India’s corporate ecosystem is governed by an evolving web of laws and compliance requirements. For businesses, especially large or listed ones, staying on top of legal obligations is important to avoid penalties and foster trust and transparency with stakeholders.
One powerful tool for ensuring this is the Secretarial Audit, a mandatory compliance check for certain companies under Indian law. It acts as an early warning system to detect non-compliance and governance gaps that can otherwise harm the business.
In this blog, we’ll explain a Secretarial Audit, its applicability, scope, and process, along with key benefits and penalties for non-compliance.
Table of Contents
What is Secretarial Audit?
A Secretarial Audit is an independent verification of a company’s compliance with corporate laws, rules, and regulations.
It helps companies to:
- Detect instances of non-compliance early.
- Promote good governance and transparency.
- Ensure that legal and procedural requirements are consistently met.
The audit is conducted by an independent professional, usually a Company Secretary (CS) holding a valid Certificate of Practice issued by the Institute of Company Secretaries of India (ICSI).
Secretarial Audit Applicability
Under the Companies Act, 2013, certain classes of companies are required to undergo a Secretarial Audit.
It is mandatory for:
- All Listed Companies.
- All Public Companies with:
- Paid-up Share Capital of ₹50 crore or more, or
- Turnover of ₹250 crore or more.
- All types of companies (including Private Companies) having outstanding borrowings of ₹100 crore or more from banks or financial institutions.
Secretarial Audit Report
The Secretarial Audit Report is the formal output of the audit process. It:
- Certifies whether the company is in compliance with applicable laws.
- Identifies any governance risks or gaps.
- Highlights areas of non-compliance and recommends corrective actions.
The report is prepared in Form MR-3, submitted to the Board of Directors, and included in the company’s Annual Report. As per Section 204 of the Companies Act, 2013, the audit can only be conducted and the report issued by a:
- Practising Company Secretary (PCS).
- Holding a valid Certificate of Practice from ICSI.
Scope of Secretarial Audit
The scope of a Secretarial Audit is broad and spans multiple laws, including but not limited to:
- Companies Act, 2013
- Securities Laws, including:
- SEBI (LODR) Regulations
- SEBI Takeover Code
- SEBI Insider Trading Regulations
- SEBI Listing Agreement
- Foreign Exchange Management Act (FEMA)
- Labour Laws
- Environmental Laws
- Industry-specific Regulations
- Secretarial Standards issued by ICSI
Additionally, the Secretarial Auditor also:
- Reviews the company’s systems and processes for compliance.
- Examines the Board structure and its functioning.
- May rely on reports from other professionals (auditors, legal counsel) for certain compliance areas.
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Eligibility Criteria for the Appointment of a Secretarial Auditor
To be appointed as a Secretarial Auditor, the individual must:
- Be a qualified Company Secretary (CS) and a member of ICSI.
- Hold a valid Certificate of Practice (CoP) issued by ICSI.
- Have undergone relevant training in corporate governance and compliance.
- Maintain professional ethics and conduct in line with ICSI guidelines.
Only a Practising Company Secretary (PCS) is authorised to conduct and issue a Secretarial Audit Report.
Process of Secretarial Audit
The typical step-by-step process for conducting a Secretarial Audit is:
- Preparation of a Compliance Checklist:
Based on applicable laws and regulatory frameworks. - Compliance Verification:
The auditor examines the company’s records, registers, filings, and processes. - Management Interaction:
Discusses preliminary findings and areas of concern with management. - Recommendations and Corrective Actions:
Advises management on how to address any gaps or non-compliance issues. - Preparation of the Final Report (MR-3):
The auditor formally documents observations and recommendations. - Filing and Disclosure:
The report is submitted to the Board and included in the Annual Report as required.
Features of Company Secretarial Audit
A Secretarial Audit is distinguished by several key features:
- Independent Audit:
Conducted by an external Practising Company Secretary. - Comprehensive Scope:
Covers company law, securities law, tax law, labour law, environmental law, and other applicable legal frameworks. - Systematic & Evidence-Based:
Based on a thorough review of records and procedures. - Board-Level Reporting:
Findings and recommendations are directly reported to the Board of Directors. - Governance-Focused:
Designed to strengthen the company’s corporate governance practices.
Punishment for Default Secretarial Audit
Non-compliance with Secretarial Audit provisions carries penalties under:
Section 204(4) of the Companies Act, 2013:
The company, every officer in default, and the PCS (if found guilty) are liable to a fine of up to ₹5 lakh.
Section 448 (False Statements):
- Imprisonment up to 10 years, and/or
- Fine up to ₹10 lakh for making false statements in the audit report.
The Company Secretaries Act, 1980:
Disciplinary action against the Company Secretary may include:
- Suspension or cancellation of the Certificate of Practice.
- Monetary penalties.
- Professional misconduct proceedings.
Objectives of Secretarial Audit
The key objectives of Secretarial Audit are:
- Ensure the company complies with legal and regulatory frameworks.
- Identify non-compliance issues before they become liabilities.
- Promote good corporate governance.
- Protect the interests of stakeholders- investors, employees, customers, and regulators.
- Help management take corrective actions proactively.
- Prevent penalties and legal actions for non-compliance.
Benefits of Secretarial Audit
Conducting a Secretarial Audit offers many advantages:
- Enhances the company’s compliance culture.
- Reduces legal risks and the likelihood of penalties.
- Supports better corporate governance and transparency.
- Increases stakeholder confidence- important for investors and regulators.
- Helps Directors and Management make more informed decisions.
- Facilitates continuous improvement in internal processes and systems.
Frequently Asked Questions
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
Frequently Asked Questions
What is the applicability of Secretarial Audit to companies?
Secretarial Audit is mandatory under Section 204 of the Companies Act, 2013 for the following companies:
- All Listed Companies
- Public Companies with:
- Paid-up share capital of ₹50 crore or more, or
- Turnover of ₹250 crore or more
- Private Companies with outstanding borrowings of ₹100 crore or more from banks or financial institutions.
Is Secretarial Audit mandatory for SME-listed companies?
Yes, Secretarial Audit is mandatory for all listed companies, including SME listed companies, irrespective of their size, as per the Companies Act, 2013.
Is a Statutory Audit compulsory for small companies?
Yes, a Statutory Audit is mandatory for all companies, including small companies, under Section 139 of the Companies Act, 2013. Regardless of size or turnover, every company must appoint a statutory auditor to audit its financial statements annually.
What is the limit of a Secretarial Audit?
There is no specific financial limit for conducting a Secretarial Audit. Applicability is based on:
- Listing status (mandatory for all listed companies), or
- Financial thresholds for Public and Private companies as mentioned earlier.
However, as per ICSI guidelines, a Practising Company Secretary (PCS) can conduct Secretarial Audits for a maximum of 10 companies per financial year.
Who can conduct the Secretarial Audit?
Only a Practising Company Secretary (PCS) holding a valid Certificate of Practice (CoP) issued by the Institute of Company Secretaries of India (ICSI) can conduct a Secretarial Audit.
Who can sign the Secretarial Audit Report?
The Secretarial Audit Report (in Form MR-3) can only be signed and issued by a Practising Company Secretary (PCS) who has conducted the audit.
How is the Secretarial Auditor appointed?
The Secretarial Auditor is appointed by the company’s Board of Directors through a formal Board Resolution. The appointment should ideally be done at the start of the financial year to ensure adequate audit scope coverage.
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