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By: Dr. Sanjiv Agarwal
September 30, 2013
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Section 204: Secretarial audit for bigger companies

This is a new section and seeks to provide that every listed company and companies belonging to prescribed class or classes of companies shall annex a secretarial audit report given by a Company Secretary in practice with its Board’s report. The form of such report shall be prescribed by the Central Government. The Board in its report shall explain any qualifications or other remarks made by the Company Secretary in practice. The section further provides penalty for the company or any officer of the company or the Company Secretary in practice.

Legislative history

This is new provision which was not there in Companies Act, 1956. The concept of “Secretarial Audit’ is a concept introduced in the Companies Bill, 2012 but the Companies Act, 1956 provides for a compliance certificate to be issued by a Company Secretary in practice and annexed to Board Report by certain class of Companies. As per Section 383A of the Companies Act, 1956., each year ,within 30 days on which the Annual general Meeting of the Company is held, every Company having a paid-up capital of not less than Rs. 10 lakhs or more but less than Rs.  5 crore shall be required to file a compliance certificate given by a practicing Company Secretary with the Registrar of Companies with the requisite fees and a copy of such certificate shall be attached with Board’s report.

Compliance Certificate, is a certificate given by a Practicing Company Secretary based on the examination of records provided by the Company ,for that concerned financial year to the shareholders of that Company, stating that whether the Company has complied with various provisions of the Companies Act, 1956 as applicable from time to time or not. It’s an audit of compliances of the company under the Companies Act, 1956 in respect of those provisions which are outlined under the said Act.

The significant changes made by the Companies Act, 2012 are :

(a) all listed companies and such companies belonging to a class as may be prescribed, shall have the Secretarial Audit done by a Company Secretary in practice and the report thereof shall be annexed with the Board Report,

(b) Board of Directors, in their report, shall explain in full, any qualification or observation or other remarks made by the Company Secretary in practice in audit report.

Secretarial Audit was very much in vogue in listed companies. However, in Companies Act, 2013, the Parliamentary Standing Committee recommended Secretarial Audit for listed as well as a company belonging to other class of companies as may be prescribed. The Companies Act, 1956 provides for compliance certificate to be issued by a Company Secretary in practice and annexed to Board Report by certain class of companies. To widen the scope of such Compliance Certificate, the concept of Secretarial Audit has now been introduced. The Board of Directors of the company are required to explain in its Board Report, every qualification, reservation or adverse remark or disclaimer made by the Company Secretary in his Secretarial Audit Report.

A qualification in the Secretarial Audit Report may imply a non-compliance of legal requirement under Companies Act and other laws and would, therefore, be significant, specially from a regulatory perspective.

According to Section 204 of the Companies Act, 2013, the provisions relating to Secretarial Audit are as follows:

a) Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board’s report a Secretarial Audit Report, given by a Company Secretary in Practice, in such form as may be prescribed.

b) The company will be obliged to give all assistance and facilities to the Company Secretary in Practice for auditing the secretarial and related records of the company.

c) The Board of Directors, in their report shall explain in full, any qualification or observation or other remarks made by the Company Secretary in Practice in his report.

While the class of companies to which secretarial audit will apply and the form of secretarial audit report shall be prescribed by the Central Government, the provision is silent on the scope of secretarial audit. Such audit shall have to be comprehensive covering all aspects of company law compliances and secretarial practices being followed by the company. It may take the form of compliance audit in which all corporate laws and secretarial related compliances are verified. The scope may be determined by the Government itself as the form and content of the report shall indirectly prescribe the sum and substance of such secretarial audit.

The secretarial auditor shall submit his report to the Board of Directors and it ought to be annexed to Board Report.

Secretarial Audit at a glance

®     Conducted by a practicing company secretary

®     Compulsory for listed and other specified class of companies

®     Form and manner to be prescribed

®     Secretarial audit report to be annexed to Board's report

®     Qualifications or observations, if any, in secretarial audit report to be explained in Board's report

®     Any contravention by officer in default / practicing company secretary to attract monetary fine from Rs. 1 lakh to Rs. 5 lakhs.


Where any default is made in complying with the provisions of secretarial audit:

(a)    the company and every officer who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees;

(b)    The Company Secretary in practice (undertaking the secretarial audit) who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Thus, penal provisions shall be attracted for all i.e., the company, officers in default and company secretary in practice.

Rules to be Prescribed

Following rules shall be prescribed separately –

(a)  Class or classes of Companies, which shall be required to annex Secretarial Audit Report with Board's Report,

(b)  Form of Secretarial Audit Report to be submitted by the practicing company sectary. 

The draft rules suggest that secretarial audit shall be compulsory for every public company having a paid up share capital of Rs. 100 crore or more. It can be argued that such a limit may be lowered or diluted so as to cover not only public companies but also other private companies and body corporates with such limit of Rs. 100 crore. It may even be expanded to entities where exposure of public funds is of Rs. 100 crore. Also, there is no cap proposed on maximum number of secretarial audits, a practicing company secretary could do. A cap of reasonable number of secretarial audits would be desirable for equity, quality and efficiency.


By: Dr. Sanjiv Agarwal - September 30, 2013



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