SECRETARIAL AUDIT COMPLIANCE MANAGEMENT AND DUE DILIGENCE

Transcription

1 STUDY MATERIAL PROFESSIONAL PROGRAMME SECRETARIAL AUDIT COMPLIANCE MANAGEMENT AND DUE DILIGENCE MODULE 1 PAPER 2 ICSI House, 22, Institutional Area, Lodi Road, New Delhi tel , fax info@icsi.edu website

2 THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Monday to Friday Office Timings 9.00 A.M. to P.M. Public Dealing Timings Without financial transactions 9.30 A.M. to 5.00 P.M. With financial transactions 9.30 A.M. to 4.00 P.M. Phones , Fax Website info@icsi.edu Laser Typesetting by Delhi Computer Services, Dwarka, New Delhi Printed at Tan Prints/PRN-2432/July, 2014/2000

3 PROFESSIONAL PROGRAMME SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT AND DUE DILIGENCE Due diligence is an investigative process for providing the desired comfort level about the potential investment and to minimize the risks such as hidden uncovered liabilities, poor growth prospects, price claimed for proposed investment being on higher side etc., In general due diligence process is transaction based. Secretarial Audit is a process to check compliance with the provisions of various laws and rules/ regulations/procedures, maintenance of books, records etc., by an independent professional to ensure that the company has complied with the legal and procedural requirements and also followed the due process. It is essentially a mechanism to monitor compliance with the requirements of stated laws. Compliance management is the method by which corporate manage the entire compliance process. It includes the compliance program, compliance audit, compliance report etc. and in other words it is called compliance solution. Secretarial Audit and Compliance management are the routine tools for effective governance. Compliance management is to be in built into the corporate system to avoid non compliances and the Secretarial audit is carried out on periodical basis by an independent professional. Due diligence is a pre-emptive tool to assess a business transaction. The study material is based on those sections of the Companies Act, 2013 and the rules made there under which have been notified by the Government of India and came into force w.e.f. April 01, 2014 (including Amendments/clarifications/circulars issued there under upto June, 2014). In respect of sections of The Companies Act, 2013 which have not been notified, applicable sections of Companies Act, 1956 have been dealt with in the study. Company Secretaryship being a professional course, the examination standards are set very high, with emphasis on knowledge of concepts, applications, procedures and case laws, for which sole reliance on the contents of the study material may not be enough. Besides Company Secretaries Regulations, 1982 requires the students to be conversant with the amendments to the laws made upto six months preceding the date of examination. This study material may therefore be regarded as basic material and must be read along with the notified provisions of companies Act 2013 and rules made thereunder and the provisions of Companies Act 1956 which is still in force. The amendments made upto June 2014 have been incorporated in this study material. However, it may happen that some developments might have taken place during the printing of the study material and its supply to the students. The students are therefore advised to refer to the e-bulletin 'Student Company Secretary' and ICSI Journal Chartered Secretary and other publications for updation of study material. In the event of any doubt, students may contact the Directorate of Academics at academics@icsi.edu. Although due care has been taken in publishing this study material yet the possibility of errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the e-bulletin 'Student Company Secretary'.

4 (iv) PROFESSIONAL PROGRAMME SYLLABUS FOR MODULE 1 - PAPER 1: SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT AND DUE DILIGENCE (100 MARKS) Level of Knowledge: Expert Knowledge Objective: (i) To acquire thorough understanding of Secretarial Audit and Corporate Compliance Management. (ii) To acquire understanding of the due diligence of various business transactions. Detailed Contents: 1. Secretarial Standards Concept, Scope and Advantages Secretarial Standards issued by the ICSI PART A: Secretarial Audit (25 Marks) Compliance of Secretarial Standards for Good Governance Relevance of Guidance Note(s) 2. Secretarial Audit Need, Objective and Scope Periodicity and Format for Secretarial Audit Report Benefits of Secretarial Audit Professional Responsibilities and Penalties 3. Checklist for Secretarial Audit 4. Due Diligence - An Overview Part B: Due Diligence and Compliance Management (75 Marks) Introduction, Nature, Need and its Significance Objectives, Scope and Types of Due Diligence Process of Due Diligence Concept of Data Room in Due Diligence Due Diligence vs. Audit 5. Issue of Securities Introduction and Regulatory Framework Pre and Post Issue Due Diligence - IPO/FPO Due Diligence - Preferential Issues of Listed and Unlisted Companies Employee Stock Option, Bonus Issue, Rights Issue, Debt Issues

