SEBI's Current Focus - SECRETARIAL AUDIT
Published: Apr 25, 2025
By CS Shweta Jain, PCS Partner, Agarwal S. & Associates, New Delhi
INTRODUCTION
AUDITING is designed to help us improve by providing genuine feedback from others. Auditing is a tool, technique, and process that is used to guarantee reliability and accuracy of information. Transparency is promoted and compliance with applicable laws and regulations is verified. It ultimately builds trust among stakeholders.
Audits also identify potential errors, irregularities, and fraudulent activities within records. There are many types of audits being conducted in corporates. Some of them are Statutory Audits, Cost Audits, Management Audits, Internal Audits, Secretarial Audits, etc. Today, we are going to gaze into latest amendments in law made pertaining to Secretarial Audit.
Section 204 of the Companies Act, 2013 deals with Secretarial Audit. It provides that every listed company and some other prescribed categories of companies shall annex with its Board's report, a secretarial audit report, given by a company secretary in practice.
Regulation 24A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) deals with Secretarial Audit. In December 2024, the SEBI amended the Regulation 24A LODR, through the SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2024, published in the Gazette on December 13, 2024 followed by a circular dated December 31, 2024, which explained certain aspects of the amendment.
The amended Regulation requires that every listed entity and its material unlisted subsidiaries incorporated in India shall undertake Secretarial Audit by a Secretarial Auditor who shall be a Peer Reviewed Company Secretary and shall annex a Secretarial Audit Report with the annual report of the listed entity.
The aforesaid amendment to Regulation 24A of LODR has caused a lot of uncertainty. Professionals and business organizations are experiencing confusion because of the lack of clarity and the wide range of interpretations of the meaning of amended Regulation 24A. This article will attempt to shed light on some essential aspects of the changes in Regulation 24A of LODR, which may alleviate any doubts or uncertainties.
WHO IS SECRETARIAL AUDITOR
Secretarial Auditor" means a Company Secretary in Practice or a firm of Company Secretary (ies) in practice appointed to conduct the Secretarial Audit.
WHO IS PEER REVIEWED COMPANY SECRETARY
"Peer Reviewed Company Secretary" means a Company Secretary in practice, who is either practicing individually or as a sole proprietor or as a partner of a Peer Reviewed Practice Unit, holding a valid certificate of peer review issued by the Institute of Company Secretaries of India.
HOW A LISTED COMPANY WOULD APPOINT SECRETARIAL AUDITOR
On the basis of recommendation of board of directors, a listed entity shall appoint or re-appoint:
(i) an individual as Secretarial Auditor for not more than one term of five consecutive years; or
(ii) a Secretarial Audit firm as Secretarial Auditor for not more than two terms of five consecutive years, with the approval of its shareholders in its Annual General Meeting.
HOW a CASUAL VACANCY FOR POST OF SECRETARIAL AUDITOR WOULD BE FILLED UP
The casual vacancy arising out of resignation, death or disqualification of a Secretarial Auditor shall be filled by the board of directors of the listed entity within a period of three months and the secretarial auditor so appointed shall hold office till the conclusion of the next annual general meeting.
WHAT ARE THE SERVICES WHICH CANNOT BE RENDERED BY SECRETARIAL AUDITOR TO CLIENT COMPANY
A Secretarial Auditor appointed under these regulations shall provide to the listed entity only such other services as are approved by the board of directors, but which shall not include any services as specified by the Board in this behalf.
FROM WHICH DATE CHANGES/AMENDMENT INTRODUCED IS EFFECTIVE
With effect from April 1, 2025, every listed entity shall ensure compliance with revised regulations for appointment, re-appointment or continuation of the Secretarial Auditor of the listed entity:
Any association of the individual or the firm as the Secretarial Auditor of the listed entity before March 31, 2025 shall not be considered for the purpose of calculating the tenure.
WHAT IS ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS CRITERIA OF SECRETARIAL AUDITOR
(a) A person shall be eligible for appointment as a Secretarial Auditor of the listed entity only if such person is a Peer Reviewed Company Secretary and has not incurred any of the disqualifications as specified by the Board.
(b) Where a firm including a limited liability partnership is appointed as Secretarial Auditor of the listed entity, only the partners who are Peer Reviewed Company Secretaries shall be authorised to act and sign on behalf of the firm.
(c) Where a person appointed as Secretarial Auditor of the listed entity incurs any of the disqualifications as specified by the Board, after appointment, such person shall vacate the office as Secretarial Auditor and such vacation shall be deemed to be a casual vacancy in the office of the Secretarial Auditor.
