ALLIED LAWS AT MUMBAI ON 28 TH MARCH 2015 PRESENTATION BY CS B - - PowerPoint PPT Presentation

SECRETARIAL AUDIT… “COMPANIES ACT , & ALLIED LAWS” AT MUMBAI ON

28TH MARCH 2015

PRESENTATION BY CS B NARASIMHAN

• 1

SECRETARIAL AUDIT … GENESIS

• February 2000 – Corporate Governance (Clause 49)
• Companies (Compliance Certificate) Rules, 2001 (Section 383A)
• Secretarial Audit Report as envisaged by SEBI for reconciliation
• f total admitted capital with depositories and total issued and

listed capital (CA or CS) December 2002

• Annual Return Certification
• Due Diligence certificates / reports for IPO, open offer, bonus

issue, GDR issue, etc. ..All were some type of reassurance

• MCA Voluntary Guidelines, 2009 … Post Satyam Fiasco
• “Reconciliation of Share Capital Audit” in September 2010
• Secretarial Audit and Annual Return certification (Companies Act

2013)

• 2

NEED FOR S A & WHOM DOES IT BENEFIT?

Multiplicity and Complexity of Laws and Regulations Need for a comprehensive and manageable compliance system Secretarial Audit would be the mechanism to firstly protect the interest of all the stake holders and secondly to avoid any non compliance leading to legal actions Gives assurance to:

• Promoters of Companies
• Directors more specifically the Independent Directors
• Management, who are entrusted with responsibility
• Investors ( Including all the Shareholders)
• Creditors / Trustees, Credit Rating Agencies
• Government & Regulatory Authorities
• Other Stakeholders
• 3

SECRETARIAL AUDIT FOR COMPANIES (SEC 204)

• Companies covered:

(a) Every Listed Company (includes Companies whose debentures, warrants are listed)

(b)Other class of companies:

(i) Every Public Company having a paid up share capital of fifty crore rupees or more (ii) Every public company having a turnover of two hundred fifty crore rupees or more

IS SECRETARIAL AUDIT A PANACEA FOR ALL ILLS ????

• 4

SECRETARIAL AUDIT FOR COMPANIES (SEC 204)

• Secretarial Audit Report shall be annexed to Board’s

Report

• Board in their Report to explain in full any qualification or
• bservation or other remarks made by PCS in his report
• Format of Secretarial Audit Report shall be in Form MR-3
• For contravention – company, every officer who is in

default and PCS punishable with fine – Rs 1 lakh to Rs 5 lakhs

• Entities not Covered
• Private Limited Companies
• Companies with less paid up Capital but with large

public interest, say companies with huge borrowings

• 5

APPOINTMENT OF SECRETARIAL AUDITOR

• The Secretarial Auditor would be required to be appointed in

the board meeting of the Company and the remuneration of the Auditor will also be determined in the aforementioned board meeting [Section 179(3)].

• What should be the fees?????(Seek Quote)!!!!!
• Management may prefer less fees, but at what cost???
• Company is required to file the certified true copy of the

resolution passed in the aforementioned board meeting with the Registrar of Companies as an attachment in e-form MGT – 14.

• However, prior to the appointment, the Company would be

required to obtain the consent of the Secretarial Auditor.

• Period for which appointment to be made…..Act Silent
• Would Rotation of Secretarial Auditor preferred???
• 6

ELIGIBILITY , QUALIFICATIONS AND DISQUALIFICATIONS OF SECRETARIAL AUDITOR

• Excepting the fact that the Auditor should be a PCS there

is no other legal provisions in the Act… Any PCS??

• Who can do justice to this assignment???
• Suggested similar requirements as are set out in the Act

for Statutory Auditors and applicable to Cost Auditors.

• For Listed entities suggest that peer review be made

mandatory like done for Statutory Auditors

• Disqualifications could also be based on Disciplinary

action taken by ICSI for eg. Removal of name from the ROM.

• 7

REMOVAL & RESIGNATION OF SECRETARIAL AUDITOR

• Removal of Secretarial Auditor – no provisions in the Act
• Resignation of Secretarial Auditor – Board to note and file

form with RoC (not specified)

• Secretarial Auditor also to file form with RoC (not

specified)

• Appointment
• f

Secretarial Auditor

• n

casual vacancy??...How and when to do????

