SUMMARISED VERSION (MIND MAP)

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 CHAPTER 1- COMPLIANCE FRAMEWORK

1. Corporate Compliance Framework

 Company has to comply with a lot of rules and regulations and to ensure compliance with laws
rules and regulations is an integral part of any corporate strategy.
 It is the duty of Board of Directors of the company to identify the scope and implication of
applicable laws and consider the same while framing and setting the corporate strategies for
achieving their target goals and objectives.
 The board of directors of the company need to establish the compliance framework. Effective
Corporate Compliance Framework enables the organization to achieve its objectives and goals
with compliance of applicable laws and regulations, mitigating the risks associated with and
making continuous improvements as required.
 The Compliance Framework is an essential part of our company's system to ensure compliance
with applicable laws and regulations. Periodically, an independent professional conducts a
secretarial audit to check how well our controls are working and whether we are following all
the required laws and regulations because when companies abide by the rules, they gain a good
reputation and the trust of customers.
 Company Secretary being the compliance officer plays the most important role in corporate
compliance framework.
 However, to ensure an effective approach to compliance, the following steps are to be
undertaken by the Board of Directors:
a. Development and maintenance of a compliance program: Senior management, which includes
company secretary, should be involved in developing and further maintaining the compliance
programme.
b. Reviewing the effectiveness of compliance system: Compliance Management System should
be reviewed on periodical level to assess effectiveness.
c. Ensuring its updation and relevance: It should be updated with updating acts, rules and
regulations.

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 Compliance Management of Maruti Suzuki Limited
Over the years, Maruti Suzuki has been committed to conducting business with compliance
and integrity. They have established systems and controls to ensure adherence to increasing
regulatory requirements. Quarterly compliance certificates are submitted to the Board,
monitoring over 3,500 applicable compliances through an electronic system. The company also
conducts 78 compliance health checks covering all facilities. The tracking mechanism was
improved for better compliance management.
In FY 20-21, Maruti Suzuki organized a virtual Compliance Month with the theme 'Being
Compliant in the New Normal'. The event aimed to educate employees about the importance
of following laws, regulations, and company policies for maintaining ethical standards and legal
adherence. Panel discussions, training programs, and talks on privacy, cyber security, risk
management, and pandemic lessons were held, with valuable insights shared by the Board
members and senior leadership, benefiting over 4,000 attendees.
Throughout the year, Maruti Suzuki observed a strong commitment to compliance, resulting in
no significant non-compliance with applicable laws and regulations.

2. The Governance, Risk management, and Compliance (GRC): Emerging concept of 21st
century
The purpose of GRC is to reduce risks and costs as well as duplication of effort.
It integrates these three crucial functions into the processes of every department within an
organization.
1. Governance or Corporate Governance: Governance means the rules and values of the business
through which a business operates. These are the practices incorporated by the Board of
Directors that is reflected in the structure of organisation and leads towards achievement of
goals. Governance describes the overall management approach through which senior executives
direct and control the entire organization.

2. Risk or Enterprise Risk management: ERM involves identification of potential threats to the
business and elimination of same to reduce the financial impact. Risk management is the set

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 of processes through which management identifies, analyzes, and, where necessary, responds
appropriately to risks that might adversely affect realization of the organization’s business
objectives.
3. Compliance or corporate compliance: Compliance is the set of process that ensures that
management and employees are adhering to legal standards while conducting the business. It
refers to the adhering with the mandated boundaries, laws and regulations and voluntary
boundaries, company’s policies, procedures, etc.

3. Components of Corporate Compliance Framework

Compliance framework consists of three key components: compliance chart, compliance advisory
and compliance board.
1. Compliance Chart: The Chart provides an overview of the applicable local, state, central and
international laws, regulations and standards relating to a business’ operations. The compliance
chart also outlines how compliance risk mitigation activities are embedded in business processes.
The compliance chart helps businesses meet their obligations to customers, regulators,
shareholders, and employees. It reflects compliance calendar and shows the tasks and deadlines
each business unit needs to follow to manage compliance risks effectively.
2. Compliance Advisory: Advices on compliance of applicable laws and effect of non-compliances.
3. Compliance Scorecard: A tool to analyse the position of an organisation in compliance.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar
(Short Note)
Compliance Scorecard:
 A compliance scorecard is a tool or system used by
organizations to measure and assess their
compliance with various laws, regulations, policies,
and industry standards. It is a visual representation
or dashboard that provides a snapshot of the
organization's compliance performance.
 The scorecard is not just for reporting; it's a
compliance management tool. If there's a
compliance violation, it immediately informs a
designated person responsible for fixing the issue.
This person can start remediation activities right
away.

4. Compliance Chart
The Chart provides an overview of the applicable local, state, central and international laws,
regulations and standards relating to a business’ operations and outlines how compliance risk
mitigation activities are embedded in business processes.
Compliance chart is a vital part of this framework and a Company Secretary plays a crucial
role in preparation of the same.
The compliance chart of the company is prepared after considering the operations and the
structure of the company, activity of the company, Industry, Sector in which the company
operates and laws which are specifically applicable to the company.
Broadly, the compliance chart is prepared by considering the following activities:
a) Identification of compliances under applicable Laws, Rules and Regulations
b) Risk Assessment
c) Risk Mitigation

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 d) Compliance Monitoring
e) Compliance Reporting

5. Content of Compliance Chart

A compliance chart should contain all information relating to compliances including-
1. Reference to compliance related laws, rules, regulations and policies and procedures of the
company.
2. Statements which provide about compliance obligations and risk arising from such obligations.
3. Risk level of such obligations (critical, medium or low)
4. The business processes or people to which the compliance obligations are linked or on which
they have an impact.
5. Compliance risk mitigation policies and compliance risk tracking and monitoring for managing
compliance obligations.
6. Ownership of activities and obligations outlined in the chart.
7. To whom and how frequently compliance related findings and results are reported.

6. Well-designed Compliance Management System

If a compliance management system is well-designed following are the advantages:
1. Compliance Dashboard
The compliance program must have a single enterprise-wide dashboard for all users to track
and trend compliance events. This interactive dashboard allows statutory auditors, internal
auditors, and compliance officers to make decisions on the organization's compliance status.

2. Compliance Policy And Procedure

A well designed compliance management system ensures that policies and procedures are in
conformity with ever changing rules and regulations.

3. Access To Rules And Regulations

A well-designed compliance management solution must offer capabilities for organization to
continuously stay in sync with changing rules and regulations. As soon as there are regulatory
changes, various departments should be notified proactively through “email based” collaboration.

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 4. Compliance Audit
Audits are now a fundamental part of enterprise operations. Audits are no longer limited to
annual activities, and companies must have suitable audit capabilities. Having evidence of
internal audits is crucial in demonstrating compliance with regulations.

5. Quality Management
Most organizations have internal operational, plant-level or departmental quality initiatives to
industry mandates like Six-sigma or ISO 9000. A well-designed compliance management program
incorporates and supports ongoing quality initiatives. Most quality practitioners agree that
compliance and quality are two sides of the same coin. Therefore, it is critical to ensure that
compliance management solution offers support for enterprise-wide quality initiatives.

6. Compliance Training
Compliance programs require evidence of employee training. Inadequate knowledge and
incomplete procedures can result in fines and penalties for company directors and officers. To
avoid such issues, the compliance office collaborates closely with the organization's legal team
to facilitate effective employee training.

7. Compliance Task Management

The company must create plan to manage and report status of all compliance related activities
from a centralized data base. Automated updates from the various compliance modules should
provide for up-to-the-date status reporting that could be viewed

7. Process of Corporate Compliance Framework

Compliance Compliance Compliance Compliance

Identification Ownership Awareness Reporting

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1. Compliance Identification includes identification of laws applicable on the companies on the
company in consultation with functional heads. The legal team identifies the rules and
regulations and compliances associated with such regulations.
2. Compliance owner is the person responsible for all compliances. Compliance ownership involves
identifying the compliances, function wise and individual wise.
3. Ownership is divided into primary owners and secondary owners where primary owners are
responsible for the compliance and secondary owners are responsible for supervising the
compliance.
4. Sometimes the compliances are handled by persons who are not fully aware of the requirements
of the legislations and hence creating appropriate awareness amongst the owners is very
important. Thus, compliance awareness involves conduct of meetings, trainings and awareness
programs, to create awareness of various compliances amongst the owner of compliances.
5. In Compliance reporting status of compliances and non-compliances is communicate to the
concerned annually by the compliance officer. Reporting of non-compliances ensures that
appropriate corrective action is being taken by the responsible person in case of non-compliance

The entire corporate compliance framework revolves around 4 process:

Maintennace Development Implementation Evaluation

Identification and Mitigating the Evaluating the Managing the non-

evaluation of compliance risks performance and compliance and
compliance reporting the needs working on
obligations continuous
improvements

8. Identification of Applicable Laws and Regulations

 Identification of applicable laws and regulations involves the identification of compliances under
various laws rules and regulations applicable on the company.

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 There must be as systematic process of identifying compliance obligations of the organisation
and their implications for its activities and services.
 For framing a compliance framework company secretary, to identify the compliances & other
requirements, has to get familiar with the business model of the company along with the
environmental, health and safety aspects, and data security requirements. He has to review
the system periodically in light of regulatory updates.

 The sources for identification of compliance obligation includes:

a. Engagement with management and other key staff in Divisions.
b. Laws and regulations.
c. Permits, licences or other forms of authorisation.
d. Orders, rules or guidance issues by regulatory agencies.
e. Judgements of courts or administrative tribunals.
f. Treaties, conventions and protocols.
g. Internal policies and procedures.
h. Voluntary principals or codes of practice.
i. Commentary sourced from the public domain.
j. Membership of professional groups.
k. Subscriptions to relevant information services.
l. Attending industry forums and seminars.
m. Monitoring regulators (websites, mailing lists, meetings, media).

Company has to comply with following Laws:

1. Labour Laws 7. Corporate and Economic Laws
2. Fiscal/ Tax Laws 8. Cyber Laws which is also known as ‘The
3. Pollution/Environment related Laws Information Technology Laws’;
4. Securities Laws 9. All other laws affecting the company
5. Commercial Laws including Intellectual concerned depending upon the type of
Property Rights Laws industry/activity.
6. Industry Specified Laws

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 In Re Siddarth Gupta (Appellant) v. The Delhi Golf Club Limited & Anr
In this matter the Appellant had acquired membership in the Delhi Golf Club Ltd after paying
the requisite fees and was enjoying the rights and privileges guaranteed to the members of the
Club. Meanwhile, the Appellant got to know that a resolution had been passed in the AGM of
the Club wherein the Appellant’s membership was cancelled. Consequently, the Appellant filed a
Petition against the said resolution in the Delhi High Court.
The court ruled that a person's membership can only be cancelled according to the provisions
stated in the Club's Memorandum of Association, Articles of Association, and the principles of
natural justice. In this case, the appellant was not given any notice or an opportunity to be
heard, and the club did not follow the specified procedures for expelling members. As a result,
the court declared the resolution invalid and directed the club to reverse it, preserving the
appellant's membership.

CCPA fines Cloudtail with Rs 1 Lakh for not complying with mandatory standards
prescribed as per the Domestic Pressure Cooker (Quality Control) Order, 2020
Cloudtail, a retail company selling pressure cookers on an e-commerce platform, was issued
an order for unfair trade practice by selling domestic pressure cookers in violation of
mandatory standards prescribed as per the Domestic Pressure Cooker (Quality Control) Order,
2020.
In the light of same
1. The Central Consumer Protection Authority (CCPA) has imposed a fine of Rs 1 Lakh for
violating the Quality Control Orders and consumer rights.
2. The company has also been asked for the price reimbursement of 1,033 pressure cookers to
the consumers and is directed to submit the compliance report within 45 days.

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9. Compliance Risk Assessment: Basis for Compliance Management
 Risk assessment should be done with changes in new laws and regulations. It is the process
where company identifies the inherent risk of each obligation and categorises them as critical-
medium-high-low. On the basis of this a risk mitigation strategy is decided.
 There are two types of risk assessments that can be performed by the company, High Level
Risk Assessment and Detailed Risk Assessment.
 To ensure that risk is properly assessed and mitigated, a detailed risk assessment should be
undertaken whereas, results from detailed risk assessments are used for high risk assessments.
The current and anticipated critical and high compliance risks must be included in the high
level risk assessment process.
 Risk Assessment includes:
1. Identification areas of potential non compliance
2. Rating the risks
3. Assessing the outcomes to find the need for training, monitoring, internal controls, detailed
reviews and corrective steps
 While considering risk following risk drivers should also be considered:
1. Legal Effect: Non compliances by the organisation can leads to various penalties, fines,
imprisonment, debarment, and seizing the products etc. against the organisation and its officers.
2. Financial Effect: Low share prices of the securities of the organisation, financial losses and
low revenues and lowering the trust of the investors are some of its negative effects.
3. Business Effect: Shutdown of the factories can affect the business operations of the
organisation.
4. Reputational Effect: Loss in customers’ confidence in the brand of the organisation, bad media
or social discussion can tarnish the reputation of the organisation.

10. Compliance Monitoring and Responsibility Centre Mapping /Allocation

Compliance Monitoring
 Monitoring enables companies to recognize whether their compliance framework has been
implemented in practice and whether it is practicable, responsive, and suitable for the
characteristics of the company.

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 It means the “oversight” of the company’s operations and activities, both in light of local and
binding cross-border regulations and the company’s local and global policies, procedures, and
ethical rules.
 A single regulatory compliance check is not sufficient since companies operate in a dynamic
environment. Business activities and services can change quickly due to mergers, acquisitions,
new partnerships, etc. To stay relevant, risk assessment and monitoring must be reviewed
periodically to ensure the compliance framework adapts to changing business conditions.

Compliance Ownership
Compliance ownership involves identifying the compliances, function wise and individual wise.
Ownership is divided into primary owners and secondary owners where primary owners are
responsible for the compliance and secondary owners are responsible for supervising the
compliance.

LET’S UNDERSTAND THIS:

Secretarial Officer /Asst. Company Secretary may be primarily
responsible and Group Company Secretary’s responsibility is
secondary.

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 The role of the various level of management for compliance ownership is as following:

Compliance officer/ Legal Cell

Top Management Senior Management
Subordinate staff

1. Understanding 1. Analysis and 1. Performing 1. Identification

the compliance research on Compliance of new and
obligations and the Regulatory Obligations changed
recent changes changes 2. Updating relevant local
2. Approval of 2. Formation of Compliance laws,
policy and policy and obligations regulations and
procedures. procedure into the standards
3. Motivating 3. Motivating Compliance 2. Communication
employees to compliance Chart in writing to
doing officer for 3. Risk compliance
compliance in timely Identification owner/
time compliance and intimation executor
4. Guiding 4. Conflict 3. Review of
compliance intimation. system and
officer in policies and
doing procedures
compliance 4. Resolution of
5. Tracking the doubts and
compliance clarity in
chart directions
6. Risk escalation 5. Periodical
7. Conflict review and

11. resolution
Escalation and Compliance Reporting assessment

 Compliance reporting enables Management and the Compliance function to evaluate whether
Compliance Risks surpass the Company's risk appetite. It also facilitates communication and
discussion of potential Compliance Risks.
 Broadly, there can be two primary types of reporting: Cyclical Reporting and Incident
Reporting.

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 In Cyclical Reporting, at least quarterly basis, the Compliance officer works with management
and other risk functions to provide non-financial risk reporting. However, the Management may
require more frequent or other types of Compliance-Risk related reporting.
 Under the Incident Reporting the material compliance incidents are reported, which need to be
handled through the risk management process. Material compliance incidents are defined as
events that have effect on the company’s integrity, damaging company reputation, legal or
regulatory sanctions, or financial loss, as a result of a failure (or perceived failure) to comply
with applicable compliance related laws, regulations and standards.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar
(Short Note)
ABC Limited, A BSE limited company has made
following cyclical reporting arrangements for
compliance activities which includes
Audit & Risk Management Committee: Quarterly
reports on the performance of the compliance
programme will be submitted to the Audit and Risk
Management Committee. These reports will include a
high-level summary of activities by all functions
undertaking significant compliance related activities.
Separate reports will also be submitted to the Audit
and Risk Committee for major noncompliance
incidents or emerging compliance issues.
Annual Certifications: At the end of each financial
year Responsible Officers will be required to provide
an assurance that to the best of their knowledge, the
ABC Limited has complied with the obligations
relevant to their area of responsibility.
Assurance Maps: To facilitate quarterly and annual
reporting requirements an assurance mapping
approach that is consistent with the model.
Regulatory Reporting: The regulatory reporting
arrangements for compliance activities shall be
accounted. The reporting of significant compliance
issues which are required by law must be undertaken
in accordance with the procedures.

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12. Creation of Compliance Reporting System
1. all compliances and non-compliances should be properly reported to the concerned authority so
that an appropriate action can be taken by the authorities to reduce the compliance risk.
Procedure for Compliance Reporting is as following:
1. Firstly, functional heads should be identified for reporting of various laws. For example - the
company secretary would be the functional head for reporting of company law, listing regulations
and commercial laws.
2. Each of the functional heads then collect and classify the relevant information from the various
units of their department and consolidate it in the form of a report.
3. The report should carry an affirmation from the functional heads that the report is prepared
based on the inputs received from the various unit and should provide, specific compliances/
non-compliances.
4. These reports are then forwarded to Company Secretary or managing director.
5. The company secretary would give a brief to the managing director and managing director after
consolidating the inputs from company secretary, submit the report to the Board with his
signature.
6. The whole process of CCR is contingent on the creation and implementation of comprehensive
legal Management Information System (MIS).

