Secretarial Audit: A Corporate Governance Measure Beyond a Statutory Requirement

With the passage of time Regulators & Corporates have realized that the soul of the corporate compliant regime is not merely enacting a plethora of legislations but in its implementation and compliance. The desired results can be achieved only if the laws are complied to its letter and spirit. To strengthen good corporate governance practice in India by providing reasonable comfort to the management, regulators, and the stakeholders in relation to compliance of multiple laws, rules, regulations, etc. the Companies Act, 2013 mandated the carrying out of secretarial audit by independent professional for a certain class of companies. 

One cannot deny the fact that good corporate governance and compliance framework is crucial to ensure transparency and accountability. It can prevent corporate scandals, fraud and scams and disasters like Satyam Scam PNB Scam and the fall of Sardha & Sahara Group.  

Secretarial Audit: Where statutory audit primarily focuses on the financial aspect and impact, secretarial audit covers non-financial aspects of the business and its impact on the performance of the company. It verifies compliances of applicable laws, regulations, and guidelines to mitigate various risks associated with non- compliance. 

Secretarial Audit is essentially a mechanism to monitor compliance with the requirements of stated laws by verification of secretarial records and compliances ought to be maintained by the company. In other words, secretarial audit is a compliance audit, and it is a part of total compliance management in an organisation. It is an effective tool for corporate compliance management and corporate governance management. It helps to detect non-compliance and to take corrective measures. The secretarial auditor shall be a practicing company secretary appointed by the board of directors, and the secretarial report submitted by the secretarial auditor shall be annexed to the director’s report. 

Applicability of Secretarial Audit: The benefits of Statutory Auditor are super-numerary, making it a comprehensive tool, too attractive to be used voluntarily by the companies & various stake holders and not only when statute mandates its applicability.  

Legal Framework governing Secretarial Audit: The Companies Act, 1956 did not contain any provision with respect to secretarial audit. However, the Ministry of Corporate Affairs had released ‘Corporate Governance Voluntary Guidelines 2009’ in December, 2009, to ensure that the effective compliance system is in place.  However, the stated guidelines did not mandatorily provide for conducting of Secretarial Audit, rather such guidelines gave an option to the Companies to get the Audit done by a Practicing Professional. 

The Companies Act, 2013 introduced secretarial audit as a mandatory requirement for a certain class of companies. Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, following companies are mandatorily required to carry out a secretarial audit: 

• Every listed company; or 
• Every public company having a paid-up share capital of Rs.50 crore or more; or 

• Every public company having a turnover of Rs.250 crore or more. 
• Every company having a borrowing of 100 crores or more. 

In addition, Regulation 24A SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report. 

Benefits of Secretarial Audit 

1. To Investors: Secretarial Audit helps prospective investors in taking informed investment decision, as it evaluates the company in terms of compliance and governance norms being followed by the company. The degree to which corporations observe basic principles of good corporate governance and compliances framework is an increasingly important factor for taking key investment decisions. It does not only become a tool of decision making for an investor, but it also acts as an effective weapon to negotiate deals. Furthermore, it also acts as an excellent bridge for an investor to ensure compliance, regulatory and cultural integration once the money is invested in the company. It facilitates due diligence exercise for prospective investors or joint venture partners. 
2. To Financial Institutions & Other Stake holders: Secretarial audit is used by various other stakeholders including but not limited to financial institutions, banks, creditors, consumers and government to measure the law-abiding nature of company management. Banks and financial institutions are more inclined to fund the companies which go an extra mile with their compliance programs.
3. To the Company 

• Safeguard against Penalties and Fines: Companies having effective compliance management faces lesser chance of imposition of penalties, both monetary and by way of imprisonment. Inspired by an age-old proverb ‘A stich in time saves nine’, the new compliance mantra is ‘A compliance in time saves fines.’ 

• Attracting and Retaining Talent: Companies which imbibe business, compliance, and personal ethics as a foundation of their work culture often attract people with like values and enjoy employee loyalty. 

• Better Brand Positioning & Customer Loyalty: Secretarial Audit that ensures compliance management in an organization leads to customer loyalty and public respect for their brand. Recognition for the company as a good corporate citizen may help tapping better market capitalization and shareholder returns
  4. Promoters: One of the features of a company form of business is ‘separation of ownership from management’. This feature, if on the one hand helps to bring suitable management skills to the company, also puts promoters under danger of company being mis-managed by management. Secretarial audit assures the promoters of a company that those in-charge of its management are conducting its affairs in accordance with the requirements of laws and the owners are not being exposed to unintended risk.
  5. Nominee Directors of Investors/ Independent Directors/ Non-Executive Directors: Secretarial Audit provides a moderate level of comfort to the nominee directors of investors/ non-executive directors/ independent directors that appropriate mechanisms, framework and processes are in place ensuring compliance with the applicable laws, thus mitigating regulatory, compliance and governance risk which the statute or agreements had placed on their positions. 

Conclusion: India has become one of the fastest emerging nations to attract foreign investments. Indian companies have increasingly been able to access newer and larger markets around the world; as well as able to acquire more funds and businesses. The response of the Government and regulators has also been admirable to meet the challenges and promote ‘ease of business. But as the global environment is changing continuously with corporates having investors around the globe there is a greater need of adopting and sustaining good corporate governance practices and credible, robust and consistent compliance framework for value creation and building corporations of the future, which goes beyond the provisions of a statute.  

Therefore, adoption of secretarial audit voluntarily by the companies on which statutes do not mandate its applicability may help businesses to get aligned with the international trends in corporate governance and coherent compliance framework, we believe that ‘Corporate governance and Compliance ethics starts where the law ends’.