Annual Secretarial Audit and Compliance Report for Companies in India
- Investors in India should note that certain types of business entities must conduct their secretarial audit and prepare the secretarial compliance report as part of the annual audit process.
- This is not a costly or disruptive exercise – firms only need to appoint a practicing company secretary to conduct the audit and file the compliance report.
- The secretarial compliance report must be filed within 60 days of the closure of the financial year with the stock exchange.
Certain types of businesses in India are mandated to prepare their secretarial audit and secretarial compliance report or will risk being non-compliant under key company legislation and rules of corporate governance.
Secretarial audits check if companies are in compliance with provisions under the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) Act, the Depositors Act, and other corporate and industry specific regulations issued by the government.
Secretarial compliance reports cover compliances under the SEBI Act and the regulations and circulars issued under the SEBI Act.
The format for the annual secretarial audit report and annual secretarial compliance report is available on SEBI’s website (see here).
Who needs a secretarial audit?
Every listed company, public companies with either a paid-up share capital of INR 500 million (US$7.03 million) and upwards or public companies with a turnover of INR 2.5 billion (US$35.02 million) are required to submit secretarial reports.
However, earlier this month, India’s ministry of corporate affairs (MCA) announced that private firms with outstanding loans or borrowings from banks or public financial institutions of over INR 1 billion (US$14.08 million) or more will have to undergo a mandatory financial and secretarial audit.
It is hereby clarified that the paid-up share capital, turnover, or outstanding loans or borrowings as existing on the last date of latest audited financial statement will be taken into account.
A practicing company secretary (PCS) conducts the secretarial audit and prepares the audit report.
Annual secretarial audit report
Companies who are mandated to file a secretarial audit report will use form no. MR-3 under the Companies Act, 2013. For the secretarial audit report, compliance should meet requirements under the following regulations:
- Companies Act, 2013;
- Securities Contracts (Regulation) Act, 1956;
- Depositories Act, 1996;
- Foreign Exchange Management Act, 1999 and rules and regulations made thereunder to the extent of foreign direct investment, overseas direct investment, and external commercial borrowings; and
- The guidelines and regulations prescribed under the Securities and Exchange Board of India (SEBI) Act. These are:
(a) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
(b) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;
(c) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
(d) The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
(e) The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
(f) 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;
(g) The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;
(h) The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998; and
- Other laws that may be applicable specifically to the company.
Further, compliance must be observed with the applicable clauses of secretarial standards as issued by the Institute of Company Secretaries of India. As well, the listing agreements entered by the company with a stock exchange (if applicable) also need to be examined.
Annual secretarial compliance report
The annual secretarial compliance report is to be submitted by the listed entity to the stock exchanges within 60 days of the end of the financial year. The format for the report can be found at Annex-A of the SEBI circular.
For the purpose of secretarial compliance, companies can use the services of the same PCS who performed the secretarial audit. Entities are required to furnish all documents and information that the PCS might need to file the compliance report.
For the secretarial compliance report, compliance with the following regulations should be checked:
- Securities and Exchange Board of India (SEBI) Act, 1992 and the regulations, circulars, guidelines issued thereunder; and
- Securities Contracts (Regulation) Act (SCRA), 1956, and rules made thereafter and the regulations, circulars, guidelines issued thereafter by SEBI.
This report should be signed by the PCS who checked and verified the compliance or their supervisor’s details along with the certificate of the practice number issued by the Institute of Company Secretaries of India.
If the PCS detects that fraud is or was committed against the company by officers or company employees during the secretarial audit, they must report it to the central government within 60 days of knowledge. A copy must be submitted to the board or the audit committee seeking their response within 45 days.