13. Compliance Risk - Review and Updation

Monitoring of compliance risk is essential to identify if any new risk has arisen and to ensure
that risk mitigation activities are working properly. Hence, the plan for monitoring the
compliance risk should be documented, reviewed and updated timely.
The entire purpose of review is to identify:
a. if the plan is still necessary and accurate
b. if the plan should be combined with another plan or if it should be rescinded
c. if the plan is up to date with current laws and regulations
d. if changes are required to improve the effectiveness or clarity of the plan

Compliance Risk Monitoring plan must include:

a) Critical and high Compliance Risks.

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b) Key Compliance Risk mitigation activities.
c) Routine business transactions to which compliance obligations or risks are associated.
d) Compliance with the laws, regulations and standards included in the chart, including the
company values.
e) The implementation /embedding of the Framework and all policies issued by the corporate
compliance department.
The plan for monitoring must include:
1. Concise statements that capture the relevant internal and external compliance obligations and
the risks arising from those obligations;
2. The business processes to which the compliance obligations are linked or on which they have
an impact;
3. Specific Compliance Risk mitigation activities for managing the compliance obligations;
4. The first line tracking (ongoing tracking as part of the normal course of business activities),
second line monitoring (health check performed by the Compliance Function) and third line
assurance (independent review performed by internal audit) for efficiency and / or effectiveness
of first and second line activities);
5. Brief description of how tracking and monitoring activities are performed;
6. Frequency of tracking and monitoring activities;
7. Recipient(s) of the tracking and monitoring reports

The following methodology may be adopted for accessing the compliance mechanism of the
company:
a) Risk Assessment: Through employee surveys, interviews, and document reviews, a company’s
culture of ethics and compliance at all levels of the organization is validated. This assessment
is done to identify gaps between company’s current practices and the regulatory requirements.
b) Program Design/Update: This approach can be used to assess the compliance programme and
the reporting structure or communication methods in an organisation.
c) Policies and Procedures: The company should review and keep updating and enhancing the
policies and procedures, including issues of financial reporting, fraud, conflicts of interest, sexual
harassment etc.

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d) Communication, Training, and Implementation: This approach involves the communication of
the various policies and procedure of the company along with the philosophy behind such
policies and training programme on such policies which may help in the adoption of such
policies in day-to-day realities and incorporate it into the attitudes and behaviours of the
employees of the company.
e) Ongoing self-Assessment, Monitoring, and Reporting: In order to understand that both the
intent and letter of the law are still being observed throughout organization and the program
and the organization adapt to changing legislation and business conditions, the assessment,
mechanisms, and processes must be incorporated including employee surveys, internal controls,
and monitoring and auditing programs, to achieve success.

14. Training and Implementation

Creating appropriate awareness amongst the owners of compliances is very important as many
times compliances are handled by such persons who are not fully aware of the requirements
of the law. This can be done through trainings/ meetings or through a manual containing detail
of compliances. A strong Compliance training and education programme reinforces Company
compliance culture and builds awareness and understanding of -:
1. Company Framework
2. Roles and responsibilities outlined in the policies and Framework
3. Critical and high compliance obligations identified in the Compliance Chart
4. The process for addressing compliance issues
5. Consequences of failing to meet compliance obligations.

Five essential things to create Compliance Training Programme:

1. Make it personal
2. Make it interesting
3. Make it understandable
4. Make it accessible
5. Make it ongoing

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 An annual plan for Compliance Risk related training and education must be developed and
updated and must include-:
1. Statements that provide relevant internal and external compliance obligations and the risks
arising from those obligations;
2. The business processes to which the compliance obligations are linked or on which they have
an impact
3. Brief description of the training or education activity;
4. Target audience (new employees or existing employees)
5. Frequency of training

15. Compliance Audit

 As per CAG Auditing Standards, the Compliance audit is the independent assessment of whether
a given subject matter is in compliance with applicable laws and regulations
 Compliance audits are carried out by assessing whether activities, financial transactions and
information comply in all material respects, with the authorities who govern the audited entity.
 The compliance audit is completely different from the audit of financial statements and from
performance audits. The compliance audits may be conducted separately on a regular basis, as
distinct and clearly-defined audits each related to a specific subject matter.
 Compliance auditing may be
 Regulatory – compliance with relevant laws, regulations and agreements applicable to the entity.
 Propriety - observance of the general principles governing sound financial management and the
ethical conduct of public officials.

16. Benefits of Corporate Compliance Management

A compliance management programme has following significance:
1. Better compliance of the law
2. Real time status of legal/statutory compliances
3. Improved operations and higher productivity
4. Lays the foundation for the control environment
5. Real time status on the progress of pending litigation before the judicial/quasi-judicial authority;
6. Companies with effective compliance management programme are more likely to avoid penalties.

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7. It creates safety valve against non-compliances which were unintended.
8. Ensures cost savings by avoiding penalties/fines and minimizing litigation.
9. Creates better brand image of the company in the market.
10. Enhances credibility/creditworthiness that only a law-abiding company can have.
11. Creates goodwill among the shareholders, investors, and stakeholders.
12. Gives recognition as Good corporate citizen.

17. Secretarial Audit and Compliance Management System

The compliance system and processes in a company are dependent mainly on the following
factors:
A. Nature of business (es).
B. Geographical domain of its area of operation(s).
C. Size of the company both in terms of operations as well as investments, technology, multiplicity
of business activities and manpower employed.
D. Jurisdictions in which it operates.
E. Whether the company is a listed company or not.
F. Regulatory authority (ies) in respect of its business operations.
G. Nature of the company viz., private, public, government company, etc.
 Based on the above the Secretarial Auditor can constitute a broad idea about the desired
system and process to be adopted by a company.
 Auditing in such systems requires the Auditor to enter and to have access within the system.
While taking up the audit assignment, the Auditor needs to ensure that access would be given
so that assessment of proper system and process of compliance is made.
 Auditing of compliance system and process is not a fault-finding exercise, rather a device to
improve compliance mechanism of a company. It is expected that the Secretarial Auditor as an
expert in corporate compliance would advice the companies to build up strong corporate
compliance system in case the system appears to be insufficient during the audit process.

18. Role of Company Secretaries in Compliance Management

1. A Company Secretary is the ‘Compliance Manager’ of the company. He ensures that the
company is in total compliance with all regulatory provisions.

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2. Corporate disclosures, which play a vital role in enhancing corporate valuation, is the forte of
a Company Secretary. These disclosures can be classified into statutory disclosures, non-
statutory disclosures, specifies disclosures and continuous disclosures. SEBI (Listing Obligations
and Disclosure Requirements) Regulation, 2015 spells out elaborately on various aspects of
disclosures which are to be made by the company such as contingent liabilities, related party
transactions, proceeds from initial public offerings, remuneration of directors and analysis in
the corporate governance report which is duly certified by company secretaries. A company
secretary has to ensure that these disclosures are made to shareholders and other stakeholders
in true letter and spirit.
3. The company secretary provide advice on compliance risk, responsibilities, obligations, concerns
and other compliance issues. The advisory services of the company secretaries impact the
compliance framework, as the business receives advice to help manage its compliance risks
more effectively. The company secretary is the professional who guides the board and the
company in all matters, renders advice in terms of compliance and ensures that the board
procedures are duly followed.
4. In nutshell, the company secretary is the professional who guides the board and the company
in all matters, renders advice in terms of compliance and ensures that the board procedures
are duly followed, best global practices are brought in and the organisation is taken forward
towards good corporate citizenship.

19. Directors Responsibility Statement

Section 134 of the Companies Act, 2013 is related to the financial statement, Board's report,
and annual return of companies. It outlines the requirements and contents of the Board's
report, which the Board of Directors of a company must prepare and present to the shareholders.
Section 134(5) Casts duty upon the directors that directors' reports must contain statements
regarding the responsibility of directors.
Director’s responsibility statement is required as per section 134(5) should report following:
a. In preparing the annual accounts, the applicable accounting standards and proper explanations
relating to material departures were followed.
b. The directors had selected such accounting policies and applied them consistently and made
judgments and estimates that were reasonable and prudent to give a true and fair view of the

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 state of affairs of the Company at the end of the financial year and of the profit and loss of
the Company for that period.
c. The directors had taken proper and sufficient care for the maintenance of adequate accounting
records in accordance with the Act’s provisions for safeguarding the Company’s assets and for
preventing and detecting fraud and other irregularities.
d. The directors had prepared the annual accounts on a going concern basis.
e. In the case of a listed company, the directors had laid down internal financial controls to be
followed by the Company and that such internal financial controls are adequate and operating
effectively.
f. The directors had devised a proper system to ensure compliance with all applicable laws and
that such systems are adequate and operating effectively.

Rajeev Saumitra Vs Neetu Singh

In the instant case director carried a competing business that conflicted with the interest
of the company, to gain advantage by directors and employees
Court held that director has breached fiduciary duty u/s 166 of Companies Act, 2013.
Section 166 imposes a fiduciary duty on the director to act in good faith in order to
promote the objects of the company for the benefit of its members. Court concluded that
a director could be liable to reimburse the company for any unwarranted gains resulting
from the breach of obligations stipulated by Section 166 of the Companies Act, 2013.

20. Certain Important Compliance Requirements under Companies Act, 2013

1. Disclosures by director of his interest- MBP-1: every director shall disclose his concern or
interest in other entities, including shareholding, in the first meeting and every first meeting
of financial year or when there is a change in disclosure already made.

2. Disqualifications of Directors-DIR-8:

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 Every director should inform about his disqualification before he is appointed or re-appointed,
according to section 164.
 where a person is appointed as a director of a company which is in default of clause (a) or
clause (b) of section 264(2), he shall not incur the disqualification for a period of six months
from the date of his appointment.
 Every person who has not filed the financial statement or annual returns for a continuous
period of 3 Financial years or has failed to pay the deposits or redeem the debentures on due
date or pay the dividend declared for a continuous period of one year or more, should not be
re-appointed as a director of that company or appointed in other company for a period of five
years from the date on which the said company fails to do so.

3. Annual Return-MGT-7: Every Company shall file its Annual Return within 60 days of holding
the AGM or where no AGM is held in any year within 60 days from the date on which the
AGM should have been held together with the statement specifying the reasons for not holding
the AGM.
Annual Return of Every Private Company shall be signed by a director and the company
secretary, or where there is no company secretary, by a company secretary in practice.

4. Filing Financial Statements: Form AOC-4 & AOC-4 CFS:

 Company is required to file its financial statements, including consolidated financial statements,
along with all the documents required to be or attached to such financial statements, duly
adopted at the AGM of the company, with the Registrar within 30 days of the date of AGM.
 In case financial statements are not adopted in the AGM or adjourned AGM, it shall be filed
with the ROC within 30 days of the date of AGM and the Registrar shall take them in his
records as provisional till the financial statements are filed with him after their adoption in
the adjourned annual general meeting.
 If annual general meeting is not held for any year, the financial statements duly signed along
with the statement of facts and reasons for not holding the annual general meeting shall be
with the Registrar within 30 days of the last date before which the annual general meeting
should have been held in such manner, with such fees or additional fees as may be prescribed.

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 LET’S UNDERSTAND THIS
The Company ABC Pvt. Ltd. has not filed annual returns for the year 2019-
2020, 2020-2021 & 2021-2022 yet.
The consequences can be that if Company does not file annual returns for
any continuous period of three financial years, then directors of said
company shall become disqualified for continuous period of 5 years, and they
would not be eligible to be appointed, re-appointed as directors in other
company

5. Certification of Annual return-MGT-8: The annual return filed by a listed company or a

company having paid up share capital of Rs. 10 Crores or more or turnover of Rs. 50 crores or
more shall be certified by a Company Secretary in Practice.

6. Circulation of Financial Statement & other relevant Documents Company should send to
all the members of the Company, all trustees for the debenture holders and to all persons so
entitled, a copy of the (approved) Financial Statements, along with consolidated financial
statement at least 21 clear days before the Annual General Meeting.

7. Notice of AGM: Notice of Annual General Meeting shall be sent to all the Directors, Members,
Auditors, legal representative of any deceased member as per section 101 of Companies Act,
2013 and SS-2.

8. Board Meetings: Every Company shall hold a minimum number of 4 Board meetings every year
and maximum gap between two meetings should not be more than 120 days. Company should
hold at least 1 Board Meeting in every quarter of each calendar year.
In case of Specified IFSC Private Company–The Company shall hold the first meeting of the
Board of Directors within sixty days of its incorporation and thereafter atleast one meeting of
the Board of Directors in each half of a calendar year.

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 LET’S UNDERSTAND THIS:
If a company is incorporated on 15th June, the first Meeting should
be held within thirty days i.e. latest by 14th July. if the meeting is
held say on 10th July, then the next Meeting should be held within
120 days from 10th July.

9. Notice of Board Meeting: a notice of board meeting should be sent to all the directors at
least 7 days before the meeting, at the registered address of directors by hand delivery, post
or electronic means.
However, meeting may be called at shorter notice to transact urgent business subject to the
presence of one independent director, if any and in his absence decision shall be circulated to
all directors and shall be final on ratification by atleast one independent director, if any.

10. Appointment of Auditor-ADT-1: Auditor shall be appointed for 5 years in the AGM. The
company shall inform the auditor of his appointment and file a notice of such appointment
with the Registrar within fifteen (15) days of the meeting in which the auditor is appointed
in E-form ADT-1.
In case of Specified IFSC Private Company- notice of auditor’s appointment shall be filed with
the Registrar within 30 days of the meeting in which the auditor is appointed.
11. Appointment of Company Secretary: Private Company having paid up share capital of Rs. 10
crores or more is required to appoint a whole time Company Secretary.
12. Register of members: company has to mandatorily maintain register of Members residing in
or outside India, register of debenture-holders and register of any other security holders.

CAN YOU SOLVE THIS?

What if the company secretary is not appointed in ABC Pvt. Ltd.,
where required under Companies Act, 2013?

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 Solution:
Such company shall be liable to a penalty of five lakh rupees and every director and key
managerial personnel of the company who is in default shall be liable to a penalty of fifty
thousand rupees and where the default is a continuing one, with a further penalty of one
thousand rupees for each day after the first during which such default continues but not
exceeding five lakh rupees.

CAN YOU SOLVE THIS?

ABC Pvt. Ltd. Has not maintained register of members. What can be
penalty under Companies Act, 2013?

Solution:
If a company does not maintain a register of members or debenture-holders or other security
holders or fails to maintain them in accordance with the provisions of sub-section (1) or sub-
section (2), the company shall be liable to a penalty of three. Lakh rupees and every officer
of the company who is in default shall be liable to a penalty of fifty thousand rupees. ABC
Pvt. Ltd. Shall be liable to a penalty of three lakh rupees and directors liable to a penalty of
`50000/-.

21. Compliance Management Tool

Compliance Management Tool handles and controls business processes and enables organisations
in scaling their operations without increasing their risk of non-compliance.
Compliance Management tools are software products that automate or facilitate processes and
procedures that businesses must have in place to be compliant with industry, legal, security
and regulatory requirements.
It is a software which facilitates your compliance management by bundling all important
workflows on a digital platform.
Compliance Management tool is generally required in large organisations where many risks are
involved. However, now a day’s not only big companies but also smaller companies are required
to comply with applicable laws and regulations.

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Objects of Compliance Management Tool:

Digitization Automation Compliances

1. Robust compliance tool 1. Provides automated 1. Robust compliance tool

replaces spreadsheets legal updates replaces spreadsheets
and manual processes 2. Helps in automated and manual processes
2. Enhances visibility & compliance tracker. 2. Enhances visibility &
accountability. 3. Showcase automated accountability.
3. Reduces the information workflows, dashboards 3. Reduces the
& knowledge gap & reports information &
knowledge gap

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short Note)

CLOUD COMPUTING
 Cloud computing is becoming increasingly popular for delivering IT services, thanks to
its scalability, ease of deployment, and lower maintenance costs. However, it also
introduces new cyber security risks and challenges that businesses need to be aware
of.
 SEBI has introduced a cloud framework to help regulated entities manage risks better.
It sets standards for security and regulatory compliance in cloud computing.
 This framework complements SEBI's existing guidelines and assists regulated entities in
adopting secure and compliant cloud practices. By following the framework, regulated
entities can establish a strong risk management approach for cloud adoption, including
risk assessment, implementing controls, and ensuring regulatory compliance.

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 Compliance Management at Bharti Airtel Limited
The Company has a strong automated Compliance Framework that covers all relevant laws
and compliance obligations globally. It regularly updates these requirements based on changes
in the law. Automated alerts are sent to compliance owners to ensure timely compliance. The
owners certify the compliance status, which is reviewed by compliance approvers. A
consolidated dashboard is presented to Business Leaders and the Managing Director & CEO.
Quarterly, a certificate of compliance, exceptions report, and mitigation plan (if any) are
presented to the Audit Committee and Board of Directors. The Company also uses a centralized
automated tool, the Notice Management System, to monitor and update legal notices and
court cases regularly.

