India Mandates Financial, Secretarial Audit for Private Firms with Outstanding Debt

Posted by Written by Nishtha Yadav Reading Time: 2 minutes

India’s ministry of corporate affairs (MCA) notified on January 3 that private companies with an outstanding debt of INR 1 billion (US$14.08 million) or more – owed to financial institutions and banks – will have to file their financial audit reports, starting financial year (FY) 2020-21, which commences April 1, 2020.

These companies will also have to conduct a mandatory secretarial audit, and then submit the audit findings with the MCA.

The latest amendments were announced under the Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020.

Threshold to mandatorily employ a company secretary increased

From FY 2020-21, every private company with a paid-up share capital of INR 100 million (US$1.4 million) or more will be required to employ a company secretary. Previously, this threshold was INR 50 million (US$704,680).

In a report by the Times of India, a senior government official was quoted saying that these changes were incorporated with the purpose of reducing the compliance cost for smaller companies, and to protect public interest in case of companies with large debt.

“A number of companies that do not have substantive business operations had represented that it is onerous for them to employ a company secretary only because they have a paid-up share capital of INR 50 million and this was raising compliance cost,” said the official, as per the Times of India report.

Push to improve compliances under Companies Act

Experts anticipate that secretarial audits will lead to better compliance with the Companies Act, which is key to the success of corporate governance reforms in India. Increasing the threshold to hire a company secretary, on the other hand, will facilitate the ease of doing business for small firms.

In the case of financial audits, currently, only listed companies in India are required to disclose their statements – every three months. Starting FY 2020-21, private firms will also have to furnish their financial statements.

Previously, only public companies with either a paid-up share capital of INR 500 million (US$7.03 million) or more, or public companies with a turnover of INR 2.5 billion (US$35.02 million), were required to submit secretarial reports.

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