Secretarial Compliance and Precautions for Statutory Auditor

B Y

C A P . M A N O H A R A G U P T A

B A N G A L O R E

Secretarial Compliance and Precautions for Statutory Auditor

Introduction

Business world is rapidly growing and changing globally. Frauds and scams also have grown resulting in collapse of large

corporates. It was found that lack of proper corporate governance was one of

major causes for collapse of giant entities like Enron, Worldcom,Xerox and IL&FS in India to name a few.

Need has arisen for corporate world particularly for largetransnational corporate entities to take corporate governancematters seriously.

Today, in India, the corporate sector is governed by a complexseries of laws, rules and regulations. It is essential for a companyto abide by plethora of applicable laws, rules, procedures,regulations and the internal regulatory framework

Even lenders have started realising importance of complianceframe work as one of major financial health checks.

By CA P.Manohara Gupta

What is Secretarial Audit

Secretarial Audit is a kind of system, which providesnecessary comfort to the management, regulators andthe stakeholders, as to the compliance by the company ofapplicable laws and the existence of proper and adequatesystems and processes in the company.

Secretarial Audit helps to ensure flawless compliance andtimely corrective action when non-compliance isdiscovered.

Secretarial Audit provides an assurance to the board ofdirectors that the company is compliant with variouslaws.


Objective of Secretarial Audit

The Secretarial Audit is an effective tool for evaluatingprimarily corporate law compliance by management.

It also indicates whether an effective system is in placefor ensuring compliance with all other applicablestatutes.

Reasonable basis is expected for evaluating the corporateconduct and statutory compliances

Importance of Secretarial audit is so seriously recognisedin our country that duel statutory authorities haveimposed secretarial audit system in large corporates.


Applicability

Concept of Secretarial Audit for select class of companies wasintroduced from FY 2014-15 through Sec 204 of The companies Act,2013.

This is applicable to:- All listed companies/ Entities;- Material Indian Subsidiaries of listed Companies effective fromMarch, 2019 as per SEBI LODR Regulations.(Material Subsidiary means subsidiary with more than 10% ofconsolidated Networth or income)

- Public companies with turnover of Rs 250 Crores or more; and- Public companies with paid up share capital of Rs 50 Crores and

more.Effective from 1st April, 2020, this is also extended to those companies

whether public or private having borrowings from Banks or Publicfinancial institutions of Rs 100 Crores or more.


Extended coverage


Secretarial Audit is also made applicable to all PSUlisted banks/ and all other listed entities effectivefrom the FY ended 31st March, 2019.

(vide SEBI Circular dated 8th February, 2019.)

Secretarial Audit Not covered

It is not applicable to:

- Material subsidiaries of Un-listed companies thoughparent companies are covered.

- Private companies even they are large are not coveredunless they have borrowings from Banks or FinancialInstitutions of Rs 100 Crores or more.

(Recently, on 03.01.2020, MCA has widened the scope of Rule 9 of the Companies

(Appointment and Remuneration to Managerial personnel) Rules, 2014 and as a result ofsuch amendment, private companies with debts amounting to Rs. 100 crore or more shallnow have to compulsory undergo secretarial audit. [To be effective from 01.04.2020]


Secretarial Audit process

Required by both Sec 204 of the Companies Act and Regulation24A of SEBI LODR Regulations

To be carried out by Practicing Company Secretary.(Effective from 1st April, 2020 PCS should have peer reviewcertificate from ICSI.)

Appointed by the Board of directors for one year term

Secretarial Audit Report is addressed to the Members to befurnished in the prescribed Form MR3.

Secretarial Audit Report forms part of Directors Report. It is anAnnexure to Directors Report.

SEBI also prescribed Secretarial Compliance Certificate inaddition to Secretarial Audit.


Scope of Secretarial Audit

Covers to compliance with five Primary laws:

1.The Companies Act 20132. Securities Contract (Regulation) Act 19563. Depositories Act 19964. FEMA (FDI / ODI / ECB5. SEBI Regulations including – Takeover Regulations, Insider Trading, ICDR,

ESOP, Issue and Listing of securities and Debt , RTA Compliance, Delisting,Buy Back, and Secretarial Standards.

As per Finance Ministers recent announcement a company with a singlesecurity being debentures or preference shares will not be considered as listed,but there is no statutory notification in this regard.

Secondary Laws:All laws applicable to the company’s activities but ensure whether appropriatesystem is in place for compliance.


