What is Secretarial Audit?
A Secretarial Audit is an independent, objective examination of a company's compliance with various laws, rules, regulations, and procedures administered by the Company Secretary. Unlike a financial audit that focuses on the accuracy of financial statements, a secretarial audit evaluates whether the company has complied with the legal and procedural requirements prescribed under corporate and allied laws.
The concept was introduced to ensure that companies, particularly those of significant size, maintain transparency and accountability in their corporate governance practices. The secretarial audit report provides stakeholders – including regulators, investors, and the public – with assurance that the company is operating within the legal framework.
The audit is conducted by a Practicing Company Secretary (PCS) who holds a Certificate of Practice issued by the Institute of Company Secretaries of India (ICSI). The findings are reported in Form MR-3, which is annexed to the Board's Report and made available to shareholders.
Legal Basis: Section 204 and Rule 9
The secretarial audit finds its legislative foundation in Section 204 of the Companies Act, 2013, read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
Section 204(1) mandates that every listed company and a company belonging to a prescribed class shall annex a secretarial audit report given by a Company Secretary in Practice in Form MR-3 to its Board's Report.
Key provisions:
- The Board of Directors must appoint a PCS to conduct the secretarial audit
- The PCS is entitled to require all documents, records, and explanations from the company
- The company and its officers must provide all assistance and cooperation to the auditor
- If the audit report contains any qualification, reservation, or adverse remark, the Board must explain the same in their report
- Penalty for non-compliance: Fine of ₹1 lakh to ₹5 lakh on the company
Who Needs a Secretarial Audit? (Applicability)
Secretarial audit is mandatory for the following classes of companies:
Listed Companies
Every company whose securities are listed on a recognized stock exchange in India must get a secretarial audit conducted every financial year, regardless of size or turnover.
Public Companies Meeting Prescribed Thresholds
- Paid-up share capital of ₹50 crore or more; OR
- Turnover of ₹250 crore or more
Private Companies Meeting Prescribed Thresholds
- Paid-up share capital of ₹50 crore or more; OR
- Turnover of ₹250 crore or more
Additional Applicability
- Material subsidiaries of listed companies (as per SEBI LODR)
- Companies that have outstanding loans or borrowings from banks/financial institutions aggregating ₹100 crore or more
- NBFCs registered with RBI (under certain RBI master directions)
- Companies where secretarial audit is mandated by specific regulators (SEBI, RBI, IRDAI, etc.)
Scope of Secretarial Audit
The secretarial audit covers compliance with the following laws and regulations:
Primary Laws
- The Companies Act, 2013 and rules made thereunder
- The Securities Contracts (Regulation) Act, 1956 (SCRA) and rules
- The Depositories Act, 1996 and regulations
- Foreign Exchange Management Act, 1999 (FEMA) and applicable rules/regulations relating to FDI, ODI, and ECBs
- SEBI Regulations including LODR, SAST, ICDR, Insider Trading, Registrars & Transfer Agents, Buyback, Delisting
Other Applicable Laws
- Secretarial Standards (SS-1 and SS-2) issued by ICSI
- Listing Agreement and SEBI Listing Obligations
- Industry-specific laws (RBI Act, IRDA Act, PFRDA Act, etc.)
- Labour laws, environmental laws, and other statutory requirements specific to the company's operations
The Secretarial Audit Process
Step 1: Appointment of the Auditor
The Board of Directors passes a resolution appointing a Practicing Company Secretary to conduct the secretarial audit. The appointment should be made at the beginning of the financial year or as early as possible. The PCS issues a consent letter and engagement letter outlining the scope, timeline, and terms of the engagement.
Step 2: Planning and Preliminary Review
The PCS studies the company's business, its regulatory environment, and prepares an audit plan. A preliminary document request list is shared with the company covering board minutes, registers, filings, and compliance records.
Step 3: Document Review and Verification
This is the core phase of the audit where the PCS examines:
- Board and committee meeting minutes
- General meeting minutes and resolutions
- Statutory registers (members, directors, charges, contracts, etc.)