22. Kinds of Compliance Management Tool

All-Purpose Industry specific

Compliance compliance
GRC Software
Management management
Platform tools

Provides: 1. Focus on the Focuses on:

1. Risk remedy compliance with laws 1. Managing the risks
2. Solves Technical issue and regulations 2. Monitoring the
3. Corporate Governance applicable to specific compliance risks
industry 3. Handling corporate
2. Structured in governance tasks
specialised frameworks 4. Streamline the
that complies with compliance workflows
particular regulations and initiatives

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 LET’S UNDERSTAND THIS:
These companies have adopted compliance management tools

Bharti Airtel Limited Reliance BP Mobility

Limited
The company has
implemented in-house The company has
rule based data analytics integrated Reliance
tool and oracle Compliance Managements
System (iRCMS), an online
Governance Risk and
compliance monitoring
Compliance (GRC
system which maps and
tracks compliances
applicable to the company
and its units state wise and
legislation wise, ensuring
“Zero non-compliance’ and
23. Benefits of Compliance Management Tools
‘Zero Pendency’.
1. Reduction in Manual Work: The management of compliances spreadsheet is time consuming
and tedious work, thus, compliance management tools helps in the growth of the business and
highlights where the improvements are required.
2. Streamlining implementation: With streamlining the implementation of various relevant
frameworks, it reduces the compliance efforts and compliance audits and corrective steps can
be facilitated easily.
3. Simplification in Monitoring and reporting: The tool automatically fills in compliance dates
and sends alerts for compliance issues. It helps responsible persons remind their subordinates
to update metrics in compliance with regulations and laws.
4. Risk in human errors reduced: It helps in improving the compliance programs performance and
it reduces the risk in human errors. It generates the reports quickly with detection of compliance
failures.

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5. Builds Organisation Reputation: A compliant entity always has a good reputation with its
customer base and its employees. Customers work with a company that’s trustworthy hence,
a good compliance record boost reputation.
6. Creates a Roadmap for Business: Major advantage of using a compliance management tool is
that it guides you in the right direction. This tool maps out the organization's regulatory
requirements and identifies areas that require improvement. The "compliance calendar" helps
prioritize what needs to be fixed and when. It maps out compliance activities to drive compliance
in the organization effectively.

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short Note)

Project Eagle
 Infosys compliance program, known as Project Eagle, is intended to track, detect,
prevent and remediate any violations of applicable laws and regulations and to
encourage a culture of compliance to protect our organizations value
 Project Eagle is supported by the implementation of software tool-based systems
(“Compliance Manager Tool”) to effectively track and monitor such applicable
compliances under various regulations and enable compliance with the same
 Infosys use the Compliance Manager Tool to implement an enterprise-wide regulatory
compliance management to oversee and track regulatory compliance for applicable
regulations globally.
 Any changes in applicable regulations are also being updated on the tool on a regular
basis.
 An inter-functional team of designated users and checkers oversee implementation
and its functioning and respective Functional Heads supervise and certify continued
adherence of applicable regulations as well as any risk of non-compliance with
mitigation plan to the Board on a quarterly basis.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 2- DOCUMENTATION & MAINTENANCE OF RECORDS

1. INTRODUCTION
Document

A document is a part and parcel of written, printed, or electronic matter that provides certain
information, which may be structured or unstructured. The emails we send and receive, reports,
shopping lists, etc. are all examples of documents.

Record

A record is a matter of evidence about the past. It can be used as proof in legal obligations or
in the transaction of business. For instance, a taped conversation between two persons may
be used as a record to conclude that they were framing a conspiracy. Some examples of records
may include final reports, emails confirming actions or decisions, photographs, spreadsheets,
business contracts, etc.

Responsibility of CS in documentation
i. It is the primary responsibility of Company Secretary to maintain the records which requires a
good understanding of what documents need to be created, what is the purpose of such
documentation, how much details are required to be disclosed in any documents etc.
ii. it is the duty of the Company Secretary to ensure the confidentiality of the documents
iii. Company Secretary checks whether document is consistent with prior records (or if it conflicts
with corporate policies, may create concerns under existing agreements, may results in a
violation of law, or may have tax implications etc.
iv. The Company Secretary is also responsible for storing, maintaining, retrieving, certifying, and
explaining corporate documents.
v. A Company Secretary is often responsible for documents relating to subsidiaries, joint ventures,
consortiums, and other entities also, many of which may be at locations other than corporate
headquarters, including locations around the world. In such cases, the Company Secretary must
consider whether and to what extent, he should rely on local partners in maintaining and
creating corporate records, as well as to what extent he or she must exercise oversight.

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 CONSEQUENCES OF NON-MAINTENANCE OF RECORDS- M/S. SDU HOLDINGS PRIVATE
LIMITED
In the case of M/s. SDU Holdings Private Limited, the Registrar of Companies in Bangalore
issued an adjudication order, imposing a penalty for violating the provisions of section 88
of the Companies Act, 2013. According to the Companies Act, 2013, every company limited
by shares is required to maintain a register of its members in Form No. MGT-1 from the
date of its registration.
During an investigation carried out under section 206 of the Companies Act, 2013, an
inspection officer reviewed the statutory registers maintained by the company. It was
discovered that the company's register in Form No. MGT-1 was incomplete. In light of this
default, the adjudication officer provided the company and the responsible officers with a
fair opportunity to present their arguments, which included a personal hearing notice.
After considering the facts, circumstances of the case, and the submissions made by the
company and its directors during the personal hearing, the Adjudicating Officer decided to
impose a penalty on the company and its directors. The penalty was imposed due to their
failure to comply with section 88 of the Companies Act, 2013, which pertains to
maintaining the required register of members in proper form.

2. PURPOSE OF DOCUMENTATION
Proper documentation serves the following purpose:
1. Client Service: Documentation helps to serve their clients better. It helps in increasing the
service standards and improving product quality.
2. Communication: Documentation helps to better communicate between the professionals.
3. Accountability: Documentation records the work of professional and ensures accountability. It
can be used for internal inquiries, regulatory proceedings etc.
4. Professional Responsibility: Documentation is an integral part of professional practice and
forms the basis for evidence of professional conduct.

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 5. Legal Requirement: Professionals are required to make and keep records of their professional
work according to standards and policy of the organisation, however, some information is
required to recorded and maintained according to laws.
6. Quality: Documentation is used to evaluate practice of professional in Peer reviews, audits and
accreditation processes or regulatory inspections.
7. Research: Documentation is a valuable source of data for researchers. It provides information
to professional and is a concise record, essential for accurate research data and evidence-based
practice.
8. Resource Management: Accurate and comprehensive documentation is a valuable source of
evidence and provide basis for resource management.

3. GUIDING PRINCIPLES OF GOOD DOCUMENTATION

The term document includes all kinds of documents which are prepared by a professional while
performing his duty including, written and electronic records, audio and video tapes, emails,
images (photographs and diagrams), charts, check lists, communication books, management
reports, incident reports and working notes. The good documentation promotes good corporate
governance practices in the company, increases compliance level of the company and helps to
communicate the information between various stakeholders. The guiding principles for good
documentation are as following-:

Clear Concise Complete Contemprary Consecutive

Correct Comprehensive Collaborative Client-Centric Consecutive

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar
What is Good Documentation Practice?
These are the best practices for record keeping which
preserves the integrity of document and guides on proper
storage of documents.

4. EXAMPLES OF POOR DOCUMENTATION PRACTICES

Events are not Write Overs/

Document with
recorded in SOP adopted are Work delegated is Multiple line-
errors, not dated
sequence or table not authorised not documented through/ White
and not signed
format out

5. EXAMPLES OF GOOD DOCUMENTATION PRACTICES

Records should Superceded

Concise, Legible Don't assume be completed at documents should
Clear Examples
& Accurate information the time of be retained for a
activity specific period

Do’s Don’ts
record the data/document as soon as it is delay in data/document recording
generated
add the reference notes to provide the delay in data/document recording
context
validate your computerised system or encourage handwritten documentation
document software
limit document access to authorised personnel intentionally falsify the record/document
specify when the data/document was pre-date or back-date the data/document
recorded, reviewed and approved

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keep data back-up, either automatically or by archive data/documents unless explicitly
storing the true copy in separate location authorised to do so

M/s Indiabulls Real Estate Limited, the Registrar of Companies, NCT of Delhi & Haryana,
i. In the case of M/s Indiabulls Real Estate Limited, the Registrar of Companies, NCT
of Delhi & Haryana, issued an Adjudication order due to the company's non-compliance
with the provisions of sub-section (10) of section 118 of the Companies Act, 2013,
which pertains to the mandatory adherence to Secretarial Standards in relation to
general and board meetings. This non-compliance involved Secretarial Standards – 1
& 2.
ii. The inspection of the company's books of accounts was conducted by the Central
Government under section 206(5) of the Companies Act, 2013. During the inspection,
it was noted that the company failed to comply with the requirements of section
118(10) along with Secretarial Standards. Specifically, the company had not serially
numbered its "Attendance Register" for board meetings and other meetings, and the
"Attendance Register" was maintained in a loose-leaf form rather than being
periodically bound.
iii. Following the inspector's report, the Registrar of Companies issued a show cause notice
to the company. The company responded by acknowledging the inadvertent mistakes
and rectifying them after receiving the notice. The company claimed that there was
no intentional wrongdoing or mens rea regarding the offenses.
iv. After reviewing the company's application and considering both oral and written
submissions made during the personal hearing, the Registrar of Companies, acting as
the Adjudicating Officer, concluded that penalties should be imposed on the company
and its officers. The penalty was imposed based on the violation of the provisions
related to Secretarial Standards and the company's failure to adhere to the stipulated
requirements.

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6. ELECTRONIC REPOSITORY OF DOCUMENT
Electronic repository is used to store electronic documents, records, images of paper-based
documents captured through scanner. In electronic repository, software called as document
management system is used to control and manage documents of the organisation. Document
management refer to the process of managing and tracking of the documents and records
through an electronic or physical source of documents.
Following are the advantages of depository management system:
1. Tracking of check-in or check-out by various officers
2. Locking and unlocking of Document
3. Simultaneous editing
4. Document Version Control
5. Ease in Audit trail
6. Annotation

North American Regional Health Care Provider (RHCP) had moved to electronic records because
they wanted one organisation that could handle every aspect of implementing their electronic
health record strategy , while simultaneously standardizing records management practices across
the four major hospitals and numerous clinics they managed.
The Electronic Record Keeping Service Provider recommended an automated, streamlined end tab labelling
system that would standardize all files.

7. ADVANTAGES OF THE ELECTRONIC RECORDS

1. Cost Effective: Storing data in a digital form is cheaper than storing data in any other format
as because of increase in technology the digital media cost is dropping day by day.
2. Ease of use: In electronic repository, through document management system it is easy to
locate and share electronic documents by searching through documents.

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3. Labour savings: With electronic documents, all the steps like filing, stapling etc are removed
and labour required to locate, manage and dispose of electronic documents is almost nil and
minimum.
4. Search Ability: Through OCR, electronic documents can be searched easily, however, same is
not possible in physical documents.
5. Portability: Electronic documents can be stored in a removable hard drive and same can be
taken to courthouse or office easily. Thus, they are more portable than physical documents.
6. Version tracking: In electronic documents it is easy to track if any changes are made to the
documents, who has made the changes, when these changes have been made and what
document looked like before making changes.

A Case Regarding Admissibility of Electronic Evidence: Arjun Panditrao Khotkar vs.

Kailash Kushanrao Gorantayal
In this case the Supreme Court of India addressed the interpretation of Section 65B of the
Indian Evidence Act, 1872. The case involved a reference to a Bench of Judges by a Division
Bench due to conflicting judgments on the matter.
The court found that the Division Bench judgment in the case of Shafhi Mohammad v. State
of Himachal Pradesh needed reconsideration by a larger Bench of the Supreme Court. In the
Shafhi Mohammad case, it was stated that electronic evidence is admissible, and Sections 65-
A and 65-B of the Evidence Act are procedural provisions clarifying its admissibility. It was
further noted that the admissibility of electronic evidence depends on its authenticity and
whether the person producing the evidence can provide a certificate under Section 65-B(4).
The Supreme Court disagreed with the premise in Shafhi Mohammad that a certificate under
Section 65-B(4) cannot be obtained by individuals not in possession of an electronic device.
The court clarified that an application can be made to a Judge for the production of such a
certificate under Section 65-B(4), even if the person in possession of the electronic device
refuses to provide it. This decision sought to address the inconsistency and provide clarity on
the admissibility of electronic evidence under the relevant sections of the Evidence Act.

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2) DISADVANTAGE OF ELECTRONIC RECORDS
1. Software risk: If documents are protected by software, there's a potential danger that the
company behind the software might not help with the data if it's stored on an unsupported
computer. Also, if the company goes out of business, there might be expenses to change things
and get back the locked documents.
2. Format risk: Sometimes, a person might not be comfortable to read a PDF or JPEG document.
Also, it might happen that the software might disappear or stop supporting PDFs, making it
hard to read these documents later on.
3. Reliability: Paper is often seen as dependable and more reliable. You only need light and eyes
to read it. While scanning important papers is a good idea, having a hard copy ensures access
anytime.
4. Portability: data stored in electronic format can be easily transferred. It’s very easy to misplace
or accidentally delete large amounts of data. Data may be duplicated without the permission
of authority or can be misplaced or become corrupt. If proper precautions are not taken, then
advantages of electronic system will turn into a disadvantage.

3) MAINTENANCE AND INSPECTION OF DOCUMENTS IN ELECTRONIC FORM UNDER

COMPANIES ACT, 2013
 Section 120 of the Companies Act, 2013 read with Rule 27 & 28 of Companies
(Management and Administration) Rule, 2014 provides for maintenance of documents in
electronic form and inspection of documents maintained in electronic form. It states that any
document, record, register, minutes, etc. that are required to be kept by a company or allowed
to be inspected or copies to be given to any person by a company under the Act, may be kept
or inspected or copies given, as the case may be, in electronic form.
 Rule 27 provides that every listed company or a company having not less than one thousand
shareholders, debenture holders and other security holders, may maintain its records in
electronic form.
 The records in electronic form shall be maintained in such manner as the Board of directors
of the company many think fit, provided that:
1. the records are maintained in the same formats and in accordance with all other requirements
as provided in the Act or the rules made there under;

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2. the information as required under the provisions of the Act or the rules made there under
should be adequately recorded for future reference;
3. the records must be capable of being readable, retrievable and reproducible in printed form;
4. the records are capable of being dated and signed digitally wherever it is required under the
provisions of the Act or the rules made there under;
5. the records, once dated and signed digitally, shall not be capable of being edited or altered;
6. the records shall be capable of being updated, according to the provisions of the Act or the
rules made there under, and the date of updating shall be capable of being recorded on every
updating.

 Security of records maintained in electronic form- Rule 28:

1. The Managing Director, Company Secretary or any other director or officer of the company as
the Board may decide shall be responsible for the maintenance and security of electronic
records.
2. The person who is responsible for the maintenance and security of electronic records shall
a. provide adequate protection against unauthorized access, alteration or tampering of records;
b. ensure against loss of the records as a result of damage to, or failure of the media on which
the records are maintained;
c. ensure that the signatory of electronic records does not repudiate the signed record as not
genuine;
d. ensure that computer systems, software and hardware are adequately secured and validated
to ensure their accuracy, reliability and consistent intended performance;
e. ensure that the computer systems can discern invalid and altered records;
f. ensure that records are accurate, accessible, and capable of being reproduced for reference
later
g. ensure that the records are at all times capable of being retrieved to a readable and
printable form;
h. ensure that records are kept in a non-rewriteable and non-erasable format like pdf. version or
some other version which cannot be altered or tampered;

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i. ensure that at least one backup, taken at a periodicity of not exceeding one day, are kept of
the updated records kept in electronic form, every backup is authenticated and dated and
such backups shall be securely kept at such places as may be decided by the Board;
j. limit the access to the records to the managing director, company secretary or any other
director or officer or persons performing work of the company as may be authorized by the
Board in this behalf;
k. ensure that any reproduction of non-electronic original records in electronic form is complete,
authentic, true and legible when retrieved;
l. arrange and index the records in a way that permits easy location, access and retrieval of
any particular record; and
m. take necessary steps to ensure security, integrity and confidentiality of records.

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short

Note)
 According to section 2(36) of Companies Act
“document” includes summons, notice, requisition,
order, declaration, form and register, whether issued,
sent or kept in pursuance of Companies Act or under
any other law for the time being in force or otherwise,
maintained on paper or in electronic form.
 The term “records” means any register, index,
agreement, memorandum, minutes or any other
document required by the Act or the Rules made
thereunder to be kept by a company. Therefore, such
documents and records can also be maintained in
electronic form.

