company secretary / secretarial audit

MCA has vide its notification dated 3rd January, 2020 allowed private companies with paid up share capital of Rs.10 crores and above to appoint a full time company secretary. Earlier the limit was Rs.5 crores.

It has also mandated that all companies (be it private or public unlisted) and having outstanding borrowings from banks or financial institutions to the tune of Rs.100 crores or more to have a secretarial audit report to be conducted pursuant to section 204 of the companies act, 2013. The cut off for the purpose of reckoning the above limit will be date of audited financials of the company.

The relevant notification is available on the MCA website.

Secretarial Compliance Report

SEBI has mandated vide their circular dated 8th February, 2019 that listed entities shall submit a Secretarial Compliance Report (SCR) for the year ended within 60 days from the end of the year to the stock exchanges. This report shall be prepared by Practising Company Secretaries (PCS) and submitted to the company and the company in turn will submit the same to the SEs within the said period of 60 days as above.

Secretarial Audit under section 204 of the Companies Act, 2013 shall continue in parallel and this applies to all listed entities and their material unlisted subsidiaries.

A look at the format of the SCR shows that the PCS has to go through the documents, records, filings, submissions, website, and certify that the company has complied with all the relevant and applicable SEBI regulations to the company. The PCS has to report on the non compliances, details of action taken against the company, its directors, promoters etc. in much detail. What action has been taken by the company against any qualified remark in the previous report(s). Whether the listed entity has maintained proper records as required under the various regulations.

It is a very dynamic report and requires lot of effort on the part of PCS to compile this report.

The time frame is also very less as the report has to be submitted by the company to the SEs within 60 days from the close of the financial year.

One has also to wonder why the need for a separate report on virtually the same subject from two different regulators. What was required was amendment of the format issued by MCA so that the points captured by SEBI in their draft SCR could have been encapsulated in the SAR itself. 

Fraud reporting

The Ministry of Corporate Affairs has vide its gazette notification dated 14th December, 2015 amended the Rule 13 of the Companies (Audits and Auditors), Rules, 2014 as under.

“13. Reporting of frauds by auditor and other matters:

(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

(2) The auditor shall report the matter to the Central Government as under:-
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.

(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:-
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.

(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.”; 

Now onerous duties has been cast on the auditors, cost auditors and secretarial auditors to report frauds and the process for reporting auditors has been laid down in the above notification.