• 8

DOCUMENTS REQUIRED FOR AUDIT

• Prepare a Response sheet indicating broadly

the various Check Points ( Evolving one)

• Will give an indicative idea of the complexity

and work involved

• How much time will it take????
• For 2014-15 and 2015 onwards?????
• Notice, agenda, notes on agenda minutes of

meetings, attendance registers

• Draft Financial Statements, Auditor’s Report,

Director’s Report

• Any SCN- Any Audit Observations
• 9

DOCUMENTS REQUIRED FOR AUDIT

• All Statutory Registers
• Disclosures / consents / declarations
• Filings with RoC / regulatory authorities / RBI
• Filings / submissions to Stock Exchanges
• Relevant approvals / correspondence
• Compliance certificates of functional heads

for compliance of applicable laws

• Whose Report precedes whom???? Statutory

Auditor or Secretarial Auditor?

• 10

SCOPE OF AUDIT & ITS METHODOLOGY

• Determine scope of Audit
• Request for details of various corporate

actions / events subject to audit

• Develop the audit framework (how and

when to do what)

• Ascertain applicable laws
• Prepare check-lists and time schedule
• Call for documents / information
• 11

SCOPE OF AUDIT & ITS METHODOLOGY

• Obtain Management Representation Letter
• Discuss and seek clarification, if required
• Discuss draft report with Management
• Finalize and submit draft addressed to shareholders
• For FY 2015 the audit invariably be a combined one time

effort

• From next year onwards prefer doing quarterly to

coincide with meetings of the Board

• Check list part of Guidance Note on

SA Of ICSI.. Should this suffice????

• 12

SCOPE OF AUDIT & ITS METHODOLOGY

• Should not be tick the box approach!!!!
• Would give confidence to the Board as well
• May be set up a meeting with Independent Directors like

Audit Committee meeting with the Statutory Auditors???

• Report is for the financial year ended 31st March
• Report is to be addressed to the Members similar to

Statutory Auditors’ Report

• Work has just started and the Council is already

looking into restricting the number.

• Is this a good sign????..Views in the matter????
• Remember this is not a Compliance Certificate!!!!!
• 13

S A REPORT FORM NO MR – 3

• Parts of Secretarial Audit Report:

(a) Para 1: Preamble (b) Para 2: Report in general (based on verification of the company’s books, papers, minute book, forms and returns filed and information provided) that the company has complied with the statutory provisions listed in the report that the company has proper Board processes and Compliance mechanism

 What would be a good Board Process??(219 to 229 of GN)  And a good compliance Mechanism??

• 14

S A REPORT FORM NO MR – 3 BOARD PROCESS

Board Process

Well-informed and high-quality decision making is a critical requirement for a board to be effective and does not happen by accident. Flawed decisions can be made with the best of intentions, with competent individuals believing passionately that they are making a sound judgment, when they are not. Many of the factors which lead to poor decision making are predictable and

• preventable. Boards can minimize the risk of poor

decisions by investing time in the design of their decision making policies and processes, including the contribution of committees……… UK Financial Reporting Council

• While the conceptual importance of boards of directors

in modern day businesses is undisputed, it is equally crucial to study the relationship between board of directors and board performance.

• 15

BOARD PROCESS

• Established ground rules for meeting behaviors?
• Encourage directors to actively participate in

meetings?

• Meeting of Independent Directors
• Women Director
• Is the meeting agenda logically structured
• Allow adequate time for discussion based on

Importance

• Is the board pack delivered at least 7 days prior
• Do the board papers follow a standard format?
• Review the content and format of the board papers?
• 16

BOARD PROCESS

• Do the minutes of board meetings provide an accurate

account of the board’s decision

• Are the minutes distributed to directors
• Do the minutes describe and record all declared

conflicts of interest?

• Follow up on items of Board Meetings
• Comprehensive calendar for its annual activities?
• Each committee have a charter or terms of reference

that clearly sets out its roles and responsibilities?

• Does the board regularly review its committee

structure?

• 17

BOARD EVALUATION

• Points to be covered in the Board

evaluation should be:

• - Clear knowledge of the Organization's

Mission and Purpose

• - Engage in Strategic Process
• - Foster a conscious culture
• - Board work program
• - Strategic thinking skills of Board and

CEO.

• 18

BOARD EVALUATION

• - Ensure Sound Risk Management Policies
• - Support the CEO and Review CEO's

Performance

• - Relationship between Board, CEO and

senior officials one level below the Board

• - Enhance the Organization's Public Image
• - Carefully Select and induct new Board

members

• - Individual Board member Self-Evaluation
• 19

S A REPORT – COMPLIANCE MECHANISM

Compliance Mechanism

• The objective of compliance programme is to

manage the compliance risk effectively, to promote ethical culture in the organization, resulting in the maintenance and enhancement

• f the reputation of the Company. CM through

systematic processes helps in achieving 100% compliance.

