarks. In such a case it should be necessary for the Board to give its explanation or comments on such remarks in the Board‘s Report.

7.11 The Ministry noted the suggestion to be addressed appropriately with legislative vetting.
7.12 In the light of the discussions held with the Committee, the Ministry of Corporate Affairs proposed a new clause 82A- Return to be filed with registrar in case promoters‘ stake changes beyond a limit in order to provide audit trail of ownership, which is given as under :-
―82A: Every listed company shall file a return in the prescribed form with the Registrar whenever there is a change in the shareholding position of promoters and top ten shareholders of such company. The return shall be filed within fifteen days of such change in the shareholding.

7.13 The Committee recommends that the new provision requiring return to be filed with Registrar, in case promoters‟ stake changes beyond a limit, in order to provide audit trail of ownership may be duly incorporated in the Bill. The Committee would also recommend in this regard that any adverse remarks or qualification, made by the Company Secretary-in-whole time practice, while certifying the annual return, should be necessarily explained for or commented upon in the Board’s report.

BIBLIOGRAPHY

1. Article by Dr. K. R. Chandratre*, FCS, Company Secretary, Pune- Corporate Compliance Management – Secretarial Audit: Compliance Audit, Reporting & Disclosures.

2. 21st Report- Standing Committee on Finance- Companies Bill 2009



2 Re: Secretarial Audit on Thu 11 Aug 2011 - 14:42

Preetpal Singh

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Thanks for sharing Cool

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