5 Issue of Securities by SMEs (v) Role of Company Secretary in Issue of Securities 6. Depository Receipts Due Diligence Introduction; Broad Regulatory Framework; Parties, Approvals, Documentation and Process Issue of ADRs, GDRs, IDRs and FCCBs 7. Merger & Acquisition (M&A) Due Diligence Introduction Stages of M&A Due Diligence Data Room Management Business, Financial, Legal and Corporate Governance Due Diligence HR and Cultural Due Diligence Impact of Due Diligence on Valuation Takeovers and Acquisitions Due Diligence 8. Competition Law Due Diligence Introduction Need for Competition Compliance Programme Mergers & Acquisitions and Competition Law Aspects Reasons for Due Diligence of Competition Law Aspects Process of Due Diligence of Competition Law Aspects Due Diligence of Various Agreements Some Common Anti Competitive Practices Due Diligence on Abuse of Dominance Due Diligence Checklist for Compliance with Competition Act, 2002 Checklist for Anti Competitive Agreements/Abuse of Dominant Position/Regulation of Combinations 9. Legal Due Diligence Introduction Objectives, Scope, Need and Process General Documents/Aspects to be covered Possible Hurdles in Carrying out a Legal Due Diligence and Remedial Actions 10. Due Diligence for Banks Introduction Need for Due Diligence for Banks Process of Due Diligence for Banks Due Diligence Report to Banks

6 (vi) 11. Environmental Due Diligence Introduction Need for Environmental Due Diligence Process involved in Environmental Due Diligence Regulatory Framework relating to Environment Check List on Major Regulatory Compliances Environmental Guidelines for Industries by Ministry of Environment Environmental Impact Assessment Environmental Management Plan Preparation of Risk Analysis Matrix Identification of Potential Issues Impact Analysis Suggestions and Mitigation Measures 12. Search and Status Reports Importance and Scope Verification of Documents relating to Charges Requirements of Financial Institutions and Corporate Lenders Preparation of Report 13. Compliance Management Concept and Significance Establishment of Compliance Management System Absolute, Apparent and Adequate Compliance

7 (vii) LIST OF RECOMMENDED BOOKS MODULE I PAPER 2 : SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT AND DUE DILIGENCE Recommended Readings and References: 1. Taxmann : SEBI Manual 2. Mamta Bhargava : Compliances and Procedures under SEBI Law, Shreeji Publishers, 8/294, Sunder Vihar, New Delhi ICSI : Handbook on Mergers Amalgamations and takeovers. 4. Snow white : Mergers/Amalgamations, takeovers, Joint Ventures, LLPs and Corporate Restructure by K R Sampath 5. Butterworths : Mergers et al by S Ramanujam 6. The Art of M&A Due Diligence : Alexandra Reed Lajoux & Charles M. Elson 7. Regulations/Rules/Guidelines/Circulars issued by SEBI, RBI, MCA etc from time to time. 8. Bare Acts 9. Listing agreement for Equity, debts, Indian Depository Receipts etc. 10. Guidance Note on Diligence Report for Banks (ICSI Publication) 11. Referencer on Secretarial Audit (ICSI Publication) 12. Important Websites (a) (b) (c) (d) (e) Journals: 1. Chartered Secretary : ICSI, New Delhi 2. Student Company Secretary : ICSI, New Delhi 3. Corporate Law Adviser : Vishaman Publisher (P) Ltd. 4. SEBI and Corporate Laws : Taxmann Note: (i) Students are advised to read the relevant Bare Acts, Regulations/circulars/rules issued by various regulatory authorities like SEBI, RBI, MCA etc from time to time in addition to reading of journels like Student Company Secretary, Chartered Secretary etc. (ii) The reference to websites of different regulatory authorities is essential.

