Secretarial Audit

Secretarial Audit: The Compliance Verification

A company operates within a dense web of legal and regulatory obligations: the Companies Act, the SEBI Listing Regulations (for listed companies), the various tax statutes, sector-specific laws, environmental regulations, labour laws, and the company's own internal codes and policies. The integrity of corporate governance depends on the company's compliance with this web — on the assurance that the company is meeting the obligations that the law and its own charter impose. The secretarial audit is the mechanism by which an independent professional verifies and reports on this compliance, providing the board, the shareholders, and the regulators with assurance that the company is observing its legal and regulatory obligations.

The Statutory Trigger and Scope

Section 204 of the Companies Act, 2013, read with the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, requires the following classes of companies to annex to its board's report a secretarial audit report, given by a company secretary in practice: (a) every listed company; and (b) every other public company having a paid-up share capital of ₹50 crore or more, or a turnover of ₹250 crore or more. The secretarial audit report must be in the prescribed form (Form No. MR-3) and must report on the company's compliance with (a) the Companies Act, 2013 and the rules made thereunder; (b) other specified statutes applicable to the company (the SEBI Act and regulations for listed companies, the Securities Contracts (Regulation) Act, the Foreign Exchange Management Act, and such other laws as may be specified); and (c) such other matters as may be prescribed. The company secretary in practice, conducting the audit, has the right to access the company's books, papers, and records and to obtain information and explanations from the company's officers.

The Function in the Governance Architecture

The secretarial audit serves several interlocking functions within the corporate-governance architecture. First, it provides the board with an independent, professional assessment of the company's compliance posture — flagging areas of non-compliance, impending deadlines, and risks that may require board attention. The board, in turn, must consider the report and disclose, in its own report, any qualifications, observations, or adverse remarks and the explanations or actions taken. Second, it provides the shareholders (and, for listed companies, the market) with assurance on the company's legal hygiene — a matter of particular concern to investors who must price the regulatory risk of their investment. Third, it provides the regulators (the Ministry of Corporate Affairs, SEBI) with a verified, professional report on compliance, supporting their supervisory and enforcement functions. The secretarial audit complements the financial audit and the cost audit: where the financial audit addresses financial reporting, and the cost audit addresses cost records, the secretarial addresses legal and regulatory compliance. For listed companies, the SEBI Listing Regulations additionally require an annual secretarial compliance report, signed by a practising company secretary, addressing compliance with the Listing Regulations specifically, and filed with the stock exchanges. The combined effect of these requirements is to bring the company's compliance into the light — to subject it to independent professional verification, to disclose it to the board and the shareholders, and to provide the regulators with the information they need to supervise the corporate sector effectively.

“Compliance, in modern corporate governance, is not a matter of good intentions but of verified fact. The secretarial audit is the law's instrument for that verification — the practising company secretary's independent report on whether the company has met the obligations the law imposes. For the board, it is a mirror; for the shareholder, an assurance; for the regulator, a tool. The health of corporate governance depends, in no small measure, on the rigour with which this audit is conducted and the candour with which its findings are reported.”