DISQUALIFICATION CRITERIA FOR APPOINTMENT OF SECRETARIAL AUDITORS AS PER SEBI CIRCULAR DATED DECEMBER 31, 2024 -
Following persons shall not be eligible to be appointed / continue as a Secretarial Auditor of the listed entity, namely: -
a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
b) an officer or employee of the listed entity;
c) a person who is a partner, or who is in the employment, of an officer or employee of the listed entity;
d) a person who, or his relative or partner is indebted to the listed entity;
e) a person or a firm who, whether directly or indirectly, has business relationship with the listed entity, or its subsidiary, or its holding or associate entity or subsidiary of such holding entity;
f) a person whose relative is a director or is in the employment of the listed entity as a director or key managerial personnel;
g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its secretarial auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as secretarial auditor of 15 or more than 15 companies;
h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
SERVICES NOT TO BE RENDERED BY THE SECRETARIAL AUDITOR AS PER SEBI CIRCULAR DATED DECEMBER 31, 2024 -
A secretarial auditor appointed under the LODR regulations, shall not provide any of the following services:
i. internal audit;
ii. design and implementation of any compliance management system, information system, policy framework, systems or processes for compliance;
iii. investment advisory services;
iv. investment banking services;
v. rendering of outsourced compliance management, record keeping & maintenance services;
vi. management services; and
vii. any other kind of services as may be specified from time to time.
PEOPLE COVERED UNDER DEFINITION OF WORD "RELATIVE" -
Following persons are considered as "relatives"
- members of a Hindu Undivided Family,
- husband and wife
- father, including step-father;
- mother, including step-mother;
- son, including step-son;
- son's wife;
- daughter;
- daughter's husband;
- brother, including step-brother;
- sister, including the step-sister.
The above scope or definition is based on section 2(77) of the Companies Act, 2013 read with rule 4 of the Companies (Specification of definitions details) Rules, 2014.
CAN PARTNERSHIP FIRM OF COMPANY SECRETARIES BE APPOINTED AS SECRETARIAL AUDITORS -
The disqualification list excludes body corporates other than LLPs from being appointed as Secretarial Auditors. Since a partnership firm is not construed to be a body corporate, the same is not disqualified.
NEXUS OF DISQUALIFICATIONS AND THE PROHIBITED SERVICES -
If the disqualifications exist, a company secretary will not be eligible to be appointed as secretarial auditor of Listed Entity. If the disqualifications arise later on, the secretarial auditor will become disentitled to continue his office as a secretarial auditor. There exists a nexus between the disqualifications and the disentitlements. If an auditor provides any of debarred services either to the Listed Entity, or to its holding or subsidiary entity, or its associate or subsidiary of such holding entity, the auditor becomes disqualified as well.
ELIGIBILITY OF PAST EMPLOYEE TO BE APPOINTED AS SECRETARIAL AUDITOR -
As per amended LODR employee is not disqualified. However, as per ICSI Auditing Standards if an auditor was in employment of the auditee, its holding or subsidiary company and 2 years have not lapsed from the date of cessation of employment, the same shall be considered as substantial conflict of interest and auditor cannot have any substantial conflict of interest with the auditee.
CAN SECRETARIAL AUDITOR GET RETAINERSHIP FEES FROM HOLDING ENTITY -
A consulting engagement is not an employment contract because in employment, there is a direct control and supervision of the employer over the employee. So Secretarial auditor get retainership fees from holding entity.
WHETHER SECRETARIAL AUDITOR is DISQUALIFIED, IF SPOUSE IS AN EMPLOYEE IN THE LISTED ENTITY -
If the spouse of the secretarial auditor is a director or Key Managerial Person of Listed Entity, then secretarial auditor will be disqualified.
ADVISORY SERVICES FALL UNDER HEADING PROHIBITED SERVICES OR NOT -
The prohibited list does not contain any reference to advisory services as advisory does not step into management functions.
CONCLUSION
With amendment to Regulation 24A of the LODR there are visible challenges for listed entities to identify and appoint eligible secretarial auditor to conduct mandatory secretarial audits on one hand and challenges for professional Company Secretary on other hand to fulfill need for compliance with the new requirements and potential complexities in identifying and classifying related parties. We are optimistic that SEBI will soon issue a clarification letter or discussion paper regarding revised Regulation 24A of the LODR.
[The views expressed are strictly personal.]