8 (viii) ARRANGEMENT OF STUDY LESSONS PAPER 1: SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT AND DUE DILIGENCE (100 Marks) Lesson No. Subject PART A 1 Secretarial Audit and Secretarial Standards An Overview 2. Check Lists for Secretarial Audit PART B 3. Due Diligence An Overview 4. Issue of Securities 5. Depository Receipts Due Diligence 6. Due Diligence Mergers & Amalgamations 7. Competition Law Due Diligence 8. Legal Due Diligence 9. Due Diligence for Banks 10. Environmental Due Diligence 11. Search & Status Report 12. Compliance Management

9 (ix) PROFESSIONAL PROGRAMME SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT AND DUE DILIGENCE CONTENTS Lesson 1 SECRETARIAL AUDIT AND SECRETARIAL STANDARDS AN OVERVIEW Learning objectives 1 Introduction 2 The objectives of Secretarial Audit 2 Scope of Secretarial Audit 5 Need for Secretarial Audit 5 Secretarial Audit & Company Secretary in Practice (PCS) 7 Benefits and beneficiaries of Secretarial Audit 9 Secretarial Standard 10 Scope of Secretarial Standards 10 Procedure for issuing Secretarial Standards 11 Need for Secretarial Standards 12 Compliance of Secretarial Standards for good governance 24 Secretarial Standards under the Companies Act, Secretarial Audit Report 26 Lesson Round Up 26 Self Test Questions 26 Page Lesson 2 CHECKLIST- SECRETARIAL AUDIT Learning Objectives 27 Introduction 28 Checklist under the Companies Act, General Compliance Requirements 28 Memorandum and/or Articles of Association 29 Disclosures 30 Issue of shares and other securities 30 Preferential issue u/s Employee Stock Option under Companies Act, 2013 and Rules made thereunder 35 Debentures 36 Issue and redemption of preference shares 36 Transfer and transmission of shares and other securities and related matters 37 Deposits 38 Charges 38 Meetings of Directors/ Committees thereof, shareholders and other stakeholders 39 Dividend 44 Corporate Social Responsibility (CSR) 44

10 (x) Page Directors and Key Managerial Personnel ( KMP ) 45 Loans to Directors etc. and Related Party Transactions (section 185& 188) 47 Loans, investments, guarantees and securities (Section 186) 47 Registers, filing of Forms, return and documents 47 Registration of resolutions and agreements 55 Checklist- FEMA Regulations 62 Foreign Direct Investment 62 Checklist on Foreign Direct Investment under Automatic Route 63 Foreign Direct Investment under Approval Route 64 Direct Investment by Residents in Joint Venture/ Wholly owned subsidiary abroad 65 External Commercial Borrowings 67 Lesson Round Up 69 Self Test Questions 70 Lesson 3 DUE DILIGENCE AN OVERVIEW Learning Objectives Introduction Why Due Diligence? Objectives of Due Diligence Scope of Due Diligence Types of Due Diligence Factors to Be Kept in Mind While Conducting Due Diligence Documents to be Checked in Due Diligence Process The Concept of Data Room in Due Diligence Data Room Virtual or Physical Major Advantages of Virtual Data Room Some Disadvantages of Virtual Data Room Virtual and Physical Data Room A comparison Data room administration and data security Due Diligence vs Audit Non Disclosure Agreement Lesson Round Up 88 Self Test Questions 89 Lesson 4 ISSUE OF SECURITIES Learning Objectives Introduction and Regulatory Framework Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 [(SEBI(ICDR) Regulations]... 93

11 (xi) Page II. Due Diligence - Initial Public Offer (IPO)/Further Public Offer (FPO) A check list on Major IPO Compliances under SEBI (ICDR) Regulations Role of Company Secretary in an IPO III. Due Diligence Issues Other than IPO/FPO III-A. Due Diligence Preferential Issue III-B. Due Diligence Employee Stock Option III-C. Due Diligence- Bonus Issue III-D. Due Diligence Right Issue 130 IV. Due Diligence- Qualified Institutional Placement 132 V. Due Diligence-Institutional Placement Programme 134 Issue of Securities by Small And Medium Enterprises SME Exchanges in India Regulatory Framework for Listed SMEs Market making compulsory for listed SMEs Model listing agreement for SMEs Debt Securities Regulatory Framework for Debt Securities A. Compliance Check List under SEBI (ICDR) Regulations B. SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (Compliances With Respect to Non-Convertible Debt Instruments) C. SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations Lesson Round Up 144 Self Test Questions 144 Lesson 5 DEPOSITORY RECEIPTS DUE DILIGENCE Learning Objectives Global Depository Receipts I. Introduction II. Types of Depository Receipts III. Broad Regulatory Framework within and outside India on Issue of Depository Receipts IV. Parties, Approvals, Documentation and Process Involved in the Issue of GDRs Checklist under Companies (Issue of Global Depository Receipts) Rules, Indian Depository Receipts Rule 13 of Companies (Registration of Foreign Companies) Rules, Rights Issue of Indian Depository Receipts-Salient Features Penal Provisions Relating to IDRs under Various Legislations Lesson Round Up 178 Self Test Questions 178

