GUIDANCE NOTE

ON

SECRETARIAL AUDIT (Release 1.2)

Release 1.2 : March 2015

Price : Rs. 500

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

Copyright :- The Institute of Company Secretaries of India. All rights reserved. No part of this Publication may be translated or copied in any form or by any means without the prior written permission of The Institute of Company Secretaries of India.

ISBN : 978-93-82207-16-0

Published by :

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003

Phones : 41504444, 45341000 Fax : 24626727

Website : www.icsi.edu Email : info@icsi.edu

Printed at Samrat Offset Works / 1000/ March 2015

(ii)

PREFACE

Governments, financial institutions, banks and companies all have realized that the corporate compliant regime lies not in the adequacy of legislations but in its implementation and compliance. Enactment of various laws is not enough and the desired results cannot be achieved unless their implementation is geared up.

The frauds and scams, which have been detrimental not only to growth of financial market but have been a set back to the economy as a whole, have occurred in the past despite and inspite of having plethora of legislations.

Realising the need to ensure compliance of laws in letter and spirit on continuous basis by an independent professional, the Companies Act, 2013 mandated the carrying out of secretarial audit for bigger companies.

The multiplicity of laws, rules, regulations, etc. has necessitated introduction of a secretarial audit to ensure compliances of laws applicable to a company. This has a two-fold objective:

(a) Firstly, to protect the interests of all the stakeholders;

(b) Secondly, to have effective compliance system and governance process.

Secretarial Audit is a mechanism which gives necessary comfort to the management, regulators and the stakeholders, as to the compliance by the company of applicable laws and the existence of proper and adequate systems and processes.

The Legislature has entrusted company secretaries in practice with this responsibility of conducting secretarial audit. The powers and duties of auditors is mutatis mutandis applicable to the company secretary in practice conducting secretarial audit.

This Guidance note (Revised edition) highlights the meaning, benefits, process, approach and scope of Secretarial audit, and professional responsibility for incorrect audit report. This guidance note also provides checklists with respect to five mandatory laws as specified in Form MR-3. It also has a chapter on Secretarial standards, board processes and specimen Secretarial Audit Report.

I am confident that this publication will prove to be of immense practical value to professionals while carrying out the secretarial audit.

I commend the dedicated efforts put in by the ICSI team led by CS Alka Kapoor, Joint Secretary and comprising CS Banu Dandona, CS Lakshmi Arun, Deputy Directors, CS Deepa Khatri, Assistant Director, Mr. Chittaranjan Pal, CS Khusbu Mohanty and CS Disha Kant, Assistant Education Officers under the overall guidance of CS Sutanu Sinha, Officiating Secretary & Chief Executive, ICSI and the guidance and leadership of CS Vineet Chaudhary, Central Council Member and Chairman, Corporate Laws and Governance Committee.

I place on record my sincere thanks to; CS Mahesh Athavale, Past President ICSI; CS Pavan Kumar Vijay, Past President, ICSI; CS V Sreedharan, Past Council Member, ICSI; CS Ahalada Rao, Council Member; CS Ashish Garg, Council Member; Mr. V K Aggarwal, Former Principal Director; CS Henry Richard, Retd. Regional Director, South Eastern Region, Ministry of Corporate Affairs and Mr. Vinay Sanduja, Senior Associate, Dua Associates (Advocates & Solicitors) for their valuable inputs.

In any publication, there is always scope for further improvement. I would personally be grateful to users and readers for offering their suggestions/comments for further refinement.

Date : 27-03-2015 CS Atul Mehta

Place: New Delhi President

The Institute of Company Secretaries of India

(iii)

I N D E X

Sl. No.

Chapter

Page Nos.

1

Secretarial Audit

1

2

Companies Act, 2013

42

3

Capital Market related laws/Rules/Regulations

107

Part A : Securities Contracts (Regulation) Act, 1956 and Rule made thereunder

107

Part B : Depositories Act, 1996

109

Part C : SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

110

Part D : SEBI (Prohibition of Insider Trading) Regulations

115

Part E : SEBI (ICDR) Regulations, 2009

122

Part F : Issue of Securities through employee stock option

132

Part G : SEBI (Issue and Listing of Debt Securities) Regulations,

2008

136

Part H : SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993

144

Part I : SEBI (Delisting of Equity Shares) Regulations, 2009

145

Part J : SEBI (Buyback of Securities) Regulations, 1998

148

Part K : Listing Agreement

151

4

Foreign Direct Investment (FDI)

159

5

Direct Investment by Resident in Joint Venture/Wholly Owned

Subsidiary abroad

165

6

External Commercial Borrowing

171

7

Secretarial Standards under the Companies Act, 2013

174

8

Labour Laws

176

9

Competition Law

192

10

Environmental Laws

199

11

Industry Specific Laws

205

12

Board Processes

212

13

Specimen Qualified Secretarial Audit Report

222

(v)

1

SECRETARIAL AUDIT

Genesis of Secretarial Audit

A corporation has to function within the periphery of host of legislations. It is essential for a corporation to abide by plethora of applicable laws, rules, procedures, regulations and the internal regulatory framework.

Under most of the laws, the persons who are responsible for compliance and liable for punishment for non-compliances are directors, the Company Secretary and officers who have been designated to ensure compliances of specific laws and regulations applicable to a company.

Under the Companies Act, 2013, a managing and/or whole-time director, along with other Key Managerial Personnel and other Directors may be treated as officers who are in default and will be liable for penal consequences for non-compliance, while under most of the other laws, persons in charge of and responsible for the conduct of business of the company are held responsible.

Secretarial Audit is a mechanism which gives necessary comfort to the management, regulators and the stakeholders, as to the compliance by the company of applicable laws and the existence of proper and adequate systems and processes.

Secretarial Audit also covers non financial aspects of the business having impact on its business and performance and verifies compliances of applicable laws, regulations and guidelines. Nonetheless, this exercise also mitigates business risk to a great extent. It evaluates the manner in which the affairs of a company are conducted. While pursuing its business activities, the company has to comply with the rules and regulations relating to the Companies Act, Securities laws, FEMA, industry specific laws and general laws like Labour Laws, Competition Law and Environmental and Pollution Related laws.

Secretarial Audit postulates verification on a test basis of records, books, papers and documents to check compliance with the provisions of various statutes, laws and rules & regulations by a Company Secretary in Practice to ensure compliance of legal and procedural requirements and processes.

Secretarial Audit is, therefore, an independent and objective assurance intended to add value and improve operations of a company. It helps to accomplish the organisations objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

Recommendation by Parliamentary Standing Committee on Finance

Report of Parliamentary Standing Committee on Finance

Twenty- first report of Standing Committee on Finance on the Companies Bill, 2009 in the year

2009-2010 recommended Secretarial Audit in listed and bigger companies. The extracts from the

Report are as follows:

(21) (Guidance Note on Secretarial Audit)

Para 7.8: *****Secretarial Audit may also be mandated for bigger companies, including all listed companies; as it inter-alia provides necessary assurance to the investors that the affairs of the Company are being conducted in accordance with the legal requirements;

Para 10.53: Keeping in view its significance for ensuring procedural compliance by companies, particularly with regard to various statutory disclosures and to ensure adherence to prescribed secretarial standards, the Committee recommend that Secretarial Audit report may be required to be attached with financial statements by companies exceeding certain threshold limit of paid-