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 M/s. Michelin India Pvt Ltd
In the case of M/s. Michelin India Pvt Ltd, the Registrar of Companies, Tamil Nadu, issued an
adjudication order on October 18, 2022, imposing a penalty for the violation of provisions under
section 134(3)(f) of the Companies Act, 2013. Section 134(3)(f) mandates that statements
presented before a company in a general meeting should include a report by its Board of
Directors. This report is expected to address and provide explanations or comments on
qualifications, reservations, adverse remarks, or disclaimers made by the auditor in their audit
report or by the company secretary in their secretarial audit report.
Upon examination, the Regional Director of the Southern Region in Chennai found that the
statutory auditors, in their audit report, highlighted deficiencies in the company's internal
financial controls and their inability to obtain sufficient and appropriate audit evidence. This
indicated that the company lacked proper internal financial control and adequate record-keeping
practices. The auditors also noted the absence of backup for electronically maintained books of
accounts on servers physically located in India. However, the company's Board of Directors did
not offer any explanation for these observations in their own report.
In response, the Regional Director, Ministry of Corporate Affairs, issued directions to take action
against the company, its directors, and key managerial personnel who were in default. The
penalty was imposed as part of the adjudication order to address the violation of the specified
provisions of the Companies Act, 2013.

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 Anil Kumar Poddar V. Bonanza Industries Ltd
In the case of "Anil Kumar Poddar V. Bonanza Industries Ltd.," the applicant filed an application
seeking an order to direct the respondent company to allow him to inspect the statutory
registers and records of the company. The applicant argued that he had a statutory right to
request such inspection as a shareholder of the company and to obtain copies of these
documents by paying the required charges.
The respondent company, on the other hand, countered that the applicant only held 10 shares
and was engaging in harassment by repeatedly demanding copies of statutory registers, general
meeting minutes, annual accounts, and other documents, which the company was required to
maintain under the Companies Act.
The Court concluded that the applicant appeared to have a history of filing such applications
and seemed to make frivolous demands. It noted that nowadays, all statutory records of
companies are available on the Ministry of Corporate Affairs (MCA) portal, accessible for
inspection by all parties concerned. Certified copies of these records can be obtained from the
relevant Registrar of Companies (ROC) department. Given this readily accessible information,
the Court found that the applicant's repeated filing of such applications was not genuine and
that he was not acting in good faith. Therefore, the Court dismissed the application.

4) PHYSICAL REPOSITORY
Repository is a place where documents can be stored. A repository can be a spot with many
databases/files for network sharing, or a place user can access without going through the
network.
Virtual and Physical Data Room - A Comparison

SNO. Particulars Physical Data Room Virtual Data Room

1. Form of documents Papers, files Electronic or soft copies of

documents- video or audio
documents

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2. Security of Security is in the hands of the More secured through
documents person handling data room specific log-in id and pass
word
3. Time required for Longer time required Can be created within 48
creation of data hours of demand of
room prospective buyer.
4. Cost Cost is high because one person Cost is low as the
is always required to maintain documents can be viewed
data room, buyers are required from any location with the
to travel from place to place to help of internet.
access the data room
5. Convenience Searching of documents Multiple buyers can review
consumes a lot of time the documents at the
same time
6. Accessibility to data Timings to access data may be Can be accessed anytime
room restricted
7. Facility to restrict Difficult to implement any Access can be restricted.
access of specific restriction
document
8. Facility to check Not available Available
who has reviewed
what documents and
how many times

9. Ability to copy Possible Not Possible

documents
10. One to one Available Not Available
communication with
the seller or his
representatives

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5) CODING AND NOMENCLATURE
Good file naming conventions should be adopted to name any documents. The file names can
be either self-descriptive or non-descriptive.
Descriptive file: The Descriptive file names are useful for small, well-defined projects with
existing identification schemes.
Non-Descriptive file: Non-descriptive file names are usually system-generated sequential
numerical such as a digital ID number, combination of Date and time, name of original file.
These file names are created for large scale digitization projects and may employ a digital ID
number and numerical sequences to indicate batch or parent-child relationships. However, the
major advantage of non-descriptive names is that there is a very less chance that the file
names will be repeated within a data structure.
Some applications do not understand and recognise spaces and for some applications it is
suggested that punctuation, symbols or special characters should not be used. Hence, following
are the best practices for file naming and the file names should:

1. Be unique and consistently structured

2. Limit the character length to no more than 25-35 characters
3. Use lowercase letters. However, when a name has more than one word, start each word with
an uppercase letter for example “File Name”
4. Contain a file format extension
5. Use a period followed by a file extension like .jpg, .gif, .pdf.
6. Use numbers and/or letters but not characters such as symbols or spaces that could cause
complications across operating platforms;
7. Use hyphens or underscores instead of spaces
8. Avoid blank spaces
9. Not use an extremely complex or lengthy naming scheme where error can be made during
manual input.
10. Use standard date notation (YYYY-MM-DD or YYYYMMDD)

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 2.14
 10 basic rules for general guideline:

Sno. Particulars Do’s Don’ts

1 Avoid Extra Long folders names and D:\ABC\FY\16- D:/ Alfa Botanicals
Complex hierarchical structures but 17\ AR\ MGT- Private\Financial Year\2016-
use information rich filenames [Link] 2017\ Annual Return\ Form
instead. [Link]
2 Put sufficient elements in the ABC_SearchRepor ABC_Report_ [Link]
structure for easy retrieval and t_ Invoice
identification but do not overdo it. 20.07.2018. pdf
3 Use the underscore (_). Do not use SMITH-J_ SMITH-J AXA 7654-6 POLICY
spaces or other characters such as: AXA_7654-6_ [Link] || FUJITSU $S1500$
! # $% &‘ @ ^ ` ~ + , . ; =)( POLICY_20120915 SPEC$[Link]
. pdf || FUJITSU_
S1500_SPEC_
[Link]
4 Use the hyphen (-) to delimit Smith-John_AIG Smith John AIG 7654 6 POLICY
words within an element or _7654- 2009 09 [Link] || White Paper
capitalize the first letter of each 6_POLICY_2009- Structured file naming
word within an element. 09-15. pdf || [Link]
WhitePaper_
Structured File
Naming Strategy.
doc
5 Elements should be ordered from FY2009_Acme- TrialBal _ Q3_20091015_ Acme-
general to specific detail of Corp _Q3_ Corp_V02_ [Link] || Paint-
importance as much as possible. TrialBal_20091015 Shop_775-2_ WorkOrder_
_ [Link] || [Link]
Production_
Paint-Shop_

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 WorkOrder_775-2.
xls
6 Dates should be ordered: YEAR, RFQ375_CablesU RFQ375_CablesUnlimited _
MONTH, DAY. (e.g. YYYYMMDD, Y nlimited BID_10152009-1655. pdf || Nov-
Y Y Y M M D D , YYYYMM). Time _BID_20091015- 20-2009_ AMATProj_ Phase1_
should be ordered: HOUR, MINUTES, [Link] || 2009- [Link]
SECONDS (HHMMSS). 11-20_AMATProj_
Phase1_Report.doc
7 Personal names within an element Tate- Peter-Tate_SunLife _1-7566-
should have family name first Peter_SunLife _1- 2_POLICY_10 Year [Link] ||
followed by first names or initials. 7566-2_ JSmith_ ID3567_ ADMIN_Wage
POLICY_10YrTerm [Link]
. pdf || SmithJ_
ID3567_ADMIN_
[Link]
8 Abbreviate the content of elements RevQC Minister of Revenue Quebec
whenever possible. _QST_2009- _QuebecSales-Tax_2009-
[Link] || MCIM_ 2ndQuarter. xls ||
27643 _POD. doc MultiCIMTechnologiesInc_27643
_ProofOf-[Link]
9 An element for version control MCIM_Proposal_ MCIM_Proposal_9. doc ||
should start with V followed by at [Link] || eXadox_ UserManual_
least 2 digits and should be placed eXadox_ [Link]
as the last most element. UserManual_V1-
02. doc
10 Prefix the names of the pertinent Prod_PS_AssL7_ WO_Suzuki_J3688-
subfolders to the file name of files W O _ Suzuki _ [Link] || Q3_
that are being shared J3688-20090725. TrialBal_20091015_ [Link]
xls || FY2009_
Acme-Corp _Q3_

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 TrialBal_20091015
_ [Link]

6) SAFETY AND RETRIEVAL OF RECORDS

To assure the quality of documents, following records should be maintained as an evidence to
ensure quality:

Operating Results of Inspection Monitoring of Information

Logs Reviews work performance Analysis

Name of Record of Those who can Name of Name of

individuals Changes access and individuals who individuals
who have change the have worked on who have
worked on records same document worked on
same same
document document

The care of records is governed by three main concepts:

1. Keeping together:
The records must be kept together with the department which created the document, in the
original order as it existed at the time of creation. This becomes very important when documents
are to be presented as an evidence as it helps to understand who created or used a record,
and where, when and why.
2. Ensure life cycle: Every record follow a ‘life-cycle’, and pass through three main phases;
current phase, semi-current phase and non-current phase. In the current phase, they are used
regularly in the conduct of current business, in the semi-current phase, they are used less
frequently in the conduct of current business and in the non-current phase they are destroyed
unless they are required to be preserved. Effective management of records in this life cycle is
very important.

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3. Record Preservation: The care of records should be taken and they should be preserved through
consistent range of actions from the development of record-keeping systems to the creation
and preservation of records and their use as archives. Four actions continue or reappear
throughout the life of a record i.e., identification of records; intellectual control; provision of
access; and physical control. The management of these actions provides the basis for a strategic
approach to records management.

U.S. Food & Drug Administration (FDA)

The U.S. Food & Drug Administration (FDA) has issued a series of warning letters to
pharmaceutical companies due to violations of Good Manufacturing Practices (GMP), particularly
related to data integrity. Some of the companies that have failed to ensure data integrity
include:
1. Ranbaxy Laboratories: A multinational pharmaceutical company that received a warning
letter from the US FDA for its facilities in Dewas and Poanta Sahib. In Dewas, the company
failed to maintain proper batch production and control records. In the Poanta Sahib facility,
incomplete batch and production records were used for the review and approval of production
and control records for drug products.
2. Canton Laboratories: A manufacturer of chemical and bulk drugs that received a warning
letter for its Vadodara plant. The company was found to be reporting test results for tests
that were never actually performed. Significant violations related to Good Manufacturing
Practices (GMP) and record maintenance were observed, with accusations of serious
documentation practices and missing data.
3. Wockhardt Limited: A Mumbai-based pharmaceutical company that received a warning letter
for its Aurangabad plants. The US FDA cited data integrity issues, indicating that the
company had not exercised appropriate controls over computer systems to ensure that only
authorized personnel could make changes in master production and control records or other
records.
These warning letters highlight the FDA's strict enforcement of data integrity standards in the
pharmaceutical industry and its commitment to ensuring the safety, efficacy, and quality of
drug products through proper manufacturing practices and accurate record-keeping.

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7) PRESERVATION OF RECORDS
 Preservation of records means implementation of strategies to manage records and archives for
a longer period.
 Regulation 9 and 30(8) of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 deals with preservation of policy and records:
1. Regulation 9: This provides that the listed entity shall have a policy for preservation of
documents, approved by its board of directors, classifying them in at least two categories as
follows-
a. documents whose preservation shall be permanent in nature
b. documents with preservation period of not less than eight years after completion of the relevant
transactions:
2. Regulation 30(8): provides that the listed entity shall disclose on its website all such events
or information which has been disclosed to stock exchange(s) under-regulation 30(Disclosure
of events or information by listed entities), and such disclosures shall be hosted on the website
of the listed entity for a minimum period of five years and thereafter as per the archival policy
of the listed entity, as disclosed on its website.

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 Factors to be considered for the archival policy of the company:

• reviewing and revising legislation and policies

Analysis & Restructuring • reviewing and revising organizational policies and
Existing System structures
• determining resource requirements, such as facilities
and staffing
• developing strategic and business plans
Organising & Controlling • managing the creation, maintenance, and use of files
Records • building proper record keeping system

• identifying and protecting vital records

Providing Physical protection for • implementing and maintaining preservation
Records measures
• developing emergency plans to protect records

• developing and maintaining records centre facilities

Managing records in record • transferring, storing, and retrieving records according
centre to disposal schedules
• disposing of records as indicated by the schedules

• acquiring and receiving archives

• arranging and describing archives according to
Managing Archives
archival principles
• providing public access to the archives

• promoting records services to the Government and

Supporting & Sustaining the Public
Program • Promoting education for records & Archives
Personnel
• Developing & Expanding the records and archives

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8) PRESERVATION OF LITIGATION DOCUMENTS
Documents arising out of various litigation shall be preserved as per the directions/orders of
the court / tribunal/ judicial/ other authorities as may be applicable. However, if no such order
has been given by the authorities the documents shall be preserved for a period of not less
than eight consecutive calendar years after conclusion of the litigation

9) DEVIATION FROM THE POLICY

Any court, tribunal, judicial or other authorities shall have the power to direct a company to
produce, preserve and/or destroy any documents. However, if any document has been destroyed
pursuant to the Policy followed as per the SEBI Regulations, herein, it may not be possible for
the company to produce such document, therefore, necessary permission to that effect has to
be taken by the company and/or a statement to that effect shall be given by the company
from/to the relevant authorities. Any other action/s shall need to be taken as may be advised
by these authorities.

10) SETTING UP OF A RECORD ROOM

1. Humidity: An excess of humidity creates fungus and lack of humidity, on the other hand,
makes paper easily breakable. Thus, a controlled humidity between 30% and 40% is the best
standard for preservation.
2. Temperature: Temperature in record room should be same as required for human beings in
public places.
3. Light: Light has a considerable impact on document’s preservation hence, visible light with
infrared or ultraviolet radiation should be avoided.

11) PRIVACY OF RECORD AND ITS CONTROL

 Though most of the communication is now made electronically and documents are kept in
digital form but there is still a lot of data that is stored physically and circulated around
various branches in same format.
 Such physical data needs to be protected and handled responsibly, especially if the data
contains personal or confidential information. In order to protect digital data company has
passwords and encryption. Similarly, to protect physical data right processes and procedures
should be applied to ensure data security.

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  To ensure confidentiality first step is to identify which information is confidential and for any
business house the following documents are primarily considered as confidential and need
complete privacy:

1. Customer’s & Employees’ Information: Information collected from employees and customers
can be information like Aadhar number, Mobile numbers, Residential addresses, Name, credit
card numbers, etc. and is considered as personal information. Majority of the business in India
have still not adopted the strong mechanism for safeguarding the personal information. The
data needs to be protected and disposed of carefully, thus, the business should work with a
trusted information destruction agency to physically destroy both electronic and physical data.
2. Office Plans, Office IDs and Internal Procedure Manuals: Internal planning & procedures is
important for every organisation and business should ensure its confidentiality. It is important
to place the documents with respect to layout of the office, to identify exits in case of
emergency but other documents and forms related to internal processes and procedures should
be kept electronically on secured networks.
3. Contracts and Commercial Documents and Trade Secretes: organisations enter into many
agreements and most of the part of this agreement contains information like the nature of
the arrangement, the value of the services offered/received in the agreement, the names of
the main contracting parties, which is confidential. Thus, sharing of contracts should be
restricted both physically and electronically as if confidential information is leaked it can be
misused for illegal activities.
12) SUGGESTIVE STEPS FOR PROTECTING CONFIDENTIAL INFORMATION
The company may adopt the following procedures for protecting confidential information:
1. All confidential documents should be stored in locked file cabinets or rooms accessible only to
those who are authorized.
2. All electronic confidential information should be protected through encryption and passwords.
3. Employees should refrain from leaving confidential information visible on their computer
monitors when they leave their office.
4. Employees should not discuss confidential information in public places.
5. Employees should avoid using e-mail to transfer certain sensitive or controversial information.
6. All confidential information should be marked as confidential.

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 2.22
7. Before removing an old computer, software programs should be used to remove the data
contained on the computer or the hard drive should be destroyed.

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 2.23
 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 3- SIGNING AND CERTIFICATION

1. INTRODUCTION
i. Companies have to file various e forms and all the e-forms are required to be authenticated
by authorized signatories of the company filing the same, using digital signatures. MCA has
entrusted practicing professionals like members of the Institute of Company Secretaries of
India (ICSI) with the responsibility of certifying the compliances and ensuring reliability of
documents filed by companies with MCA in electronic mode.
ii. The authorized signatory and the professionals, who certify e-form, are responsible for the
correctness of the contents of e-forms and enclosures attached with the e-form.
iii. Once an e-form has been pre-certified by a professional towards its authenticity based on the
contained in the books of accounts and records of the company, the Registrar takes on record
such e-form. If a professional gives a false certificate or omits any material information
knowingly, he is liable for punishment under the provisions of Companies Act, 2013 as well as
liable for professional or other misconduct

2. PRE-CERTIFICATION
 Pre-certification means certification of correctness of any document by a professional including
Company Secretary in Practice, before the same is filed with the Registrar in terms of the
requirements of the Companies Act, 2013.
 Company Secretaries are recognized to pre-certify the e-forms which are required to be filed
with the Registrar.
 Initially, pre-certification was introduced to avoid registration delays and eventually evolved to
check correctness of documents filed by professionals. The introduction of pre-certification by
an independent professional in the e-form is aimed at self-regulations of companies and reduce
the involvement of government machinery, i.e. the Registrar of Companies.
 Once an e-form has been pre-certified by a professional towards its authenticity based on the
particulars contained in the books of accounts and records of the company, same can be taken
on record without further examination.
 Authentication of Documents:
Rule 8(1), (2) & (5): all electronic forms are required to be authenticated by authorised
signatories using digital signatures. The e-forms are required to be authenticated on behalf of
the company by the Managing Director or Director or Company Secretary or other key

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 3.1
 managerial personnel and in there is any change in directors or Company Secretary, the form
relating to appointment of such directors or Company Secretary is required to be filed by
continuing director or Secretary of the company or other Key Managerial Personnel.