12 (xii) Page Lesson 6 DUE DILIGENCE MERGERS AND AMALGAMATIONS Learning Objectives Introduction Due Diligence Process in the M&A Strategy Activity Schedule for Planning a Merger Preparation of Scheme of Amalgamation Impact of Due Diligence on Valuation Data Room Management in Strategic Decisions HR and Cultural Due Diligence in Business Transactions Cultural Due Diligence Scope of Cultural Due Diligence Corporate Governance Due Diligence Factors Influencing Quality of Corporate Governance Takeover Due Diligence 196 Public Announcement (PA) Contents of Public announcement (Regulation 15) Filing Draft Letter of Offer Offer Price Payment of Consideration (Regulation 21) Directors of the Target Company (Regulation 24) Obligation of target company Obligation of the acquirer 208 Obligation of the manager to the open offer (Regulation 27) 208 Consequences of Violation of obligations SEBI (SAST) Regulations, Lesson Round Up 210 Self Test Questions 210 Lesson 7 COMPETITION LAW DUE DILIGENCE Learning Objectives Introduction Need for compliance of Competition Law Why Comply? Competition Act, 2002 A Bird s Eye View Anti-competitive agreements (Section 3) Anti Competitive Agreements are void [Section 3(2)] Horizontal Agreements [Section 3(3)] Vertical Agreements [Section 3(4)]

13 (xiii) Page Abuse of Dominance (Section 4) Regulation of Combinations. (Section 5) Due Diligence of Competition Law Aspects Due Diligence Checklist for Compliance with Competition Act, I Checklist for Anti Competitive Agreements II Checklist for Abuse of Dominant Position III Checklist for Regulation of Combinations Need for Competition Compliance Programme Lesson Round Up 228 Self Test Questions 228 Lesson 8 LEGAL DUE DILIGENCE Learning Objectives I. Introduction II. Objectives of Legal Due Diligence III. Scope of Legal Due Diligence IV. Need of Legal Due Diligence V. Legal Due Diligence Process VI. General Documents/Aspects to Be Covered VII. Possible Hurdles in Carrying out a Legal Due Diligence and Remedial Actions VIII. Role of Company Secretaries in Legal Due Diligence Lesson Round Up 240 Self Test Questions 240 Lesson 9 DUE DILIGENCE FOR BANKS Learning Objectives Introduction Background Need for Diligence Report Scope of Diligence Report Format of Diligence Report Guidance on Diligence Reporting Period of Reporting Secretary in Whole-Time Practice Right to access Records and Methodology for Diligence Reporting Reporting with Qualification Professional Responsibility and Penalty for False Diligence Report

14 (xiv) Page Other compliances 247 Specimen sanction letter 259 Lesson Round Up 277 Self Test Questions 278 Lesson 10 ENVIRONMENTAL DUE DILIGENCE Learning Objectives Introduction Why Environmental Due diligence? Process involved in Environmental Due diligence Regulatory Framework relating to environment Checklist on Major Compliances The Environment (Protection) Act, 1986 (Read With The Environment (Protection) Rules, 1986) The Water (Prevention & Control of Pollution) Act, 1974 [Read With Water (Prevention & Control Of Pollution) Rules, 1975] The Air (Prevention & Control of Pollution) Act, 1981 [Read With The Air (Prevention & Control Of Pollution) Rules, 1982] Environmental Guidelines for Industries by Ministry of Environment Environmental Impact Assessment (EIA) ISO standards for Environment Environmental Management Plan (EMP) for commissioning of projects Preparing a Risk Analysis Matrix Environmental Management as a Tool- For Value Creation Lesson Round Up 296 Self Test Questions 296 Lesson 11 SEARCH/STATUS REPORTS Learning Objectives Introduction Scope and Importance Search/Status Report Legal Provisions Requirements of Various Financial Institutions and other Corporate Lenders Certification by Company Secretaries in Practice Necessary Powers of a company its Directors to Enter into an agreement 306 Borrowing Limits and Compliance of section 180 (1) (c) 307 Compliance for borrowing money 307 Lesson Round Up 307 Self Test Questions 308

