Compliance Check – Secretarial Audit

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    Overview:

    Compliance check or secretarial audit is a thorough and systematic assessment of a company’s compliance with various laws and regulations applicable to it. It is an independent review of the company’s compliance with statutory and regulatory requirements as well as its own policies and procedures. The primary objective of secretarial audit is to identify non-compliances and weaknesses in the company’s compliance processes and practices, and to recommend corrective actions to mitigate the risks associated with non-compliance.

    Why do you need Compliance Check – Secretarial Audit?

    • Ensure compliance with the Companies Act, 2013 and other applicable laws and regulations.
    • Minimize the risk of penalties, fines, legal liabilities, and reputational damage arising from non-compliance.
    • Identify gaps and weaknesses in the company’s compliance framework and address them proactively.
    • Improve corporate governance and transparency.
    • Enhance investor confidence and trust.

    Scope and area of secretarial Audit

    The Scope of Secretarial Audit involves assessing adherence to five key legislations as specified in form MR-3:

    • Companies Act, 2013 and its associated rules;
    • Securities Contracts (Regulation) Act, 1956 (‘SCRA’), and its rules;
    • Depositories Act, 1996, and its rules;
    • Foreign Exchange Management Act, 1999 and its regulations, particularly concerning Foreign Direct Investment, Overseas Direct Investment, and External Commercial Borrowings;
    • Regulations and Guidelines under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’).

    It also includes:

    • Verifying compliance with secretarial standards issued by the Institute of Company Secretaries of India;
    • Ensuring adherence to the Listing Agreement;
    • Checking compliance with industry-specific laws, such as those applicable to the banking, insurance, petroleum, pharmaceutical, and cement industries, among others.

    Additionally, the audit:

    • Reviews and reports on the effectiveness of systems and processes in relation to other laws;
    • Monitors compliance with general laws like labor laws, competition law, environmental laws;
    • Provides observations on the Board’s structures/systems and processes during the audit period.

    A Secretarial Auditor may utilize reports from statutory auditors or other professionals to verify compliance with laws like Income Tax, Customs, GST.

    Procedure:

    The procedure for compliance check or secretarial audit typically involves the following steps:

    1. Planning and scoping: The auditor evaluates the scope of the audit based on the size, nature, and complexity of the company’s operations, as well as the relevant laws and regulations. The auditor also identifies the key areas and activities to be audited.
    2. Review of documents and records: The auditor examines the company’s books, records, registers, contracts, agreements, minutes, resolutions, policies, procedures, and other relevant documents to assess the company’s compliance with legal and regulatory requirements.
    3. Interviews and discussions: The auditor interacts with the company’s directors, officers, employees, and other stakeholders to understand the company’s compliance practices, procedures, and policies.
    4. Audit report: Based on the findings of the audit, the auditor prepares an audit report that identifies non-compliances, weaknesses, and areas of improvement. The report also includes recommendations for corrective actions and timelines for their implementation.
    5. Follow-up: The company’s management takes necessary actions to implement the recommendations and rectify the non-compliances. The auditor follows up to ensure that the corrective actions have been implemented effectively.

    Penalties of non compliance

    If a company, any officer of the company, or the company secretary in practice contravenes the provisions of this secretarial audit, the following penalties apply:

    • The company or
    • Every officer of the company or
    • The company secretary in practice

    who is in default, shall be punishable with a fine:

    • Minimum: Rs. 1 lakh.
    • Maximum: Rs. 5 lakh.

    Documents Required:

    The auditor may require the following documents for conducting a compliance check or secretarial audit:

    • Memorandum and Articles of Association
    • Board and committee minutes
    • Shareholders’ agreements
    • Contracts and agreements
    • Registers and records
    • Financial statements and reports
    • Tax returns and compliance certificates
    • Licenses and permits
    • Other relevant documents

    Secretarial Audit is not compulsory for private and smaller public companies. However, these entities are encouraged to implement secretarial audit practices to ensure compliance and mitigate the risks linked to non-compliance.

    The audit is founded on the principle that “Prevention is better than cure,” focusing on proactive measures rather than being a retrospective fault-finding exercise. It fortifies a company’s reputation and standing in the eyes of regulators and stakeholders and serves as an effective tool for compliance risk management and governance.

    If you need any help, or partner to help you deal with compliance check – secretarial audit, Corporate Raasta Consulting is here for you.

    • A qualified and independent company secretary or chartered accountant can conduct a compliance check or secretarial audit.

    • A compliance check or secretarial audit should be conducted at least once a year or as per the requirements of the Companies Act, 2013.

    • The benefits of compliance check or secretarial audit include improved compliance practices, minimized risks of non-compliance, enhanced corporate governance, and increased investor confidence.

    • Yes, a compliance check or secretarial audit can be conducted remotely using digital tools and platforms.

    • Non-compliance can result in penalties, fines, legal liabilities, reputational damage, and even criminal prosecution in some cases.

    • Secretarial Audit benefits a wide range of stakeholders, including promoters, executive directors, officers of the company, regulators, government authorities, investors, financial institutions, banks, creditors, and consumers.

    • No, a Secretarial Audit is not mandatory for private and small public companies. However, all listed companies and public companies must meet certain financial thresholds.

    • The Secretarial Audit reports on compliance with the Companies Act, 2013, SCRA, Depositories Act, FEMA (specifically for FDI, ODI, and ECBs), and SEBI Act regulations and guidelines.