Section 204 of the Companies Act, 2013 ("the Act") mandates a secretarial audit for a defined class of companies. The audit is conducted by a practising company secretary and the report is annexed to the board's report in Form MR-3. The provision is not a voluntary governance enhancement; it is a statutory obligation, and the failure to appoint a secretarial auditor or to annex the report is a penal offence.
The Applicability Matrix
Every listed company and every public company having a paid-up share capital of fifty crore rupees or more, or a turnover of two hundred fifty crore rupees or more, must conduct a secretarial audit. A public company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more, or having outstanding deposits of twenty-five crore rupees or more, is also covered. The thresholds are cumulative in the sense that the company must satisfy any one of them; they are not alternative tests that require satisfaction of all.
The scope of the audit is prescribed by Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The secretarial auditor must examine compliance with the Act, the rules, the secretarial standards, and the applicable regulations, including the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for listed entities. The audit is not a financial audit; it is a compliance audit focused on the company's secretarial and governance processes.
Form MR-3: Contents and Disclosure
The secretarial audit report is in Form MR-3. It must set out the auditor's observations on the company's compliance with the applicable laws, the adequacy of the board's processes, and any specific non-compliances. The report is not a certificate of good governance; it is a report of the auditor's examination, and it must disclose adverse observations where they exist.
The report must be annexed to the board's report and must form part of the annual report. For listed companies, Regulation 24A of the SEBI LODR imposes additional requirements, including the audit of the material unlisted subsidiary. The secretarial audit report is a public document, and it is subject to the scrutiny of regulators, shareholders, and proxy advisers.
The Consequences of Non-Compliance
The ROC has imposed penalties on companies that failed to appoint a secretarial auditor or to annex the Form MR-3 report to the board's report. The penalty is imposed on the company and on every officer in default. The penalty is not a substitute for the appointment; it is an additional consequence, and the company remains obligated to appoint the auditor and to file the report.
A compliant secretarial audit requires an auditor who is independent, a scope that is comprehensive, and a report that is candid. A report that conceals adverse observations is a false report, and the auditor is liable for the consequences.
Call to Action
Anuj Desai & Associates advises companies on the applicability of Section 204, the appointment of the secretarial auditor, the scope of the audit, and the contents of Form MR-3. If your company is unsure whether it is covered, or if you are remediating a non-compliance, we can help you structure a compliant secretarial audit process.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
Article 71