Section 204 of the Companies Act, 2013 mandates secretarial audit for prescribed classes of companies. What follows walks through the Section 204 process end to end: who must appoint a secretarial auditor, how the appointment is made, what the audit examines, and how the MR-3 report is finalised and filed.
Legal Framework
Section 204 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes the framework for secretarial audit. The section mandates that every listed company and prescribed class of companies shall annex to its Board’s Report a secretarial audit report given by a company secretary in practice, in Form MR-3 as prescribed under the rules.
Appointment of Secretarial Auditor
The board of directors must appoint a Company Secretary in Practice (PCS) as the secretarial auditor. The appointment is made by a board resolution, and the company must ensure there is no conflict of interest. The PCS must hold a valid Certificate of Practice issued by the Institute of Company Secretaries of India (ICSI). The auditor’s consent must be obtained before the appointment.
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A comprehensive Section 204 audit covers the following areas: compliance with the Companies Act, 2013 and Rules made thereunder, compliance with the Securities Contracts (Regulation) Act, compliance with the Depositories Act and SEBI regulations, compliance with FEMA for foreign transactions, examination of board composition and processes, verification of statutory registers and records, review of all ROC filings, examination of related party transactions under Section 188, and review of CSR spending under Section 135 where applicable.
Form MR-3: The Audit Report
The secretarial audit report is issued in Form MR-3 and covers the financial year under review. The report must contain the auditor’s opinion on whether the company has complied with applicable laws. If there are observations, qualifications, or adverse remarks, these must be clearly stated. The board is required to respond to each qualification in the Board’s Report, explaining the steps taken or proposed to address the non-compliance.
Penalties for Non-Compliance
If a company fails to comply with Section 204, penalties are prescribed under Section 204(4). The company shall be punishable with a fine of Rs 1 lakh to Rs 5 lakh. Every officer in default shall be punishable with imprisonment of up to 1 year or a fine of Rs 1 lakh to Rs 5 lakh, or both. Additionally, the secretarial auditor who makes a false report can face penalties under Section 448.
Best Practices
Companies should appoint the secretarial auditor at the beginning of the financial year to allow adequate time for the audit. Maintaining organized records and a compliance calendar throughout the year significantly eases the audit process. Regular internal compliance reviews and periodic interaction with the secretarial auditor can help identify and rectify issues proactively.
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Need a secretarial audit under Section 204?
Check whether it applies to you and have the Form MR-3 report handled by a practising CS.
Book a consultationSecretarial audit services →