• Compliance programme helps in preventing,

detecting and responding to non-compliance

• Tools could be Risk Management policies,

Training and Communication, compliance controls and audits, whistle blowing and effective remedial action to prevent recurrence.

• 20

SECRETARIAL AUDIT REPORT – FORM

• NO. MR - 3

(a) Para 3: Examination of the books, papers, minute books, forms and returns filed and other records maintained by the company according to the Provisions of:

(i) The Companies Act, 2013 (the Act) and the rules made there under; ( Refer Checklist from page 36 to 75 covering 14 items under GN on SA by ICSI) (ii) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder; ( Pages 101 &102 of GN) (iii) The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder; (Page 103 of GN) (iv) Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings; (Pages 144 to 159 of GN)

• 21

SECRETARIAL AUDIT REPORT – FORM

• NO. MR - 3

(v) The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):- (a) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; (b) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992; (c) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009; (d) The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999; (e) The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

• 22

SECRETARIAL AUDIT REPORT – FORM

• NO. MR - 3

(f) The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with client; (g) The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and (h) The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998; (Covered under pages 104 to 143 of GN)

(vi) ...... (Mention the other laws as may be applicable specifically to the company)  The Background which lead to this change????  Proposed Secretarial Standards for BM to identify list

• f applicable laws
• 23

SCRA, DEPOSITORIES AND SEBI LAWS

• SCRA and Depositories Act
• Compliance with clause 35
• Minimum Public Shareholding
• Compliance with Listing Agreement
• Admission of Securities
• Compliance with clause 55A Quarterly Recon
• SAST essentially event based
• Regular filings
• Transfer of unpaid amount to IPEF SEBI
• INSIDER TRADING
• Any action taken including conviction
• Code of Conduct
• Compliance officer
• List of designated employees
• 24

SCRA, DEPOSITORIES AND SEBI LAWS

• Disclosures and Filings
• Opening and Closing of trading window
• Pre-clearance of trade
• Trading Plan
• Limits prescribed under new clause
• Counter position within 6 months
• Self declaration from all designated employees (Include UPSI,

derivatives, day trading and the like)

• ICDR, ESOS, ESPS,DELISTING, BUY-BACK ARE ALL

ESSENTAIALLY EVENT BASED

• RTA
• Registration with SEBI remains valid
• Registration of Transfer within 15 days
• Completion of Demat within 21 days
• 25

SECRETARIAL AUDIT REPORT – FORM

• NO. MR - 3

(d) Para 4: Report deals with examination of compliance with applicable clauses of the following: (i) Secretarial Standards issued by the Institute of Company Secretaries of India (Not Notified) (ii)The Listing Agreements entered into by the Company with …. Stock Exchange(s), if applicable (iii) Report deals with compliance or otherwise with the provisions of the Acts, Rules, Regulations, Guidelines, Standards, etc. mentioned above, subject to following

• bservations, if any
• 26

SECRETARIAL AUDIT REPORT – FORM

• NO. MR - 3

(e) Para 5: Report deals with: (i) Constitution of Board of Directors – Executive / Non- Executive, Independent Director / Women Director, etc. (ii) Adequate Notice to directors for Board Meetings (g) Para 6: Report deals with Confirmation of adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines Note: Qualifications, if any, observed to be cited.

• Will a qualified report be a blot on CS in employment??
• No choice but to report qualifications….
• 27

SECRETARIAL AUDIT REPORT- PROCESS OF VERIFICATION- RPT

• RPT covered by Companies Act, Clause 49 and AS 18.
• Section 2 (76) defines RP
• Approval of Audit Committee and Board & Shareholders
• Exemption provided
• In the ordinary course of business
• And it is on an arms length
• Burden on proof lies on the company
• Ban on voting by RP
• Clause 49 will get attracted for listed company only if

They are RPT within the meaning of clause (VII)(A) and the party is a RP within the meaning of sub clause(VII) (B)

• 28

SECRETARIAL AUDIT REPORT- PROCESS OF VERIFICATION- RPT

• Check for the Board Resolution for contracts or

arrangements with RP.

• Whether the Board Agenda has disclosed the

information

• Whether prior approval obtained from the

shareholders

• Whether interested party voted on the resolution
• Maintained Register of Contracts or arrangements
• Whether the Register placed and signed by the

directors present

• 29

OTHER LAWS AS MAY BE SPECIFICALLY APPLICABLE TO THE COMPANY

Reporting on compliance of ‘Other laws as may be applicable specifically to the company’ which shall include all the laws which are applicable to specific industry for example for Banks- all laws applicable to Banking Industry; for insurance company-all laws applicable to insurance industry; likewise for a company in petroleum sector- all laws applicable to petroleum industry; similarly for companies in pharmaceutical sector, cement industry etc.