- ROC filings and MCA compliance records
- SEBI/stock exchange filings (for listed companies)
- RBI/FEMA compliance (if applicable)
- Related party transactions and their approvals
- Directors' appointments, resignations, and disclosures
- Share transfers, allotments, and capital changes
Step 4: Management Discussion and Clarification
The PCS discusses observations with the management, seeks clarifications, and obtains management representations. This phase helps distinguish between non-compliances and matters requiring only disclosure.
Step 5: Reporting in Form MR-3
The PCS prepares the Secretarial Audit Report in Form MR-3, which includes an opinion on compliance, qualifications (if any), observations, and recommendations. The report is addressed to the members of the company.
Form MR-3 Explained
Form MR-3 is the prescribed format for the Secretarial Audit Report. Its key components include:
- Scope paragraph: Lists the laws, rules, and regulations examined during the audit
- Responsibility paragraph: Clarifies that management is responsible for compliance while the auditor provides an independent opinion
- Opinion paragraph: States whether the company has complied with the applicable provisions
- Qualifications/Observations: Reports any non-compliances, deviations, or areas of concern
- Annexure: Details of non-compliances with specific references to laws/regulations violated
The report must be signed by the PCS with their membership number, CP number, and UDIN (Unique Document Identification Number) issued by ICSI.
Common Observations and Qualifications
Based on practice experience, the following are frequently reported observations in secretarial audit reports:
- Delayed filings: Late filing of annual returns (MGT-7), financial statements (AOC-4), or event-based forms with ROC
- Board meeting gaps: Gap between board meetings exceeding 120 days or fewer than 4 meetings in a year
- Non-compliance with Secretarial Standards: Inadequate notices, improper minutes, or non-circulation of agenda within prescribed timelines
- Related party transaction irregularities: Transactions without prior board/audit committee approval or shareholder approval where required
- SEBI LODR non-compliance: Delayed intimation to stock exchanges, non-filing of corporate governance reports, or inadequate disclosures
- Director appointment issues: Non-filing of DIR-12 for appointments/resignations within stipulated timelines
- Inadequate disclosures: Directors not making required disclosures under Section 184 or 189
- Non-maintenance of statutory registers: Registers not updated or maintained in the prescribed format
Consequences of an Adverse Report
A qualified or adverse secretarial audit report can have significant implications:
- Board accountability: The Board must explain every qualification in their Directors' Report, which becomes part of the public record
- Regulatory scrutiny: An adverse report may trigger inspection or investigation by the ROC, SEBI, or other regulators
- Investor confidence: Qualifications visible in the annual report can erode investor and stakeholder confidence
- Credit rating impact: Rating agencies consider governance compliance as a factor in creditworthiness assessment
- Stock exchange queries: Listed companies may face clarification requests from stock exchanges
- Director liability: Persistent non-compliances may expose directors to personal liability and disqualification proceedings
How to Prepare for a Secretarial Audit
Companies can ensure a smooth audit process by taking these preparatory steps:
- Appoint early: Engage the PCS at the start of the financial year so they can conduct periodic reviews rather than a year-end rush
- Maintain real-time records: Keep board minutes, statutory registers, and compliance trackers updated throughout the year
- Track all filings: Maintain a register of all ROC, SEBI, RBI, and other regulatory filings with dates and SRN numbers
- Document approvals: Ensure all related party transactions, director appointments, and material decisions have proper board/shareholder resolutions
- Internal compliance checklist: Prepare a law-wise compliance checklist and review it quarterly with the Company Secretary
- Organize documents: Create a structured filing system (physical and digital) with indexed folders for easy retrieval during audit
- Conduct internal review: Perform a self-assessment before the external audit to identify and rectify gaps proactively
- Management representation: Prepare a comprehensive management representation letter addressing all compliance areas
Conclusion
Secretarial audit is not merely a compliance exercise – it is a governance health check that ensures companies operate within the legal framework while maintaining transparency and accountability. For companies meeting the applicability thresholds, it is a mandatory requirement whose non-compliance attracts penalties and reputational risk.
At Deepa Sharma & Associates, we conduct thorough, professional secretarial audits that go beyond tick-box compliance. Our approach helps companies identify governance gaps, strengthen internal processes, and build a culture of compliance that serves them well in the long run. Whether you need your first secretarial audit or want to switch to a more proactive audit partner, we are here to assist.