Scope of SA in cased of listed Banks

Apart from those discussed in previous slide, in case of PSU Banks, SA report should also cover:

Banking Regulation Act, 1949;

Banking Companies (Acquisition and Transfer of Undertakings)Act, 1970;

The Nationalised Banks(Management and Miscellaneous Provisions) Scheme, 1970;

Respective Bank (Shares and Meetings) Regulations

Reserve Bank of India Act, 1934


Basic Tenets of Secretarial Audit

Report to be in prescribed format MR 3Notice agenda including notes on agenda, minutes of meetings,attendance registers

Draft Financial Statements, Auditor’s Report, Director’s Report Statements for borrowings and investments All Statutory Registers Disclosures / consents / declarations Filings with RoC / regulatory authorities / RBI Filings / submissions to Stock Exchanges Relevant approvals / correspondence/disclosures by directors. Compliance certificates of functional heads for compliance of

applicable laws Legal cases or disputes in courts of law


Scope

Secretarial Audit should also cover specificevents/actions having material bearing on theentity’s affairs.

Insolvency Resolution Plan under IBC, 2016;

Action under RERA, 2015

Mergers and Acquisitions and Other Restructuringactivities

Loss of any critical documents


Expectations

Whether the company has made comprehensive disclosuresabout its code of conduct, recruitment, procurement/tendering, customer charters and other important policydisclosures on its website?

Whether there exist institutional mechanisms for disclosingpositive and negative information of the company to allstakeholders on a timely basis?

Whether all disclosures pertaining to personal interestleading to potential conflict with the interest of companyare made?


Concerns

Defaults appearing in SEBI /NSE/BSE websites are notreported in certain Secretarial Audit Reports.

Regulators raised concerns regarding lack of trust in thereports of the Secretarial Auditor


NSE Analysis of SA Reports

ParticularsReporting of Non Compliance

Companies with non compliance

Reported Not Reported

Corporate Governance Non-Compliances:

Composition of Board of Directors 126 74 52

Composition of Audit Committee 63 21 42

Appointment of Women Director 16 16 0

100 % Promoter Shareholding not in DematForm

98 1 97

Non submission of Limited Review Report 99 0 99

SAST & PIT Non-Compliance 57 0 57

Modified/Unmodified Opinion not submitted along with the Financial results

84 1 83

No disclosure for BRR Policy in Annual Report

12 0 12

No Disclosure for Dividend Policy in Annual report

51 0 51By CA P.Manohara Gupta

Observations on Audits undertaken of Nifty Companies in 2016

153 unique Acts, Rules, Regulations, Guidelines,Agreements and Standards were referred to in theSecretarial Audit Reports of 48 companies in 2016.

This represents a decrease in the number ofmandates reported by 4 from 157 reported in 2015.

Ten companies had qualified Secretarial AuditReports of which seven were public sectorcompanies. in 2016


Compliance status

There is a reduction by three companies with qualifiedSecretarial Audit Reports in 2016, as 13 companies hadqualified reports in 2015

In public sector companies, qualified Secretarial AuditReports remained unchanged at seven in 2016, the sameas in 2015.

Overall, the standards of compliance have improved withlesser number of companies having qualified SecretarialAudit Reports.

However, the improvement is only in private sectorcompanies, as compliance levels in public sector companiesremained unchanged.


Duties of Secretarial auditor – Fraud Reporting [Sec 143(12)(14)]

If Company Secretary in Practice, during conduct ofSecretarial Audit, has sufficient reason to believe that anoffence involving fraud is being committed or has beencommitted against the company by officers or employeesof the company, he shall report the same to the CentralGovernment immediately but not later than 60 days ofhis knowledge.

First he should write to the Board / Audit Committeewith in two days of his knowledge seeking their replywithin 45 days.

On receipt of reply with in 15 days he should report to theCentral Government.

These duties are the same as that of Statutory Auditor.


Secretarial Compliance Certificate

SEBI has prescribed for all listed companies to obtainand furnish Secretarial Compliance Certificate from aPracticing Company Secretary with in 60 days from theend of relevant financial year.

PCS must independently check and track compliancewith the applicable SEBI regulations.

He/she has to report on applicable SEBI regulations, itscompliance, deviation, if any and his/her independentremark of particular deviation.

PCS has to not only audit current F.Y but shall alsocomment on action taken by listed entity on deviationpointed out in previous compliance report


Contents of Secretarial Compliance Certificate

Secretarial compliance Certificate is a kind ofexception report.

Clause 3 (a) states that The LE has complied with the provisions of the aboveRegulations and circulars /guidelines except in respect of matters specified

Clause 3 (b) states that The LE has maintained proper records under theprovisions of the above Regulations and circulars/guidelines issued there underinsofar as it appears from his examination of those records…….

Clause 3 (c ) requires to furnish details of action taken against the company, itspromoters, Directors, Material Subsidiaries by SEBI or Stock Exchanges

Clause 3 (d) refers to Action taken by the company to comply with theobservations made in previous years reports.