SECRETARIAL AUDIT REPORT – FORM

• NO. MR - 3

(h) Para 7: Report deals with specific events / actions having

a major bearing on the company’s affairs in pursuance of the above referred laws, rules, regulations, guidelines, standards, etc. referred to above. For example: (i) Public / Right / Preferential Issue of shares / Debentures / sweat equity, etc. (ii) Redemption / buy-back of securities (iii) Major decisions taken by the members in pursuance to Section 180 of the Companies Act, 2013 (iv) Merger / Amalgamation / reconstruction, etc. (v) Foreign technical collaboration

• 31

DUTIES OF SECRETARIAL AUDITOR – FRAUD REPORTING [SEC 143(12)(14)]

• Reference to Fraud appears in 45 sections of the New Act(Section

7,8,34,35,36,38,46,56,66,73,74,75,130,134,140,143,144,149,177, 195,199,206,210,211,212,213,216,218,219,221,223,224,225,226, 229,245,251,266,271,336,339,430,442,447 & 448)

• If Company Secretary in Practice, during conduct of

Secretarial Audit, has sufficient reason to believe that an

• ffence involving fraud is being committed or has been

committed against the company by officers or employees

• f the company, he shall report the same to the Central

Government immediately but not later than 60 days of his knowledge with a copy to the Board / Audit Committee seeking their reply within 45 days

• 32

DUTIES OF SECRETARIAL AUDITOR – FRAUD REPORTING [SEC 143(12)(14)]

• Board / Audit Committee to reply in writing the steps taken to

address the fraud

• The Auditor to forward his report and reply of the Board / Audit

Committee with his Comments to the Central Government within 15 days of reply by Board / Audit Committee

• The Report shall be in Form ADT – 4
• Even omission, concealment of any fact would amount to

a fraud by the professional!!!!!.

• It is immaterial whether there is any wrongful gain or

wrongful loss!!!!!!

• 33

• 34

Comments: (1) PCS to certify compliance with provisions of the Act and Rules in respect of the eighteen items set out in the Form MGT – 8. (2) The certification by PCS in the Annual Return is with respect to correctness and adequacy of the facts as at the close of the financial year set out in the return. (3) It does not extend to certification to the effect that the Company has complied with all the provisions of the Act as stated under Section 92(2) of the Act

SECRETARIAL AUDIT VS VS CERTIFICATION OF ANNUAL RETURN

PUNISHMENT FOR FRAUD (SEC 447)

• Section 447 states that without prejudice to any liability

including for repayment of any debt under the Act or any

• ther law for the time being in force, any person who is

found guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud but which may extend to three times the amount involved in fraud

• The Section further states that where the fraud in

question involves public interest, the term

• f

imprisonment shall not be less than three years.

• 35

PUNISHMENT FOR FRAUD (SEC 447)

Fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss

• 36

PUNISHMENT FOR FALSE STATEMENT (SEC 448)

Section 448 states that, save as otherwise provided in the Act, if in any return, certificate, financial statement, prospectus, statement or other document required by the Act or Rules made thereunder, any person makes a statement: (a) Which is false in any material particulars, knowing it to be false; or (b) Which omits any material fact, knowing it to be material, He shall be liable under Section 447

• 37

PUNISHMENT IN CASE OF REPEATED DEFAULT (SEC 451)

Section 451 provides that if an offence punishable either with fine or imprisonment is repeated within a period of three years, the company and the officer shall be punishable with imprisonment as provided and twice the amount of fine for such default, for the second and subsequent occasions. REPEAT OFFENDERS TAKE CARE????

• 38

WHAT IS BHAKTI

• When Bhakti enters food it becomes Prasad
• When it enters water it becomes Charanamrit
• When it enters travel it becomes Pilgrimage
• When it enters hunger it becomes Fast
• When it enters Music it becomes Kirtan
• When it enters Home it becomes Temple
• When it enters Action it becomes Service
• When it enters Work it becomes Karma
• When it enters Man it becomes Human
• Please therefore add Bhakti to everything and be blessed

and successful

• IN ORDER TO SUCCEED YOUR DESIRE FOR SUCCESS

SHOULD BE FAR GREATER THAN YOUR FEAR OF FAILURE………..Albert Einstein

• 39

• 7/10/2015
• 40

THANK YOU