Rule 8(6): scanned image of documents must be of the original signed documents relevant to
the e-forms and the scanned document image shall not be left blank without bearing actual
signature of authorised person.

Rule 8(7): the person signing the form and the professional certifying the form are responsible
to ensure that all the required attachments relevant to the form have been attached completely
and legibly to the forms or applications or returns filed as per the Act and the rules.

3. IMPORTANCE OF PRE-CERTIFICATION
From a Company’s perspective and also from regulators standpoint, pre-certification is important
to:
1. Ensure correctness: The professional checks the correctness of the particulars stated in the
prescribed forms after due consideration of the provisions of the Act and the Rules made
thereunder. He also ensures that the particulars stated in the Forms are in agreement with
the books and records of the company. If he notices any defect or that the information provided
in the form is incomplete or defective, he appropriately advices/provides guidance for completion
of document/rectification of defect and makes pre-certification only after completion of
documents/ rectification of such defects.
2. Pre-emptive step: Pre-certification acts as a pre-emptive check to ensure that the particulars
stated in the form or return are as per the books and records of the company and are true
and correct. This would mean that the Registrar can rely on the certification of the Company
Secretary in practice and may take the document on record without further examination. Thus,
Pre-certification by a Company Secretary in practice ensures that no form or return filed with
the Registrar of Companies is defective or incomplete.
3. Aids good governance: Disclosure of information to shareholders is a critical requirement of
good governance mechanism with a view to protect the interests of the shareholders and other
stakeholders and to ensure better governance. Accordingly, the Act has stipulated stringent

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 measures and requirements for disclosure, included in financial statements, Board’s report and
annual return. The Act has also prescribed onerous duties and responsibilities on the Director
of a company as well as the Company Secretaries. The punishment for violation of provisions
of the Act has also been enhanced under the Act, to ensure the correctness of information
filed by the corporates.
4. Self-regulation: The introduction of pre-certification by an independent professional in the e-
form was aimed at self-regulations of companies and to reduce the involvement of government
machinery, i.e. the Registrar of Companies. Once an y form has been pre-certified by a
professional based on the particulars contained in the books of accounts and records of the
company, same can be taken on record without further examination.

4. HISTORICAL BACKGROUND
i. Pre-certification was initially introduced to avoid delay in registration of charges and other
documents; however, its scope was later expanded to authentication and verification of
documents being filed with the MCA.
ii. With a view to avoid delay in the Registration of documents, MCA issued two circulars advising
the Registrars of Companies to take on record documents that are filed by companies or the
creditors concerned, duly certified as correct by a Company secretary/ Chartered accountant/
Cost Accountant in practice.
iii. The Department Related Parliamentary Standing Committee, which examined the Companies
(Second Amendment) Bill, 1999, realised that verification of compliances with the provisions
of the Companies Act, 1956 by a Company Secretary in practice was necessary and introduced
the concept of pre-certification.
iv. Later, The High-Level Committee on Corporate Audit and Governance (Naresh Chandra
Committee) in its report in 2002, also recommended a system of pre-certification by Company
Secretaries to remove defect in documents so that these could be taken on record immediately
and reduce the workload on Ministry.
v. Accordingly, the Companies (Amendment) Bill, 2003 introduced in the Rajya Sabha sought to
add a new Section 383C to provide that all documents, returns, forms required to be filed with
the Registrar or any statutory authority shall be pre-certified by a company secretary in
practice.

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 3.3
vi. After enactment of the Companies Act, 2013, the provision of Pre-certification was introduced
in the Companies (Registration Offices and Fees) Amendment Rules, 2014 which elaborates
on the responsibility of professionals certifying the forms.
vii. The professional certifying the form must verify whether all the requirements as per the
provisions of the Act and the rules made thereunder have been complied with and all the
attachment to the forms have been duly signed/authenticated, scanned and attached
completely and legibly in the PDF Format

5. VARIOUS CERTIFICATIONS BY COMPANY SECRETARY IN PRACTICE

CERTIFICATIONS UNDER COMPANIES ACT, 2013

1. INC 20A Application for Declaration prior to the commencement of business or

exercising borrowing powers

2. INC-22 Notice of situation or change of situation of registered office

3. INC-28 Notice of Order of the Court or any other competent authority
4. PAS-3 Return of Allotment
5. SH-7 Notice of Registrar of any alteration of share capital
6. CHG-1 Application for registration of creation, modification of charge (other
than those related to debentures)

7. CHG-4 Particulars for satisfaction of Charge

8. CHG-9 Charge for Debenture
9. MGT-14 Filing of Resolutions and agreements to the Registrar
10 DIR-6 Intimation of change in particulars of Director to be given to the Central
Government

11. DIR-12 appointment of Directors and the key managerial personnel and the
changes among them

12. MR-1 Return of appointment of MD/WTD/Manager

13. MR-2 Form of application to the Central PCMA Government for approval of
appointment or reappointment and remuneration or increase in
remuneration or waiver for excess or over payment to managing director

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 or whole time director or manager and commission or remuneration to
directors.

14. MSC-3 Return of Dormant Company

15 MSC-1 Application to Registrar for obtaining the status of Dormant Company
16. MSC-4 Application for seeking status of active company
17. GNL-1 Applications made to Registrar of Companies
18. GNL-3 Details of persons/directors/charged/specified “officer who is in default”

19. ADT-1 appointment of Auditor

20. NDH-1 Return of Statutory Compliance
21. NDH-2 Application for Not available extension of Time
22. NDH-3 Half yearly Return
23. MGT-7 Annual Return
24. AOC-4 Financial Statements
25. DIR-3KYC KYC of Directors

PRE-CERTIFICATION UNDER SEBI REGULATIONS

1. Regulation 40(9) (Listing The listed entity shall ensure that the Share transfer
Obligations and Disclosure agent and/or the in-house share transfer facility, as
Requirements) the case may be, produces a certificate from a
Regulations, 2015 practicing company secretary within thirty days from
the end of the financial year, certifying that all
certificates have been issued within thirty days of the
date of lodgement for transfer, sub-division,
consolidation, renewal, exchange or endorsement of
calls/ allotment monies.
2. Regulation 24A (Listing Secretarial audit report given by a company secretary
Obligations and Disclosure in practice
Requirements)
Regulations, 2015

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 3. Regulation 55A SEBI Audit report by a practicing company secretary on a
(Depositories and quarterly basis, for the purposes of reconciliation of the
Participants) Regulations, total issued capital
2018
4. Regulation on 76 SEBI Reconciliation of Share Capital Audit Report
(Depositories and
Participants) Regulations,
2018.

Other Certifications:
i. Compliance of Conditions of Corporate Governance
ii. Offer/allotment of securities to more than 49 to up to 200 investors
iii. issue certificate of compliance to an investment adviser under SEBI (Investment Advisers)
Regulations, 2013.
iv. conduct annual audit of Research analyst or research entity in respect of Compliance with
SEBI (Research Analysts) Regulations, 2014
v. Certifying that the SEBI (ICDR) Regulations, 2018 for bonus issue has been complied with
vi. Certificate for receipt of money specifically certifying that the company has received the
application/ allotment monies from the applicants of these shares.
vii. Quarterly certificate specifically certifying that the company has received the application/
allotment monies from the applicants of these shares.
viii. Certifying that debenture holders have provided their consent for changing the terms of the
Debentures whereby mentioning the existing as well as revised terms

LLP ACT
1. Form 3 LLP Agreement and changes
2. Form 4 Change in DP or partners
3. Form 11 Annual Return of Limited Liability Partnership
4. Form 15 Shifting of registered office

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6. PREPARATIONS BEFORE PRE CERTIFICATION
Before undertaking the work of precertification, professional should

Provisions of companies act, Familarise with actual practices that are

Read 2013 & Rules followed

Ensure:
1. Letter of engagement or Board Resolution authorizing the professional for the assignment by
the company to be obtained.
2. Maintain a physical/scanned of all documents verified
3. Ensure that all relevant documents and attachments are legible & visible.
4. Verification of the documents from the original records of the company.
5. Correctness of the records and the material departure from the facts.
6. The form is signed by the authorised person of the company.
7. Before certification of any form, the person should be aware about the relevant provisions
under the Act and Rules made thereunder, Process to be followed by the company, approval if
any required etc.

7. COMMON ERRORS NOTICED IN E-FILING

1. Digital signature is not registered / expired.
2. Payment of challan has not been done before the expiry date
3. Duplicate Payments have been made
4. Excess size of the form
5. Approval status of e-form is not verified.
6. Use of outdated version of e-form
7. Incorrect particulars in the e-form
8. Using older versions of Adobe and Java

8. CONSIDERATIONS IN FILLING E-FORMS

1. Before filling of e-forms, the professional should always go through the instruction kit
provided with every e-form by the MCA on MCA-21 portal.
2. Ensure that latest version of the e-forms has been downloaded from the MCA Website.

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3. DIN is mandatory for e-filing of documents thus, details related to DIN of the Directors
should be updated on the MCA Portal.
4. Digital Signature is mandatory and same shall be registered on the MCA Portal before it’s
first use.
5. The attachments to the e-forms should be complete and all pages of the attachment should
be page numbered and attached in order.
6. Don’t wait for the last days or the due date of the filing of e-forms.
7. Ensure that the all the entries in the forms are correct as option for revision/cancellation of
e-forms is not available on MCA Portal once it is taken on Record.
8. Don’t forget to pay the filing fees before the expiry date of the challan as non-payment of
fees would lead to cancellation of transaction.
9. As a trusted advisor of the Company, keep track of various reportable events and advise the
Company regularly to file requisite forms to avoid penalties and regulatory actions
10. Use various inbuilt utilities like “PREFILL” and complete the form by clicking on “CHECK”
and “PRE-SCRUTINY” options.

9. REGISTER OF CERTIFICATION
The Practicing Company Secretary should maintain the register for the all attestation
/certification services, which includes:
1. Signing of Annual Return (MGT-7);
2. Certification of Annual Return (MGT-8);
3. Issue of Secretarial Audit Report (MR-3);
4. Certification of E forms of MCA under Companies Act, 2013 / LLP Act, 2008;
5. Internal Audit of Depository Participants/ portfolio Manager/ Stock Broker;
6. Annual Compliance auditor under SEBI (Research Analyst) Regulations, 2014;
7. Issue of certificate of Securities Transfers in compliance with the Listing Agreement with
Stock Exchanges;
8. Certificate of reconciliation of capital, updation of Register of Members, etc.
9. Conduct of Internal Audit of Operations of the Depository Participants;
10. Corporate Governance Certification under SEBI (LODR) Regulations, 2015;
11. Information relation to E-forms certified and signed;

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 10. CERTIFICATION OF ANNUAL RETURN
i. Section 92 of the Act read with rule 11(1) of the Companies (Management and Administration)
Rules, 2014, provides that every company shall file its annual return in Form MGT- 7, except
One Person Company (OPC) & Small Company which shall file annual return from the financial
year 2020- 2021 onwards in Form MGT-7A.
ii. The Annual Return of a listed company or of a company having a paid up share capital of Rs.
10 Crore or more or turnover of Rs. 50 Crore or more shall be certified by a company secretary
in whole time practice in the Form No. MGT-8.
iii. While certifying the Form No. MGT 8, the PCS shall certify that:
The Annual Return discloses the facts correctly and adequately and the Company has complied
with the provisions of the Act & Rules during the end of financial year in respect of:
 It’s status under the Act
 Maintenance of registers or records & making entries within the time prescribed.
 Closure of Register of Members Security holders.
 Advances or loans to its directors and persons or firms or companies referred in section 185
of the Act.
 Contracts/arrangements with related parties as specified in section 188 of the Act.
 Declaration/ payment of dividend or transfer of unpaid/ unclaimed dividend/ other amounts to
the Investor Education and Protection Fund.
 Appointment / reappointment/ filling up casual vacancies of auditors as per the provisions of
section 139 of the Act.
 Alteration of the provisions of the memorandum and / or articles of association of the
Company.
 Issue, allotment, transfer, transmission or buy back of securities.
 Filing of forms and returns as stated in the Annual Return, with the Registrar of Companies,
Regional Director, Central Government, the Tribunal, Court or other authorities within the
prescribed time.
 Signing of audited financial statement and report of directors is as per section 134 of the
Act.

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 11. SIGNING OF THE ANNUAL RETURN - SECTION 92 (1)

 Annual return is required to be signed by a Director and the Company Secretary, or

where there is no company secretary, by a company secretary in practice.
 In case of OPC and small company same shall be signed by the Company Secretary or
where there is no company secretary, by the director of the company.

Deep Himanshu Desai (petitioners) Vs. Union of Indian (Respondents).

In this matter it was held that the petitioners who were treated as disqualified directors under
section 164(2)(a) sought direction to use their Director Identification Number (DIN) and Digital
Signature Certificate for purpose of filing annual return. As per the decision of court the respondents
were directed to reactivate Director Identification Number (DIN) of petitioner(s) and Digital
Signature Certificate to enable petitioner(s) to file necessary annual return and also to discharge
their statutory obligations

While signing the Form MGT-7 (Annual Return) Company Secretary/Company Secretary in
practice and Director certifies that:
1. The return state the facts, as they stood on the date of the closure of the financial year
aforesaid correctly and adequately.
2. Unless otherwise expressly stated to the contrary elsewhere in this return, the Company has
complied with applicable provisions of the Act during the financial year.

In case of the Private Company, the Company Secretary/Company Secretary in Practice and
Director also certifies that:
3. The company has not, since the date of the closure of the last financial year with reference
to which the last return was submitted or in the case of a first return since the date of the
Incorporation of the company, issued any invitation to the public to subscribe for any
securities of the company.

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 4. Where the annual return discloses the fact that the number of members, (except in case of
a one person company) of the company exceed two hundred, the excess consists of persons
who under second proviso to section 2(68)(i) of the Act are not to be included in reckoning
the number of two hundred.

Also, Company Secretary/ Company Secretary in Practice and Authorised Director declares
that –
1. Whatever is stated in this form and the attachments thereto are true, correct and complete
and no information material to the subject matter of this form has been suppressed or
concealed and is as per the original records maintained by the Company.
2. All the required attachments to the form, are complete and legible.

Time and mode of appointment of Company Secretary

Considering the voluminous work it is advisable that the PCS is appointed by the Board,
at the beginning of the respective financial year.

12. SCOPE AND EXTENT OF WORK FOR PCS

For the purpose of certification, PCS should carry out a scrutiny of the data available and
check the correctness of the same. For ensuring the correctness of information contained in
the Annual Return, the primary source documents should be looked into and while doing the
detailed scrutiny, he may rely on certified copies of the resolutions, forms, agreements as also
certificates from the management.

Documents to be Obtained/Verified before Certification of Annual Return by Company Secretary

in Practice
i. Memorandum and Articles of Association
ii. Forms & receipts filed with the Registrar of Companies
iii. Statutory Registers
a. Record of Private Placement PAS-5 (Section 42)
b. Register of Members MGT-1 (Section 88)

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 c. Register of Debenture holder MGT-2
d. Register of Directors & their Shareholding (Section 170)
e. Register of Key Managerial Personnel (Section 170)
f. Register of Related Party Contracts MBP-4 (Section 188)
g. Register of Loan and Investment SH-12 (Section 186)
h. Register of deposit- Section 73 and 76 read with rule 14
i. Register of Charge CHG-10 (Section 85)
j. Register of Securities Register of Employee Stock Option Under SH-6 (Section 62)
k. Register of Buyback under SH-10 (Section 68)
l. Register of Sweat Equity shares under SH-3 (Section 62).
iv. Minutes of the Meetings
a. Board Meeting
b. General Meeting
c. Committee Meeting
v. Notices and agenda papers for convening meetings of the Board and Committees thereof;
vi. Attendance Registers of all Meetings
vii. Copy of Latest Financial Statements along with the Board’s Report and Auditors Reports;
viii. Copy of Notice of Annual General Meeting/Extraordinary General Meetings/Postal Ballots/Court
convened meetings/Creditors meetings and debenture holders meeting
ix. Certificate from RTA stating the number of shareholders as on the close of the financial year.
x. Indebtedness Certificate signed by Company Secretary/CFO/ Statutory Auditors of the company;
xi. Board Resolution for any type of corporate actions taken by the company
xii. Corporate Action Forms filed by the company with Depositories
xiii. Shareholding pattern and its break up
xiv. List of Promoters

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Maker and Checker Concept: , it is advisable to have the Annual Return
reviewed/verified by a different professional before it is certified, for independent
verification of the Returns being certified. where a company is having a Company
Secretary then signing of the annual return as per section 92(1) shall be done by the
Company Secretary in employment only, but not by the Company Secretary in Practice

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 13. TIME LIMIT FOR FILING ANNUAL RETURN
Under section 92, annual return should be filed within 60 days from the date on which the
annual general meeting is held or where no annual general meeting is held in any year within
60 days from the date on which the annual general meeting should have been held together
with the statement specifying the reasons for not holding the annual general meeting.