15 (xv) Lesson 12 COMPLAINCE MANAGEMENT Learning Objectives Introduction Need for Compliance Risk of Non-Compliance Significance of Corporate Compliance Management Scope of Corporate Compliance Management Establishment of Compliance Management Framework Role of Information Technology in Compliance Management Systems Through Web Based Compliance Systems The Systems Approach to Compliance Management Compliance Solutions Apparent, Adequate and Absolute Compliances Secretarial Audit and Compliance Management System Role of Company Secretaries in Compliance Management Lesson Round Up 327 Self Test Questions 327 TEST PAPERS 2014 Test Paper Test Paper 2 332

16 Lesson 1 Secretarial Audit and Secretarial Standard An Overview LESSON OUTLINE Secretarial Audit Concept objective, scope of secretarial audit Benefits and Beneficiaries Secretarial Audit process Professional Responsibilities and Penalties Secretarial Standard Concepts Secretarial Standards under the Companies Act, 2013 Secretarial Audit Report Format LEARNING OBJECTIVES Timely examination of compliance reduces risks as well as potential cost of non-compliance and also builds better corporate image. Secretarial Audit establishes better compliance platform by checking the compliances with the provisions of various statutes, laws, rules & regulations, procedures by a Practicing Company Secretary to make necessary recommendations/ remedies. The primary objective of the Compliance Management backed Secretarial Audit is to safeguard the interest of the Directors & officers of the companies, shareholders, creditors, employees, customers etc. With the introduction of concept of 'Secretarial Audit' in Voluntary Corporate Governance Guidelines (CGV) 2009 and the 'Companies Act 2013, it has gained immense importance. After reading this lesson the students would be able to understand the need, objectives, scope, benefits of secretarial audit, professional responsibilities and penalties etc. Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its report to the shareholders. MCA CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009

17 2 PP-SACM & DD INTRODUCTION Section 204 of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company and companies belonging to other prescribed class of companies. Such companies are required to annex a secretarial audit report with its Board s report. As per rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the prescribed class of companies is as under: (a) every public company having a paid-up share capital of fifty crore rupees or more; or (b) every public company having a turnover of two hundred fifty crore rupees or more. Company secretary in practice has been exclusively recognised for conducting secretarial audit. The section further provides that Secretarial Audit Report is to be submitted in a format prescribed under rules. As per sub-rule (2) of Rule 9, the format of the Secretarial Audit Report shall be in Form No. MR.3 (Annexure A). Section 134 and Sub-section (3) of section 204 provides that the Board of Directors, in its report, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in the secretarial audit report. The Objectives of Secretarial Audit The objectives of Secretarial Audit may be briefed as under. To check & Report on Compliances To Point out Non-Compliances and Inadequate Compliances To Protect the interest of the Customers, employees, society etc. To avoid any unwarranted legal actions by law enforcing agencies and other persons as well. Scope of Secretarial Audit The scope of Secretarial Audit comprises verification of the compliances under the following enactments, rules, regulations, notifications and guidelines: (i) The Companies Act, 2013 (the Act) and the Rules made thereunder: The Act is divided into 29 chapters, 470 sections and VII Schedules. On various matters; Central Government has been empowered to make rules. A perusal of the scheme of the Act makes it clear that compliances under the Act may be divided into two categories. Compliances of the first type are annual and non-event based such as filing of the annual return, annual report including secretarial audit report, wherever applicable, etc. The compliances of second category are event based i.e. on happening of certain event. These events require compliance of various provisions of the Act. While secretarial audit envisages the verification of all secretarial records of a company. For ease of presentation, the following key areas have been highlighted for verification. Under Companies Act, Maintenance of registers and records.

18 Lesson 1 Secretarial Audit An Overview 3 2. Filing of forms, returns and documents. 3. Memorandum and / or Articles of Association. 4. Meetings of directors/committees thereof, shareholders and other stakeholders. 5. Secretarial standards. 6. Directors and key managerial personnel ( KMP ) 7. Disclosures. 8. Issue of shares and other securities. 9. Transfer and transmission of shares and other securities and related matters. 10. Dividend. 11. Deposits. 12. Borrowings. 13. Loans, investments, guaranties and securities. 14. Loans to directors etc. and Related party transactions. 15. Charges. 16. Corporate Social responsibility (ii) Other major Acts and Regulations: a. The Securities Contracts (Regulation) Act, 1956 and the Rules made under that Act; (where applicable): With special reference to listing, delisting and continuous listing of any of the securities. b. The Depositories Act, 1996 and the Regulations and Bye-laws framed under that Act; (where applicable) c. The 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; (where applicable) d. The regulations and guidelines made under the Securities and Exchange Board of India Act, 1992 (where applicable). The various laws/ regulations/ guidelines which could be considered under this are: (i) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; (ii) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992; (iii) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009; (iv) The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999; (v) The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008; (vi) 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; (vii) The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;

