Companies Act Section 204

Companies Act, Section 204: Secretarial Audit for Bigger Companies

Section 204 of the Companies Act, 2013 introduces the requirement of secretarial audit for larger companies, specifically listed companies and other companies that fall within a certain class as prescribed by regulations. This provision emphasizes the importance of transparency, compliance, and good corporate governance in companies of significant size, and it mandates that certain companies undergo an audit of their secretarial and related records to ensure that they comply with the applicable legal and regulatory requirements.

1. Requirement for Secretarial Audit

(a) Companies Subject to Secretarial Audit

Subsection (1) of Section 204 mandates that every listed company and any other company belonging to a class of companies as prescribed by regulations must include a secretarial audit report in their Board's report as required under Section 134(3) of the Companies Act. The secretarial audit report must be provided by a company secretary in practice, which means that the individual conducting the audit must be a professional who is independent and qualified to provide this service.

The secretarial audit report should be in the prescribed form as per regulations. This report provides an independent review of the company's compliance with various legal provisions, rules, and regulations applicable to it. The requirement ensures that companies meet the governance standards set forth in the law and that their operations are transparent to stakeholders.

(b) Form and Content of the Audit Report

The secretarial audit report must adhere to a specific format that is prescribed by regulations under the Act. It should reflect the findings of the audit, which primarily involves assessing the company’s compliance with:

The Companies Act, 2013
Other applicable laws and statutory requirements
Corporate governance standards
Regulatory requirements set by the authorities
The audit should provide an overview of the company's compliance, highlighting any discrepancies, non-compliance, or violations of the law. The report ensures that any areas where the company is not fully compliant with legal or regulatory requirements are clearly identified and addressed.

2. Company’s Responsibility to Provide Assistance for Secretarial Audit

Subsection (2) places the responsibility on the company to facilitate the secretarial audit. Specifically, the company is required to provide all the necessary assistance and facilities to the company secretary in practice conducting the audit. This could include:

Access to records: The company must provide the auditor with access to all secretarial records, including registers, filings, and any other documents that are required for the audit.
Support for examination: The company must allow the company secretary to examine any documents or books that are relevant to the compliance review, ensuring that the audit can be conducted comprehensively and effectively.
This provision ensures that the auditor has everything necessary to carry out an independent and thorough audit of the company’s compliance with legal obligations.

3. Explanation of Qualifications and Observations in the Audit Report

Subsection (3) of Section 204 requires the Board of Directors to address any qualifications, observations, or remarks made by the company secretary in practice within the secretarial audit report. Specifically:

Explanation of Observations: If the company secretary identifies any issues or concerns in the audit, the Board of Directors must fully explain these issues in their report, which is made in accordance with Section 134(3) of the Act.
Disclosures and Accountability: This provision ensures that the company takes accountability for any deficiencies or areas of non-compliance. The directors are required to provide a detailed explanation, including what actions will be taken to address the issues raised.
This adds a layer of transparency and governance, ensuring that the company addresses any compliance gaps or legal issues and maintains an open line of communication with stakeholders about any challenges in meeting statutory requirements.

4. Penalty for Non-Compliance

Subsection (4) outlines the penalties for non-compliance with the provisions of Section 204. It specifies that:

Company's Liability: If the company or any officer of the company, or the company secretary in practice, contravenes the requirements of this section, they will be liable to a penalty of two lakh rupees.
Officer’s Liability: Similarly, if any officer of the company or the company secretary in practice fails to comply with the provisions or defaults in providing the necessary support for the audit, they will be personally liable for the penalty.
This provision ensures that there is a financial deterrent for companies and individuals who fail to comply with the secretarial audit requirements, thus encouraging adherence to the regulatory framework established under the Companies Act, 2013.