14. CONSEQUENCES OF NOT FILING ANNUAL RETURN

For the Director
1. Penalty: Liable to a penalty of Rs.10,000 and in case of continuing failure, with further
penalty of Rs.100 for each day during which such failure continues, subject to a maximum of
Rs.2 lakh incase of a company and Rs.50,000 incase of officer in default.
2. Disqualification: If the company has not filed its financial statement or Annual Return for
continuous period of three financial years, then every person who is or has been director of
that company shall not be eligible for re-appointment as Director of that company or
appointed in any other company for a period of five years from the date on which the said
company fails to do so.
3. Penalty for misstatement: If in Annual Return, any Director or any Person makes a
statement which is false then he shall be punishable with imprisonment for a term which
shall not be less than 6 months but which may extend to 10 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 the fraud.
4. Class action suit: Under section 245, the class of shareholders or depositors may file an
application with the Tribunal alleging that the management or conduct of the affairs of any
company are being conducted in a manner prejudicial to the interest of the company, its
members or depositors. Such class action may include suite against the company, its
directors, officers, experts or any other person for wrongful or fraudulent act. The order
passed by the Tribunal shall be binding on the Company, its directors and officers.

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 Abbas Maru Vs. Union of India
It was held that that section 164 does not have a retrospective effect but a prospective effect and defaults
contemplated under section with regard to non-filing of financial statements or annual returns for any
continuous period of three financial years to be counted from financial year 2014-15 only.
Gautam Mehra Vs. Union of India
This ruling clarified that directors can be disqualified if they were involved with a defaulting company for
any part of the continuous three-year period, and it underscored the swift cancellation of DIN for
disqualified individuals. The court’s ruling clarified that the disqualification outlined in Section 164(2)(a)
is not restricted only to individuals who have served as directors of a company for the entire three-year
period during which the company was in default of not filing annual returns. Instead, the disqualification
also applies to individuals who have served as directors of the defaulting company for any portion of the
relevant continuous three-year period.

For the Company

1. Penalty: Liable to a penalty of Rs.10,000 and in case of continuing failure, with further
penalty of Rs.100 for each day during which such failure continues, subject to a maximum of
Rs.2 lakh in case of a company and Rs.50,000 incase of officer in default.
2. Winding up: If the Company has defaulted in filing Annual Returns for the immediately
preceding five financial years, the Company may be wound up by the Tribunal.
3. Inactive Status: If the Company has not filed its Annual Return for last two financial years, it
will be termed as “inactive company”.
4. Dormant Status: If the Company has not filed its Annual Return for two financial years
consecutively, the Registrar shall issue notice to the Company and enter its name in the
Register of Dormant Companies.

AVS Enterprises (P.) Ltd. Vs. Registrar of Companies

In this matter the appellant company had not filed annual returns with Registrar of Companies from
year 2006-07 onwards and, its name was ‘struck-off’ from Register of Companies. Further, in view of
fact that company was carrying on business operation and right to seek restoration of name of
company was not extinguished, name of company was to be restored in register of companies subject
to filing of all pending statutory documents along with late fee.

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 Compounding of Offence: However, offence can be compounded under section 441 of
Companies Act, 2013. According to section 441 of Companies Act, 2013 any offence
punishable with fine, imprisonment or fine or imprisonment or fine or both shall be
compoundable by NCLT or Regional Director. Offence which is specifically punishable only
with imprisonment or with imprisonment and fine is non-compoundable.

CAN YOU SOLVE THIS?

Whether non-filing of Annual Return is a compoundable?

Solution:
If any company fails to file its annual return under section 92 (4), before the expiry of the
period specified therein, such company and its every officer who is in default shall be liable to
penalty of ten thousand rupees and in case of continuing failure, with further penalty of Rs.100
for each day during which such failure continues, subject to a maximum of Rs.2 lakh incase
of a company and Rs.50,000 incase of officer in default. However, the provisions are
compoundable as per the procedure specified under section 441 of Companies Act, 2013.
15. CONSEQUENCES OF WRONG CERTIFICATION OF ANNUAL RETURN
Company Secretary will be liable under
i. Section 447, 448 & 449 of Companies Act, 2013
ii. Section 92 and will be liable to a penalty of 2 Lac Rs.
iii. Will be liable for disciplinary actions by the Disciplinary Committee of the ICSI under the
provisions of the Company Secretaries Act, 1980.

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Authority to initiate action against Professionals
Regional director/ ROC would initiate action under section 448 and 449 of the Act in
the cases of submitting false or misleading or incorrect information. Further, the cases
u/s 448 and 449 may also be referred to the concerned Institute for conducting
disciplinary proceedings against the errant member and the MCA may debar the
concerned professional from filing any document on the MCA portal in future.

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 16. FILING ANNUAL RETURN WHEN ANNUAL GENERAL MEETING IS NOT HELD
i. Where no Annual General Meeting is held in a particular year, the Annual Return has to be
filed within 60 days from the last day on which the meeting should have been held along with
a statement specifying the reasons for not holding the annual general meeting.
ii. However, as per Section 403 if the Annual return under section 92 is not filed within the due
date specified the same can be filed on payment of additional fee which shall not be less than
one hundred rupees per day and different amounts may be prescribed for different classes of
companies.

17. DETAILED SCRUTINY OF ANNUAL RETURN

i. A PCS has to verify the documents properly as he has to certify the annual return, but the
question arises is the extent of detailed verification that has to be resorted to before certifying
the Annual Return.
ii. It is a well-established principle in any auditing practice that an auditor is not expected to
carry out a 100% checking of every piece of paper generated by the company, in arriving at
the final facts and figures represented in the end document.
iii. Similarly, a PCS cannot be expected to check every entry of the Registrar of Members or
transfer of shares.
iv. Therefore, certain techniques of sample checking and test checking should be used before
forming a opinion that the document being certified projects a true and fair view of the state
of affairs of the company.
v. Professional is ultimately responsible for the documents certified, thus, he should be careful
and safeguard himself against any possible charge of negligence in respect of inaccurate or
incomplete statements, certified by him.

Below mentioned are few guidelines which can be adopted while deciding about the extent of
checking required:
1. Internal Controls: The PCS shall perform a detailed review of the internal controls, checks and
balances built into the systems and procedures of the Company. If appropriate internal controls
exist, and operate effectively, the need for detailed checking is reduced to a large extent.

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 2. Materiality: Similar to any audits, the principle of materiality is another important and relevant
concept. The sample chosen for detailed checking should be representative of the whole, or the
‘population’, in statistical parlance. For example, in share transfers, instances of transfer of
large blocks of shares could be chosen for detailed scrutiny. Or, the ‘busy’ period for transfer
of shares in the year could be identified and selected for sample checking.
3. Risk assessment: The PCS shall have an overall understanding of the Company, the industry
in which the it operates, corporate governance practices, etc., and perform risk assessment to
identify the ‘high risk’ areas. These ‘High risk’ areas shall be subjected to more extensive
verifications.

In conclusion, it may be noted that the ultimate responsibility of the document certified will
rest with the professional. While the extent of checking is a matter of professional judgment,
he should safeguard himself against any possible charge of negligence in respect of inaccurate
or incomplete statements certified by him, by adequately documenting the procedures performed
and conclusions drawn.

Certification with reservation /qualification /observations /adverse remarks

where material facts are not stated correctly and completely in the Annual Return or where
the company has not complied with the provisions of the Companies Act, the PCS may certify
annual return with certain reservations /qualifications/ observations/adverse remarks by way of
an annexure to his certificate.
While signing the Annual Return of a company, a Company Secretary or a Company Secretary
in practice should observe the guidance note on the Certification of the Annual Return as
published by the ICSI and take the appropriate professional judgments wherever necessary

18. CORPORATE GOVERNANCE CERTIFICATION BY PRACTICING COMPANY SECRETARY

i. This certificate on the compliance of conditions of Corporate Governance by the Company is
issued under regulation 46(2) of the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015.
ii. The certificate can be issued either by the statutory auditors or PCS and shall be annexed to
the director’s report.

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iii. Regulation 27(2) of SEBI(LODR), specifies that the listed entity shall submit quarterly
compliance report on corporate governance in the format specified by the Board from time to
time to recognized Stock Exchange(s) within twenty one days from close of the quarter.
iv. In order to bring about transparency and to strengthen the disclosures around loans/
guarantees/comfort letters/ security provided by the listed entity, directly or indirectly to
promoter/ promoter group entities or any other entity controlled by them, SEBI has decided to
mandate such disclosures on a half yearly basis, in the Compliance Report on Corporate
Governance.
v. The format for compliance report on Corporate Governance shall be as under:
a. Annex - I - on quarterly basis
b. Annex - II - at the end of a financial year
c. Annex - III - at the end of 6 months from the close of financial year
d. Annex - IV - on a half yearly basis

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Compliance with Corporate Governance Reg 46(2) in respect of following:
1. The listed entity having paid up equity share capital not exceeding rupees
10 crore; and net worth not exceeding rupees 25 crore, as on the last day
of the previous financial year.
2. The listed entity which has listed its specified securities on the SME
Exchange.

19. IMPORTANT POINTS RELATED TO CORPORATE GOVERNANCE COMPLIANCE CERTIFICATE

i. In order that the PCS can carry out the necessary verification for the purpose of issuing
Corporate Governance Compliance Certificate (CGCC), the Company should provide the PCS
access to the registers, books of accounts, papers, documents, reports and records of the
Company wherever kept.
ii. The CGCC from the PCS should relate to the financial year of the listed Company under Report.
iii. When a PCS is assigned the compliance certification work of the Company for the first time,
he should communicate his appointment to the earlier incumbent, if a PCS, by registered post.

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iv. The PCS who has issued the CGCC should make himself available at the Annual General
Meeting to provide clarifications, on CGCC, if required.
v. Any failure or lapse on the part of a PCS in issuing a CGCC, may not only attract disciplinary
action for professional or other misconduct under the provisions of the Company Secretaries
Act, 1980, but also make him liable for any injury caused to any person due to his negligence
in issuing the CGCC

20. MODE OF ISSUING CORPORATE GOVERNANCE COMPLIANCE CERTIFICATE (CGCC)

obtain from the listed examine relevant records relating to Corporate certify the compliance
entity its draft report Governance & obtain necessary information of the conditions of
on Corporate and explanation from the management Corporate Governance
Governance and give his
certification to the
Where a Company has adopted the Voluntary Board to be annexed
Guidelines, the PCS would also certify the to the Board’s Report.
compliance

21. TYPES OF CERTIFICATION

Unqualified: issued when the PCS forms the opinion that the conditions of Corporate
Governance have been duly complied with by the Company
Qualified: issued when the PCS concludes that there are certain specific non-compliances or
inadequacies. It should contain a brief description of non-compliances under the act.

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  Qualifications, should be stated in bold type or in italics in the CGCC.
 If the PCS is unable to form any opinion with regard to any specific matter, the PCS shall
state clearly the fact that he is unable to form an opinion with regard to that matter and
the reasons therefor.
 If the scope of work required to be performed is restricted on account of limitations
imposed by the client, or on account of other limitations (such as certain books or papers
being in custody of another person or Government Authority), the certificate may indicate
such limitations.
 If such limitations are so material that the PCS is unable to express any opinion, the PCS
should state that “in the absence of necessary information and records, he is unable to
certify compliance or otherwise of the conditions of Corporate Governance by the Company”.

22. PENALTY FOR FALSE CORPORATE GOVERNANCE COMPLIANCE CERTIFICATE (CGCC)

i. As per section 448 if, in any return, report, certificate, balance sheet, prospectus, statement
or other document required by or for the purposes of any of the provisions of the Act, any
person makes a statement which is false in any material particular, knowing it to be false or
which omits material fact, knowing it to be material, he shall be punishable under section 447.
ii. As per section 449 of Companies Act, 2013 penalty of imprisonment for a minimum period of
3 years and a term which may extend to seven years, and fine which may extend to ten lakhs
rupees will be imposed if any person intentionally gives false evidence upon any examination
on oath or solemn affirmation.
iii. As per Section 23H of the Securities Contracts (Regulation) Act, when a person fails to comply
with any provision of SCRA, the rules or articles or bye-laws or the regulations of a recognized
stock exchange or directions issued by the Securities and Exchange Board of India he shall be
liable to a penalty which may extend to one crore rupees, where no specific penalty is provided.
iv. Section 23M of the SCRA provides that when any person contravenes or abets the contravention
of any offences for which no punishment is provided elsewhere in SCRA, he shall be punishable
with imprisonment for a term which may extend to ten years, or with fine, which may extend
to twenty-five crore rupees or with both.

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 23. CORPORATE GOVERNANCE AND SEBI (LISTING OBLIGATIONS AND DISCLOSURE
REQUIREMENTS) REGULATIONS, 2015

CORPORATE GOVERNANCE PRINCIPLES UNDER LISTING REGULATIONS

Rights of shareholders
i. right to participate and be sufficiently informed of, decisions concerning fundamental corporate
changes.
ii. opportunity to participate effectively and vote in general shareholder meetings.
iii. Being informed of the rules, including voting procedures that govern general shareholder
meetings.
iv. Opportunity to ask questions to the board of directors, place items on the agenda of general
meetings, and to propose resolutions, subject to reasonable limitations.
v. Effective shareholder participation in key corporate governance decisions, such as the
nomination and election of members of board of directors.
vi. exercise of ownership rights by all shareholders, including institutional investors.
vii. Adequate mechanism to address the grievances of the shareholders.
viii. Protection of minority shareholders from abusive actions and effective means of redress

Timely Information
Listed Entity should provide timely information to Shareholders including:
i. sufficient and timely information about the date time and location of the meeting and issues
discussed in the meeting.
ii. Capital structures and arrangements that enable certain shareholders to obtain a degree of
control disproportionate to their equity ownership.
iii. rights attached to all series and classes of shares, which shall be disclosed to investors before
they acquire shares

Equitable Treatment
Equitable treatment should be ensured of all shareholders in following manner:
i. All shareholders of the same series of a class shall be treated equally.

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 ii. Effective shareholder participation in key corporate governance decisions, such as the
nomination and election of members of board of directors, shall be facilitated.
iii. Exercise of voting rights by foreign shareholders shall be facilitated.
iv. The listed entity shall devise a framework to avoid insider trading and abusive self-dealing.
v. Processes and procedures for general shareholder meetings shall allow for equitable treatment
of all shareholders.
vi. Procedures of listed entity shall not make it unduly difficult or expensive to cast votes.

Role of stakeholders in corporate governance:

i. The listed entity shall respect the rights of stakeholders that are established by law or through
mutual agreements.
ii. Stakeholders shall have the opportunity to obtain effective redress for violation of their rights.
iii. Stakeholders shall have access to relevant, sufficient and reliable information on a timely and
regular basis to enable them to participate in corporate governance process.
iv. The listed entity shall devise an effective vigil mechanism/whistle blower policy enabling
stakeholders, including individual employees and their representative bodies, to freely
communicate their concerns about illegal or unethical practices.

Disclosure and Transparency

i. Information shall be prepared and disclosed in accordance with the prescribed standards of
accounting, financial and non-financial disclosure.
ii. Channels for disseminating information shall provide for equal, timely and cost efficient access
to relevant information by users.
iii. Minutes of the meeting shall be maintained explicitly recording dissenting opinions

Responsibilities of Board of Directors

i. Disclosure of Information
a. Members of the Board and KMP should disclose where they have a material interest in any
transaction
b. The board of directors and senior management shall ensure transparency to shareholders and
simultaneously ensure good corporate governance

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 ii. Key functions of the Board of Directors
a. Monitoring the effectiveness of the listed entity’s governance practices and making changes
as needed.
b. Selecting, compensating, monitoring and, when necessary, replacing key managerial personnel
and overseeing succession planning.
c. Aligning key managerial personnel and remuneration of board of directors with the longer term
interests of the listed entity and its shareholders.
d. Ensuring a transparent nomination process to the board of directors with the diversity of
thought, experience, knowledge, perspective and gender in the board of directors.
e. Overseeing the process of disclosure and communications
f. Ensuring the integrity of the listed entity’s accounting and financial reporting systems,
including the independent audit.
g. Monitoring and managing potential conflicts of interest of management, members of the board
of directors and shareholders, including misuse of corporate assets and abuse in related party
transactions.

iii. Other Responsibilities

a. The board of directors shall provide strategic guidance to the listed entity, ensure effective
monitoring of the management and shall be accountable to the listed entity and the
shareholders.
b. The board of directors shall set a corporate culture and the values by which executives
throughout a group shall behave.
c. Members of the board of directors shall act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the listed entity and the shareholders.
d. The board of directors shall encourage continuing directors training to ensure that the members
of board of directors are kept up to date.
e. Where decisions of the board of directors may affect different shareholder groups differently,
the board of directors shall treat all shareholders fairly.
f. The board of directors shall maintain high ethical standards and shall take into account the
interests of stakeholders.
g. The board of directors shall exercise objective independent judgement on corporate affairs.