19 4 PP-SACM & DD viii) The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998; e. The Listing Agreement, (where applicable). (iii) Other Applicable Laws include: Competition Law Labour Laws Environmental Laws Industry/sector Specific Laws Other applicable state Laws The Secretarial Auditor should prepare a list of specific laws as applicable to the company whose secretarial audit is being conducted and verify compliance with the same. (iv) Adherence to board process and compliance mechanism The scope of Secretarial Audit should include the assessment of the adequacy and quality of board process and compliance mechanism. In preparing the Audit Report, the secretarial auditor shall consider the following matters( illustrative) : 1. Instances of non-compliance during the defined audit period, in relation to the statutes, rules, regulations, etc. applicable to the company, continuing non-compliance, if any, and the reasons therefor; 2. Significant litigation(s) initiated by the company or filed against the company with brief details of the cases; 3. (a) Board structure (i) Composition of the Board (ii) Is there a stated process to ascertain the suitability of directors? (iii) Is there a stated process in place for succession planning? (b) Deficiencies in the Board systems and processes - (i) In convening meetings. (ii) In the circulation of agenda (whether the agenda is made available to the Board along with supporting papers/presentations sufficiently in advance of the meetings). (iii) In conducting the meetings (frequency and length). (iv) In the decision making process of the Board. (v) Adequacy and integrity of minutes recorded. (vi) In the functioning of Board constituted Committees. 4. The existence and adequacy of internal control systems, procedures and processes, commensurate with the size of the company and the nature of its business, for ensuring compliance with laws applicable to the company; 5. Any material event(s) that have happened, after the end of the financial year but before the date of the report, having a significant impact on any of the above reported items. 6. Whether any event occured or action was taken in the auditee company which may have bearing on the Compliances under various laws, regulations, guidelines and standards etc.

20 Lesson 1 Secretarial Audit An Overview 5 NEED FOR SECRETARIAL AUDIT Secretarial Audit is the process of independent verification, examination of level of compliance of applicable Corporate Laws to a company. The audit process if properly devised ensures timely compliance and eliminates any un-intended non compliance of various applicable rules and regulations. An action plan of the Corporate Secretarial Department is to be designed so as to ensure that all event based and time based compliances are considered and acted upon. Secretarial Audit is to be on the principle of Prevention is better than cure rather than post mortem exercise and to find faults. Broadly, the need for Secretarial Audit is: Effective mechanism to ensure that the legal and procedural requirements are duly complied with. Provides a level of confidence to the directors, officers in default, Key Managerial Personnel etc. Directors can concentrate on important business matters as Secretarial Audit ensures legal and procedural requirements. Strengthen the image and goodwill of a company in the minds of regulators and stakeholders Secretarial Audit is an effective compliance risk management tool. It helps the investor in analyzing the compliance level of companies, thereby increases the reputation. Secretarial Audit is an effective governance tool. Secretarial Audit & Company Secretary in Practice (PCS) A Company Secretary in practice is considered to be a professional well-versed in matters of statutory, procedural and practical aspects of laws applicable to companies, both listed and unlisted public and private companies. A strong knowledge base makes him a competent professional to conduct Secretarial Audit. In order to provide guidance to its members who are in practice to adopt a robust and efficient process of Secretarial Audit, the Institute of Company Secretaries of India has issued this guidance note. Secretarial Audit The process Appointment of Secretarial Auditor Communication to earlier Incumbent Acceptance Appointment of Preliminary Discussions /Surveys Auditor Preliminary Meeting Finalization of Audit Plan and Briefing the Staff Testing, Interviews and Analysis Working Papers Audit Summary for Discussions Submission Secretarial Report of Audit Secretarial Audit is a process to check compliance with the provisions of all applicable laws and rules/regulations/procedures; adherence to good governance practices with regard to the systems and processes of seeking and obtaining approvals of the Board and/or shareholders, as may be necessary, for the business and activities of the company, carrying out activities in a lawful manner and the maintenance of