Secretarial Audit is an independent verification and compliance audit carried out to ensure that a company has complied with all applicable corporate laws, rules, regulations, and guidelines.

• It acts as a compliance mechanism to detect non-compliance, minimize legal risks, and safeguard stakeholders’ interests.
• Conducted by a Company Secretary in Practice (PCS), Secretarial Audit emphasizes good corporate governance and transparency in company operations.

Legal Framework

Companies Act, 2013

• Section 204 – Lays down provisions for Secretarial Audit.
• Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 – Specifies applicability.
• Form MR-3 – Prescribed format for Secretarial Audit Report.

Key Provisions:

1. Mandatory for Certain Companies – Every listed company and certain prescribed classes of companies must obtain a Secretarial Audit Report.
2. Auditor – Only a Practicing Company Secretary (PCS) can conduct Secretarial Audit.
3. Board’s Responsibility – Board of Directors must explain qualifications/observations in Board’s Report.
4. Penal Consequences – Company, officers, and PCS are liable for penalties in case of contravention.

3. Applicability of Secretarial Audit

As per Section 204(1) and Rule 9:
Secretarial Audit is mandatory for the following companies:

1. Every Listed Company
2. Every Public Company having:
   • Paid-up share capital of ₹50 crore or more, or
   • Turnover of ₹250 crore or more.
3. Every company having outstanding loans or borrowings from banks or public financial institutions of ₹100 crore or more (as per 2019 amendment).

Voluntary Secretarial Audit – Companies not falling under the above can also opt for Secretarial Audit to strengthen governance practices.

Scope of Secretarial Audit

Secretarial Audit is not limited to the Companies Act; it covers a wide range of corporate and economic laws.

The PCS examines compliance with:

1. Companies Act, 2013 and rules.
2. Securities Laws:
   • SEBI Act, 1992
   • Depositories Act, 1996
   • SEBI Regulations (LODR, Takeover Code, Insider Trading, Issue of Capital, Buy-back, etc.)
3. Foreign Exchange Laws: FEMA, 1999 & RBI regulations.
4. Labour Laws: Factories Act, EPF, ESI, Payment of Wages, Gratuity, Bonus, Minimum Wages, etc.
5. Environmental Laws: Air Act, Water Act, Environment Protection Act, etc.
6. Other Applicable Industry-specific laws – depending on company operations.

Process of Secretarial Audit

A systematic process is followed:

Step 1: Appointment of Secretarial Auditor

• Board of Directors passes a resolution for appointment of PCS.
• Intimation is filed with ROC (not mandatory, but advisable for record).

Step 2: Pre-Audit Planning

• Auditor understands company’s structure, operations, applicable laws, and risk areas.
• Prepares a checklist and audit plan.

Step 3: Conduct of Audit

• Verification of statutory registers, minutes books, filing records, policies, disclosures, etc.
• Examination of Board & General Meeting compliance.
• Review of filings with MCA/SEBI/Stock Exchanges.

Step 4: Audit Working Papers

• PCS maintains evidence of examination and observations for professional accountability.

Step 5: Draft Report & Discussions

• Draft report prepared and shared with management for responses.
• Management clarifies discrepancies, provides explanations or corrective action.

Step 6: Final Report in Form MR-3

• Auditor issues the Secretarial Audit Report addressed to the Board of Directors.
• Must be annexed to the Board’s Report under Section 134(3).

Contents of Secretarial Audit Report (Form MR-3)

The report includes:

• Examination of compliance with applicable laws.
• Specific comments on:
  • Maintenance of registers/records.
  • Board/Committee constitution and functioning.
  • Filings with ROC and regulators.
  • Compliance with SEBI Regulations.
  • Adequacy of systems and processes.
• Qualifications, observations, reservations, or adverse remarks.

Duties of the Company

• Provide access to books, papers, registers, and documents.
• Ensure cooperation from directors and officers.
• Implement corrective measures suggested in audit report.

Duties of Secretarial Auditor (PCS)

• Conduct audit objectively and independently.
• Maintain working papers for minimum 8 years (as per ICSI guidelines).
• Report fraud/non-compliance, if material, to the Central Government (Section 143 applicable mutatis mutandis).

Filing & Disclosure Requirements

• Secretarial Audit Report (MR-3) must be attached to Board’s Report in the Annual Report.
• Listed companies must disclose in Corporate Governance Report.
• Non-disclosure is treated as violation under Section 204 & Section 134.

Penalties for Non-Compliance

Under Section 204(4):

• Company – Fine of ₹1 lakh to ₹5 lakh.
• Officers in Default – Fine up to ₹50,000.
• PCS – Penalized under the Company Secretaries Act, 1980 for professional misconduct.

Recent Updates & Practical Insights

• MCA Notifications (2019) expanded scope by including companies with loans of ₹100 crore or more.
• SEBI emphasizes stricter compliance under LODR; thus, Secretarial Audit plays a crucial role for listed companies.
• Increasing importance in ESG (Environmental, Social, Governance) reporting – many auditors include non-financial compliances.

Benefits of Secretarial Audit

• Ensures statutory compliance and reduces risk of penalties.
• Enhances corporate governance standards.
• Builds investor confidence and goodwill.
• Helps management in early detection of non-compliance.
• Useful for due diligence in mergers, acquisitions, and funding.

Summary
Secretarial Audit is a compliance health check-up for companies, ensuring adherence to corporate laws and safeguarding stakeholders’ interests. For large and listed companies, it is a mandatory legal requirement, while for others, it is a good governance practice.