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 h. The board of directors shall consider assigning a sufficient number of non-executive members
of the board of directors capable of exercising independent judgement to tasks where there is
a potential for conflict of interest.
i. The board of directors shall ensure that, while rightly encouraging positive thinking, these do
not result in over optimism that either leads to significant risks not being recognised or exposes
the listed entity to excessive risk.
j. The board of directors shall have ability to ‘step back’ to assist bexecutive management by
challenging the assumptions underlying: strategy, strategic initiatives (such as acquisitions),
risk appetite, exposures and the key areas of the listed entity’s focus.
k. When committees of the board of directors are established, their mandate, composition and
working procedures shall be well defined and disclosed by the board of directors.
l. Members of the board of directors shall be able to commit themselves effectively to their
responsibilities.

24. SIGNING OF FINANCIAL STATEMENTS

i. Section 129 and Schedule III of Companies Act, 2013
ii. Financials statements are laid before the AGM
iii. As per section 2(40), financial statements should includes:
 a balance sheet as at the end of the financial year;
 a profit and loss account, or in the case of a company carrying on any activity not for profit,
an income and expenditure account for the financial year;
 cash flow statement for the financial year;
 a statement of changes in equity, if applicable;
 any explanatory note

As per the provisions of Section 134(1) of Companies Act, 2013, the financial statement,
including consolidated financial statement, shall be approved by the Board of Directors before
they are signed on behalf of the Board and the Financial Statement will be signed by the
following:
(i) Chairperson of the Company (if he is authorized by the board of directors); OR
(ii) Two Directors (out of which one shall be Managing Director); AND

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(iii) Chief Executive Officer/ Company Secretary/ Chief Financial Officer of the Company (on the
basis of their appointment in the Company

CAN YOU SOLVE THIS?

Is it mandatory to sign financial statement from the company
secretary?

Solution
As per Section 134(1), the company in which the Whole-time Company Secretary is appointed,
then it is mandatory that the Financial Statement is signed from the Whole-time Company
Secretary. Further if the company appointed Chief Executive Officer or Chief Financial Officer
then the financial statement shall also be signed from them.

Sourajit Ghosh Vs. Union of India

In the instant case court held that if a director of a company who has failed to file financial statements
incurs disqualification for appointment of a director in another company or re-appointment as a director,
his right to continue as director in all companies which may have filed financial statements of annual
returns as required under Companies Act would immediately be forfeited.

25. ADOPTION AND CIRCULATION OF SIGNED FINANCIAL STATEMENTS

The Annual General Meeting of the company can be held within 6 months from the end of
the financial year i.e. 30 September and the company is required to adopt the Financial
Statement in the Annual General meeting.
Financial Statement along with consolidated financial statement shall be circulated along with:
 any notes or annexure
 the auditor’s report; and
 the Board’s report

If company fails to comply with the provisions of financial statement company shall be liable
to a penalty of three lakh rupees and every officer of the company who is in default shall
be liable to a penalty of fifty thousand rupees.

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26. OBLIGATION & PENAL PROVISIONS
Company:
 The provisions of the Companies Act, 2013 provides for the actions/ fine/ penalty to be imposed
on the companies in case of the default made by the company/its officers.
 Action is taken by the Central Government for compulsory winding up of the company.

Authorised Representative
 The provisions of the Companies Act, 2013 provides for the actions/ fine/ penalty to be imposed
on the companies in case of the default made by the company/its officers.
 Action may be taken under section 447 & 449 of companies’ act, 2013

Certifying Professional
i. Risk on Reputation
Reputation of CS firm will be affected
It can create a bad rift with ICSI and may lead to losing the practice as well.

ii. Under the Company Secretaries Act, 1980

 The Second Schedule to the Company Secretaries Act, 1980 provides that “where a Company
Secretary in Practice certifies or submits in his name, or in the name of his firm, a report of
an examination of the matters relating to company secretarial practice and related statements
unless the examination of such statements has been made by him or by a partner, he will be
guilty of professional misconduct.
 Where a Company Secretary in Practice while pre-certifying any e-Form or document fails to
disclose a material fact known to him in his report, which is material, he will be guilty for
professional misconduct.
 Id PCS provided any false statement in report, he would be liable for Disciplinary action under
Company Secretaries Act, 1980.
 In case he is found guilty of professional or other misconduct mentioned in the second schedule
to the Company Secretaries Act, 1980, he will be liable for the following actions:
(a) Reprimand

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(b) Removal of name from the registrar of members permanently or for such period as may be
thought fit by the disciplinary committee,
(c) Fine which may extend to five lakh rupees

iii. Under the Companies Act, 2013

i. where any instance of filing document, application or return etc. containing a false or misleading
information or omission of material fact, requiring action under section 448 or section 449 is
observed, the person shall be liable under section 448 and 449 of the Act.
ii. The section provide that if in any return, report, certificate, financial statement, prospectus,
statement or other document required by, or for the purposes of any of the provisions of this
Act or the rules made thereunder, any person makes a statement,
– which is false in any material particulars, knowing it to be false; or
-which omits any material fact, knowing it to be material, he shall be liable under section 447
iii. 447: any person who is found to be 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 the fraud. In case, the fraud in question
involves public interest, the term of imprisonment shall not be less than three years.

Action by Regulators
i. The Digital Signature Certificate shall be de-activated by the central government if there is
any omission or false statement in the report.
ii. where any instance of filing of documents, application or return or form etc, containing false
information or omission of material fact is observed, the Regional Director or the Registrar
shall conduct a quick inquiry against the professionals who certified the form and signatory
thereof including an officer in default who appears prima facie responsible for submitting false
or misleading or incorrect information and a 15 days notice will be served.
iii. The Regional Director or the Registrar will submit his/her report in respect of the inquiry
initiated, irrespective of the outcome, to the E-Governance cell of the Ministry within 15 days
of the expiry of period given for submission of an explanation with recommendation in initiating

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 action under section 447 and 448 and referral of matter to the Institute for Disciplinary
proceedings.
iv. The E-Governance cell will thereafter refer such cases to the concerned Institute for conducting
disciplinary proceedings against the errant member as well as debar the concerned professional
from filing any document on the MCA portal in future.
v. The Registrar shall forward a fortnightly report to the concerned Regional Director as well as
to the E-Governance Division.
vi. Thereafter, the Regional Director shall forward a consolidated report to the Joint Secretary E-
Governance Division on or before 7th of every month.

The Institute of Company Secretaries of India (ICSI) Disciplinary Committee has taken
disciplinary actions against two Company Secretaries for committing professional misconduct
in different cases.
1. In the first case, a Company Secretary was penalized for professional misconduct related to
mistakes in a Compliance Certificate issued for a company. The respondent incorrectly indicated
that the company had not issued equity shares, made erroneous statements about Board of
Directors meetings, and inaccurately stated the applicability of Provident Fund to the company.
After an inquiry, it was found that the Compliance Certificate did not accurately reflect an
increase in share capital as reported in Form 23AC filed by the company. Additionally, the
Board of Directors meeting claims were contradictory to the resignation of two directors, and
the Provident Fund information was not accurately verified. The Respondent has stated that
the Board of Directors has duly met 4 times during the period under review but it appears that
the Board was not constituted as two directors had resigned for which the Respondent has
stated that they had written to the ROC, but failed.
The disciplinary committee found the respondent guilty of professional misconduct and imposed
a fine of Rs. 15,000. If the fine was not paid within the stipulated time, the respondent would
face a 60-day removal from the register.
2. In the second case, another Company Secretary was disciplined for filing Compliance Certificates
without proper due diligence. The complaint alleged that the respondent had committed
professional and other misconduct while certifying Compliance Certificates for a company.
Among the allegations were that the respondent wrongly stated that proper notices for Board

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meetings were given and failed to disclose illegal allotment of equity shares and an invalid
Annual General Meeting. The disciplinary committee noted laxity on the respondent's part
for not verifying notices for all board meetings and other discrepancies. The respondent
admitted thelack of due diligence and pleaded guilty.
The committee found the respondent guilty of professional misconduct, but the document cuts
off before specifying the penalty imposed.

In both cases, the disciplinary actions were taken by the ICSI against Company Secretaries for
failing to exercise due diligence in certifying Compliance Certificates and making errors or
omissions in their professional roles.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 4 – LEGAL FRAMEWORK GOVERNING COMPANY
SECRETARIES

1. INTRODUCTION
i. The Department of Company Affairs conducting examination leading to Government Diploma
in Company Secretaryship (GDCS), marked the beginning of the profession of Company
Secretaries in an organized manner.
ii. Later in the wake of substantial increase in the number of candidates for GDCS, the Institute
of Company Secretaries of India was set up and registered as a company on 4th October, 1968
under Section 25 of the Companies Act, 1956 (i.e. not for profit company) with its registered
office at New Delhi.
iii. The work relating to Company Secretaries’ Examination and all allied matters were taken over
by the Institute with effect from 1st January 1969.
iv. In 1980, the Government moved the Company Secretaries Bill, 1980 to convert the Institute
into a statutory body.
v. Company Secretary (CS) professionals are recognized as Key Managerial Personnel (KMP)
under the Companies Act, 2013, wherein they are entrusted with a senior-level position in the
management and are an intrinsic part of the Board of corporate entity.

2. FUNCTIONS AND DUTIES OF COMPANY SECRETARIES

i. The Company Secretary is an in-house legal expert and a compliance officer of the company,
possessing expertise in corporate laws, securities laws & capital market and corporate
governance.
ii. The Company Secretary is chief advisor to the board of directors on best practices in corporate
governance, bearing responsibility for all regulatory compliances of company, corporate planner
and strategic manager.
iii. Expectations are also extended to the areas of Corporate Social Responsibility (CSR), Business
Responsibility and Sustainability Reporting (BRSR) and Environment Social Governance (ESG),
all of which put together highlights the focus on sustainability, because CS is referred to as a
Governance Professionals.

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 According to the section 205 of the Companies Act, 2013 read with rule 10 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Company Secretary
must perform the following functions and duties:
i. To report to the Board about compliance with the provisions of this Act, the rules made
thereunder and other laws applicable to the company
ii. To provide to the directors of the company, collectively and individually, such guidance as they
may require, with regard to their duties, responsibilities and powers
iii. To facilitate the convening of meetings and attend Board, committee and general meetings
and maintain the minutes of these meetings
iv. To obtain approvals from the Board, general meeting, the government and such other authorities
as required under the provisions of the Act
v. To represent before various regulators, and other authorities under the Act in connection with
discharge of various duties under the Act
vi. To assist the Board in the conduct of the affairs of the company
vii. To assist and advise the Board in ensuring good corporate governance and in complying with
the corporate governance requirements and best practices
viii. To discharge such other duties as have been specified under the Act or rules
ix. Such other duties as may be assigned by the Board from time to time
x. To ensure that the company complies with the applicable secretarial standards

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 Mayank Agarwal (Applicant) VS. M/s. Technology Frontiers (India) Private Limited
(Respondent Company)
 In this case, the Company Secretary of the respondent company had sent the notice to
the applicant under Section 90(5), (who is nominee director of the Respondent Company)
on May 3rd, 2021 along with the form to disclose their Ultimate Beneficial Ownership of
the shares held. However, the applicant alleged that the company alone is empowered to
apply to NCLT under Section-90(7) of the Companies Act, 2013 and Company Secretary
has not taken approval from Board of directors to file the present petition.
 CS submitted in his written petition that according to the Board resolution he has the
locus standi. He also referred to the provisions of section 205 of the Companies Act 2013,
under which he is authorized to represent and that it is his duty to do so.
 Court Ordered : The usage of the words “Company shall give notice” under Section 90(5)
makes it amply clear that the Key Managerial Personnel have to do this activity of seeking
information; in order to find out the Ultimate Beneficial Owners. The Company Secretary
has acted diligently and promptly to ensure compliance of the mandatory provisions. Hence,
the application stand dismissed.

Regulation 6(2) of the SEBI (LODR) Regulations, 2015 provides that a listed company is
required to appoint a qualified company secretary as the compliance officer who will be
responsible for following:
i. Ensuring compliance with regulatory provisions
ii. co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories
about the compliance with rules, regulations and other directives of these authorities.
iii. Ensure that the procedures followed are correct and authentic.
iv. Monitor the grievance redressal mechanism

3. COMPANY SECRETARY AS A PART OF SENIOR MANAGEMENT

The senior management shall mean the officers and personnel of the listed entity who are
members of its core management team, excluding the Board of Directors, and shall also

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 comprise all the members of the management one level below the Chief Executive Officer or
Managing Director or Whole-Time Director or Manager (including Chief Executive Officer and
Manager, in case they are not part of the Board of Directors) and shall specifically include the
functional heads, by whatever name called and the Company Secretary and the Chief Financial
Officer- Regulation 16d of SEBI(LODR) Regulations.

Company Secretary has two roles to play:

Company Secretary in Company Secretary in Practice

Employment

4. SOME LEGAL TERMINOLOGIES AND INTERPRETATION

i. “Company Secretary” means a person who is a member of the Institute of Company Secretaries
of India.
ii. “Register” means the Register of members of the Institute maintained under section 19 or the
Register of firms of the Institute maintained under section 20B
iii. Under the Companies Act, 2013 Company Secretary has been defined under section 2(24) as:
‘Company Secretary’ or ‘Secretary’ means a Company Secretary as defined in clause (c) of
sub section (1) of Section 2 of the Company Secretaries Act, 1980 who is appointed by a
company to perform the functions of the Company Secretary under the Companies Act, 2013.
iv. Section 2(25) of the Companies Act, 2013 defines “Company Secretary in Practice” means a
company secretary who is deemed to be in practice under sub-section (2) of section 2 of the
Company Secretaries Act, 1980.
v. “key managerial personnel” means:
a. the Chief Executive Officer or the managing director or the manager
b. the company secretary
c. the whole-time director
d. the Chief Financial Officer
e. such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and
f. such other officer as may be prescribed.

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 5. ASSOCIATES AND FELLOWS
Associate Members
As per section 5 of the Company Secretaries Act, 1980, Any person shall, on his name being
entered in the Register of members, be deemed to have become an Associate and as long as
his name remains so entered, shall be entitled to use the letters “A.C.S.” after his name to
indicate that he is an Associate.
A person is entitled to enter his name in the Register of Members if:
i. has passed examinations conducted by the dissolved company and has completed practical
training either as prescribed in the earlier regulations or as prescribed in the Company
Secretaries (Amendment) Regulations, 2020; or
ii. has passed the qualifying examinations and completed the practical training as prescribed in
these regulations; or
iii. has passed such other examination and completed such other training outside India as is
recognised by the Central Government or the Council as being equivalent to the examination
and training prescribed in these regulations; or
iv. had registered himself as a student with the Institute of Chartered Secretaries and
Administrators, London on or before 31st December, 1972 and had passed the Final Examination
or Professional Programme Examination of that Institute and had either possessed the required
practical experience or undergone the prescribed practical training as stipulated for candidates
passing the Final Examination or Professional Programme Examination conducted by the
Institute.
v. is an Indian citizen who is a “person resident outside India” and has become a member of the
Institute of Chartered Secretaries and Administrators, London, after passing the qualifying
examination conducted by that Institute and had either possessed and required practical
experience in India or abroad, or undergone the prescribed practical training as stipulated for
the candidates passing the Final Examination or Professional Programme Examination conducted
by the Institute.

Fellow Members
As per section 5 of the Company Secretaries Act, 1980, A person, being an Associate who has
been in continuous practice in India as a Company Secretary for at least five years and a

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 person who has been an Associate for a continuous period of not less than five years and who
possesses such qualifications or practical experience as the Council may prescribe with a view
to ensuring that he has experience equivalent to the experience normally acquired as a result
of continuous practice for a period of five years as a Company Secretary shall, on payment of
such fees, as may be determined, by notification, by the Council, and on application made and
granted in the prescribed manner, be entered in the Register of members as a Fellow.

Regulation 4(2) of The Company Secretaries Regulations, 1982 as amended by the Company
Secretaries (Amendment) Regulations, 2020 prescribes as follows:

No person shall be entitled to have his name entered in the Register of Members as a Fellow
unless he:

a. was a Fellow including Honorary Fellow of the dissolved company immediately before the
commencement of the Act; or
b. was admitted as a Fellow under the earlier regulations; or
c. is an Associate and has been in continuous practice in India as a Company Secretary for at
least five years; or
d. is an Associate for a continuous period of not less than five years and possesses such
qualifications or practical experience as may be determined by the Council.

No Associate member shall be admitted as a fellow member of the Institute, if;

a. has been found guilty of any professional or other misconduct and his name has been
removed from the Register or he has been imposed fine in preceeding 5 years on the date of
application.
b. has not completed such minimum numbers of Professional Development Credit Hours as may
be determined by the Council

6. CERTIFICATE OF PRACTICE AND DEEMED TO BE IN PRCATICE

According to section 2(d) of the Company Secretaries Regulations, 1982 ‘certificate of practice’
means a certificate granted under these or earlier regulations entitling the holder to practise
as a Company Secretary and a member can practice in India or outside India only after obtaining
certificate of practice.

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 According to section 2(2) of the Company Secretaries Act, 1980, a member of the Institute
shall be deemed “to be in practice” when, individually or in partnership with one or more
members of the Institute in practice or in partnership with members of such other recognised
professions, in consideration of remuneration received –
i. Engages himself in the practice of the profession of Company Secretaries in relation to any
company or,
ii. Offers to perform or performs services in relation to the promotion, forming, incorporation,
amalgamation, reconstruction, reorganization or winding up of companies or,
iii. Offers to perform or performs such services as may be performed by
a. a share transfer agent
b. an issue house
c. a share and stock broker
d. a secretarial auditor or consultant
e. an adviser to a company on management, including any legal or procedural matters,
f. unauthorized representative of a company with respect to filing, registering, presenting,
attesting or verifying any documents on behalf of the company.

iv. Holds himself out to the public as a Company Secretary in practice or

v. Renders professional services or assistance with respect to matters of principle or detail relating
to the practice of the profession of Company Secretaries or
vi. Renders such other services as, in the opinion of the Council, are or may be rendered by a
Company Secretary in practice.