SA Vs SCC

Covers Companies Act and other

laws as may be applicable specifically to

the company which shall include all the

laws which are applicable to specific

industry

Confines to SEBI Regulations, Circulars & Guidelines.

No concept of reporting follow up of previous year’s observations

Provide the list of observations in thereport for the previous year along withthe action taken by the LE on thoseobservations

To be reported as part of Directors Report

To be reported to SEBI with in 60 days of the end of FY.

To be addressed to Members Addressee is not specified, but to be submitted to Stock Exchanges.

Applies to all listed companies and other large companies

Applies only to listed companies & their Material Subsidiaries.


Statutory Auditor’s Obligation under SA 720

The Auditor is required to read other informationcontained in the Annual Report and:

(a) To consider whether there is a material inconsistencybetween the other information and the financialstatements;

(b) To consider whether there is a material inconsistencybetween the other information and the auditor’sknowledge obtained in the audit;

(c) To respond appropriately when the auditor identifiesthat such material inconsistencies appear to exist, orwhen the auditor otherwise becomes aware that otherinformation appears to be materially misstated


Other Information

Other Information is defined in SA 720 as Financial or Non Financial Information included in the company’s Annual Report other than financial statements and Independent Audit Report thereon.

Directors Report is undoubtedly constitutes Other Information

Secretarial Auditors Report being Annexure to the Directors Report is one of Other Information


Statutory Auditor’s Obligation with regard to Other Information

Statutory Auditor should obtain and read Other Information from the management while framing his report

If the auditor finds any material inconsistency or material misstatement of the other information, he should ascertain whether such material misstatement exists in the financial statements or in the other information.

He should request the management to correct such misstatement.


Other Information prior to Audit Report

When the Auditor obtains Other Information before issuing Auditors Report and management has refused to correct any material misstatement:

He should communicate to those charged with governance that how he is going to address such misstatement in his report;

Withdraw from the engagement, if such withdrawal is possible in accordance with applicable law or regulation.


Other Information after the Audit Report

If the auditor comes to know of any material misstatement exists in other information after the date of his report

He should take up the matter with those charged with governance for appropriate communication to the members

He may in appropriate situation, amend his report and request the management to circulate such amended report to the members.


Areas of common information

Following are common areas under the CompaniesAct, 2013:

Related party Transactions and compliance with sec177 & 188

Loans and Investments and Compliance with sec 185and 186

Managerial Remuneration and compliance with Sec197 & 198

Going concern issues

Directors disqualifications u/s 164(2) & 167


Conclusion

As ‘SA’ stands for both Statutory Audit and SecretarialAudit, both the audits compliment to each other.

ICSI also is following our footsteps by introducingSecretarial Standards in the line of Standards on Auditand mandatory UDIN in their reports effective from 1st

October, 2019. With long awaited accomplishment for multi

professional firms is offing, it would be more effective inhormonisation of financial and legal disciplines in acorporate entity.

This would promote sustainable development andendeavour to balance between private and publicinterest.


Case study

Alok Industries: Qualifications in Secretarial Audit Report:

1. Non appointment of Woman Director;2. Default in payment of interest on debentures for more

than one year, thereby disqualification u/s 164(2) & 167.3. Non implementation of change in capital structure and

winding up petition filed by a lendor4. Interest free loan to subsidiary based on audit report

qualification“As per the Statutory Auditors’ Report and information

provided by the Company, the Company has grantedunsecured loans to its wholly owned subsidiaries without anyinterest”


Case study contd…

Alok Industries:

Secretarial Audit Report further states as under:

“I rely on Statutory Auditors’ Report in relation to thefinancial statements, qualifications and accuracy offinancial figures for, Sales Tax, Value Added Tax,Related Party Transactions, Provident Fund, ESIC,FERA etc. as disclosed under financial statements”

“For the compliance with the other applicable laws,we are relying on the certificate given by AdvocateMr. Mohit Kapoor from K.N. Kapoor & Co.”


Case study

Kerala Ayurvedic:Secretarial Auditor has reported the following:

“The limited review and audit reports are given by an auditor who has notsubjected himself to the peer review process of Institute of CharteredAccountants of India as per Regulation 33 (1) (d) of the Securities andExchange Board of India (Listing Obligations and DisclosureRequirements) Regulations 2015.”

Posers:i. Whether the act of CA in accepting the appointment as auditor andissuing audit report in contravention of SEBI Regulations would amount toprofessional misconduct?

ii. Is it a disqualification though not prescribed under the Companies Act?

iii. Whether appointment of auditor by the company would amount toinvalid?



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Secretarial Compliance and Precautions for Statutory Auditor

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