7. REGISTER OF MEMBERS
Institute will maintain a Register of Members and it should include following:
a. his full name, date of birth, domicile, residential and professional addresses
b. membership number and the date on which his name is entered in the Register
c. his qualifications
d. whether he holds a certificate of practice

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 e. email-id, mobile number, telephone number if any, and such other particulars as may be
determined by the Council.

Any change in these details should be communicated within 30 days of such change.

Removal from Register of Members:

According to section 20 of the Company Secretaries Act, 1980, name of those member will be
removed by the Council:
a. who is dead;
b. from whom a request has been received to that effect; or
c. who has not paid any prescribed fee required to be paid by him; or
d. who is found to have been subject at the time when his name was entered in the Register of
members, or who at any time thereafter has become subject, to any of the disabilities
mentioned in section 8, or
e. who for any other reason has ceased to be entitled to have his name borne on the Register of
members.

8. DISCIPLINARY MECHNAISM

Board of Disciplinary Disciplinary

Discipline Committee Directorate

Board of Discipline
i. It is constituted by the Council of Institute under section 21A of Company Secretaries Act,
1980.
ii. Follows summary disposal procedure in dealing with all the cases before it.
iii. Where the Borad is of the opinion that member is guilty of misconduct under First Schedule,
after giving of Opportunity of being heard, it may take following actions:
a. Reprimand the member
b. remove the name of the member from the Register up to a period of three months
c. impose such fine as it may think fit which may extend to rupees one lakh.

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 iv. The Director (Discipline) shall submit before the Board of Discipline all information and
complaints where he is of the opinion that there is no prima facie case and the Board of
Discipline may close the matter if he agrees or in case it disagrees, it may advise the Director
(Discipline) to further investigate the matter.

Disciplinary Committee
i. Constituted by the Council.
ii. The Disciplinary Committee shall consist of the President or the Vice-President of the Council
as the Presiding Officer and two members to be elected from amongst the members of the
Council and two members to be nominated by the Central Government from amongst the
persons of eminence having experience in the field of law, economics, business, finance or
accountancy
iii. Where the Disciplinary Committee is of the opinion that a member is guilty of a professional
or other misconduct mentioned in the Second Schedule or both the First Schedule and the
Second Schedule, it shall afford to the member an opportunity of being heard before making
any order against him and may thereafter take any one or more of the following actions,
namely:—
a. Reprimand the member
b. Remove the name of the member from the Register permanently or for such period, as it
thinks fit
c. impose such fine as it may think fit, which may extend to rupees five lakhs.

Disciplinary Directorate
i. It is headed by an officer of the Institute designated as Director (Discipline) and such other
employees for making investigations in respect of any information or complaint received by it.
ii. Where the Director (Discipline) is of the opinion that a member is guilty of any professional
or other misconduct mentioned in the First Schedule, the matter shall be placed before the
Board of Discipline and if the member is guilty under second schedule, the matter shall be
placed before the Disciplinary Committee.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar
(Short Note)
Powers of all the three authorities are similar to
Civil Court:
S__________________
I__________________
I__________________
D_________________

9. APPEAL TO AUTHORITY
i. Any member of the Institute aggrieved by any order of the Board of Discipline or the
Disciplinary Committee imposing on him any of the penalties may within ninety days from the
date on which the order is communicated to him, prefer an appeal to the Authority. (the
Appellate Authority constituted under Chartered Accountants Act, 1949, shall be deemed to be
the Appellate Authority for the purposes of this Act)
ii. The Director (Discipline) may also appeal against the decision of the Board of Discipline or
the Disciplinary Committee to the Authority if so authorised by the Council, within ninety
days.
iii. The Authority may entertain appeal after the expiry of ninety days, if it is satisfied that there
was sufficient cause for not filing the appeal in time.
iv. The authority may:
 confirm, modify or set aside the order
 impose any penalty or set aside, reduce, or enhance the penalty imposed by the order
 remit the case to the Board of Discipline or Disciplinary Committee for such further enquiry
as the Authority considers proper in the circumstances of the case
 pass such other order as the Authority thinks fit

An opportunity of being heard is to be given to both the parties.

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 10. CERTAIN PROVISIONS RELATING TO MISCONDUCT UNDER THE COMPANY SECRETARIES
ACT, 1980
Professional misconduct means any act or omission provided in any of the Schedules.
Professional misconduct in relation to members of the Institute is broadly structured under
Schedule I and Schedule II of the Act.
The Supreme Court in Council of the Institute of Chartered Accountants of India and Another
v. B. Mukherjee after examining the nature, scope and extent of the disciplinary jurisdiction
under the provisions of the Chartered Accountants Act, 1949 observed if a member of the
Institute is found, prima facie, guilty of conduct, which, in the opinion of the Council renders
him unfit to be a member of the Institute, even though such conduct may not attract any of
the provision of the Schedules, it would still be open to the Council to hold an enquiry against
the member in respect of such conduct and a finding against him, in such an enquiry, would
justify appropriate action being taken by the High Court.
Following are the examples of other misconduct:
i. where a Company Secretary retains the records, books of account and documents of the client
and fails to return to the client on request without a reasonable cause.
ii. where a Company Secretary makes a material misrepresentation.
iii. where a Company Secretary uses the services of his apprentice(s) for purposes other than
professional practice
iv. conviction by a competent court of law
v. wrong publicity causing damage to the clients
vi. where in the opinion of the Council member brings disrepute to the profession or the Institute
as a result of his action whether or not related to his profession
vii. member is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months
viii. furnishing false declaration to the institute or any regulator; and
ix. non-compliance with Guidelines issued by the Council of the Institute.

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 A. Professional misconduct in relation to Company Secretaries in Practice (Part I of the First
Schedule to the Act)
Clause 1: A Company Secretary in Practice shall be deemed to be guilty of professional
misconduct, if he - “allows any person to practice in his name as a Company Secretary
unless such person is also a Company Secretary in Practice and is in partnership with or
employed by him.”
The rule permits another person to practice in the name of a Company Secretary in Practice
provided such other person is also a Company Secretary in Practice and is in partnership with
or is employed by the Company Secretary in Practice in whose name the work is to be carried
out
Two persons are said to be in Partnership when they work together on mutual faith and agency.
Sharing of remuneration does not make them partners. Thus an associate who is not a part of
decision making process does not become a partner.
Following tests if fulfilled cumulatively may make two persons partners of each other:
i. Sharing of profits and or losses
ii. Taking decisions together
iii. Sharing the responsibilities of such decision making; and iv. Acting on behalf of each other
and binding other person with one own acts of commission or omission.

Clause 2: A Company Secretary in Practice shall be deemed to be guilty of professional

misconduct, if he— “pays or allows or agrees to pay or allow, directly or indirectly, any
share, commission or brokerage in the fees or profits of his professional business to any
person other than a member of the Institute or a partner or a retired partner or the legal
representative of a deceased partner or a member of any other professional body or with
such other persons having such qualifications as may be prescribed, for the purpose of
rendering such professional services from time to time in or outside India.
This clause does not prohibit a Company Secretary in Practice from sharing fees, commission
or brokerage in the fees or profits of his professional business, with any other member of the
Institute or a partner or a retired partner or the legal representative of a deceased partner.

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 The term ‘partner’ used in this rule would include ‘ipso facto’ another Company Secretary in
Practice or a member of any other recognised profession under Section 2(2) of the Act. In
regard to sharing of fees with the legal representative of a deceased partner it is desirable
that the partnership deed contains a suitable covenanting this behalf.
It may appear that this Clause permits sharing of fees by PCS with members of the Institute
who are not employed but are practicing as CA / CWA or an Advocate. However, this does not
appear to be the intention. The term “Professional Business” used may be understood as
professional activities. A CA who does not hold CP of ICSI, cannot issue Secretarial Audit
Report by a multidisciplinary firm even if such CA/ CWA is a partner of PCS for the purposes
of Clause 2, 3, 4, & 5 of the First Schedule.

Clause 3: A Company Secretary in Practice shall be deemed to be guilty of professional

misconduct, if he— “accepts or agrees to accept any part of the profits of the
professional work of a person who is not a member of the Institute
a Company Secretary in Practice can partake of his profits with other members of the Institute
and with members of any other professional bodies specified in this regard or with such other
persons having such qualifications as may be prescribed, under clause a Company Secretary in
Practice as recipient can enter into profit sharing arrangement with a member of the Institute
and/or with a member of such other professional body or other person having qualifications, as
is referred to in clause (2)

Clause 4: A Company Secretary in Practice shall be deemed to be guilty of professional

misconduct, if: “he enters into partnership, in or outside India, with any person other
than a Company Secretary in Practice or such other person who is a member of any other
professional body having such qualifications as may be prescribed, including a resident
who but for his residence abroad would be entitled to be registered as a member under
clause (e) of sub-section (1) of section 4 - or whose qualifications are recognised by the
Central Government or the Council for the purpose of permitting such partnerships .
This clause prohibits a Company Secretary in Practice entering into partnership with any person
other than a Company Secretary in Practice or a member of any other recognised profession.
Even entering into partnership with persons, who are not members of the Institute, for the

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 purposes of carrying on a business and not the profession of Company Secretaries, would attract
the mischief of the clause.

Clause 5: A Company Secretary in Practice shall be deemed to be guilty of professional

misconduct, if: “he secures, either through the services of a person who is not an employee
of such Company Secretary or who is not his partner or by means which are not open to
a Company Secretary, any professional business.
. The clause covers instances of obtaining professional work by unethical means and by means
which are not open to a Company Secretary. Council has issued guidelines for advertisement
by PCS. A PCS can, within the parameters of the above guidelines issue advertisement / launch
his own website and such action on the part of PCS would not be treated as violation of Clause
5 as well as Clause 6 of the Part I of the First Schedule.

Clause 6: A Company Secretary in Practice shall be deemed to be guilty of professional

misconduct, if: “he solicits clients or professional work, either directly or indirectly, by
circular, advertisement, personal communication or interview or by any other means:
Provided that nothing herein contained shall be construed as preventing or prohibiting: (i)
any Company Secretary from applying or requesting for or inviting or securing professional
work from another Company Secretary in practice; or (ii) a member from responding to
tenders or enquires issued by various users of professional services a organisations from
time to time and securing professional work as a consequence.
This clause further fortifies the proposition under clause (5) about securing clients or
professional work. Solicitation of clients or solicitation of professional work or both, are
prohibited. Such a solicitation may be direct or indirect and such a solicitation may further be
by means of a circular, advertisement, personal communication or interview or any other means

Clause 7: A Company Secretary in Practice shall be deemed to be guilty of professional

misconduct, if he advertises his professional attainments or services, or uses any
designation or expressions other than Company Secretary on professional documents,
visiting cards, letterheads or signboards, unless it be a degree of a University established
by law in India or recognised by the Central Government or a title indicating membership

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 of the Institute of Company Secretaries of India or of any other institution that has been
recognised by the Central Government or may be recognised by the Council.
This clause covers two aspects –
(i) advertisement of professional attainments or services by a Company Secretary in Practice; and
(ii) using the designation ‘Company Secretary’.
 As regards the ban on advertisement of professional attainments or services, almost all the
professions all over the world had this type of restriction at least to start with. The idea behind
this restriction was that advertisement by professionals is incompatible with the qualities of
integrity and independence which a professional is expected to possess, especially when these
acts are motivated by a desire for personal gain.
 The advertisement of professional attainment or services under this clause is completely
prohibited except where the Company Secretary in Practice advertises as per the guidelines
issued by the council, through a write up setting forth services provided by him or his firm.
 What amounts to advertisement of professional attainments or services is to be decided on a
case to case basis, having regard to the attendant facts. For instance, where in the visiting
card or name board or letterhead, a member in practice mentions that he is a specialist or
expert in company law, tax law, etc. it would amount to advertisement of professional
attainments or services.
 This clause also speaks of using the designation ‘Company Secretary’ on professional documents,
visiting cards, letterheads, sign-boards, etc. This requirement fortifies the provisions of section
7 of the Act and in fact is an extension of the requirement in regard to the use of proper
designation. Designations like Company Law Consultant, Income Tax Consultant, Corporate
Adviser, Investment Adviser, Management Consultant etc. are prohibited. The use of descriptions
indicating membership of the Institute of Chartered Accountants of India, The Institute of
Cost and Works Accountants of India and the Bar Councils is permitted provided members are
not holding certificate of practice issued by the Institute or using the description ‘Company
Secretary’. The use of the designation “Practicing Company Secretary”. “Company Secretary in
whole-time practice”, etc. is not violative of this clause.

Clause 8: Provides that a Company Secretary in Practice shall be deemed to be guilty of

professional misconduct, if: “he accepts the position of a Company Secretary in Practice

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 previously held by another Company Secretary in Practice without first communicating
with him in writing.
The primary requirement under this clause is of prior communication with the previous
incumbent. This is intended for reasons of professional courtesy.
It would be desirable for the new incumbent to obtain a letter from the company letting him
know the name of the earlier incumbent or that no other Company Secretary has been appointed
for the same assignment. It would be necessary that the communication, in order to be
effective, shall be by a registered letter or by hand with an acknowledgement so that there is
positive evidence of the communication having been complete. Members have been held guilty
of professional misconduct under this clause for having accepted and commenced the
certification of Annual Return of a company without first communicating with the earlier
incumbent in writing.
In respect of following it shall not be mandatory (though desirable) to send a prior written
communication to the earlier incumbent:
i. certifying e-forms for various companies.
ii. giving Due Diligence Certificate for consortium borrowers.
iii. holding assignment as retainer for a company or group of companies.
iv. issuing search reports.
v. Issuing certificates as contemplated under SEBI (LODR) Regulation, 2015.
vi. Giving legal opinion

In respect of the following, it shall be mandatory to send a prior written communication to

the earlier incumbent:
(i) Signing / Certification of Annual Return.
(ii) Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013.
(iii) Issuance of Certificate of Securities Transfers.
(iv) Certificate of reconciliation of capital, updation of Register of Members, etc. as per the
Securities & Exchange Board of India’s Circular
(v) Conduct of Internal Audit of Operations of the Depository Participants.
(vi) Certification of corporate governance under SEBI (LODR) Regulation, 2015.

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 Clause 9 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if: “charges or offers to charge, accepts or offers to accept, in
respect of any professional employment, fees which are based on percentage of profits
or which are contingent upon the findings or results of such employment, except in cases
which are permitted under any regulations made under this Act”.

Clause 10 Provides that a Company Secretary in Practice shall be deemed to be guilty of

professional misconduct, if: “engages in any business or occupation other than the
profession of Company Secretary unless permitted by the Council so to engage: Provided
that nothing contained herein shall disentitle a Company Secretary from being a director
of a company except as provided in the Companies Act.”
This clause is intended to ensure that a PCS does not engage in vocations which are not
compatible with the profession of Company Secretary. This has been provided with a view to
ensure the profession develops in its true sense. Pursuant to the Company Secretaries
Regulations, 1982, the Council has decided not to issue certificate of practice to members
engaged in other professions such as Chartered Accountants, Cost Accountants and Advocates
and also to members in employment. The said decision was taken by the Council to give an
independent identity and status to the profession and a thrust to the concept of Company
Secretary in whole-time practice.
The Council has expressly permitted a PCS to take up following vocations:
(i) Authoring Books and Articles.
(ii) Holding of Life Insurance Agency License for the limited purpose of getting renewal commission.
(iii) Holding of public elective offices such as M.P., M.L.A., M.L.C. and others.
(iv) Honorary office-bearership of charitable, educational or other non-commercial organisations.
(v) Acting as Justice of Peace, Special Executive Magistrate and the like.
(vi) Teaching assignment under the Coaching Organisation of the Institute and other Institutes.
(vii) carrying out valuation of papers, acting as a paper-setter, head examiner or a moderator, for
any examination.
(viii) Acting as editor of professional journals.

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 Clause 11 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “allows a person not being a member of the Institute in
practice or a member not being his partner to sign on his behalf or on behalf of his firm
anything which he is required to certify as a Company Secretary, or any other statements
related thereto.
 It is not permissible for a Company Secretary in Practice to allow any person to sign on his
behalf or on behalf of his firm anything which he is required to certify as a Company Secretary
or any other statement related thereto. The purpose is not to allow a member to have his
judgment and expertise substituted by the judgment of any other person who is not a member
in practice or his partner in the firm
 For Example: the annual return under Section 92 of the Companies Act, 2013 has to be certified
by a Company Secretary in Practice himself. It is not possible to have the certification done
by a Company Secretary, say, through a power of attorney holder, even though the holder of
the power of attorney is an employee (of the Company Secretary) who has been associated
with the checking up of various details furnished in the Annual Return.
 In e-governance era, a PCS on many occasions attaches his Digital Signature to various forms
statements. Due care has to be taken that such digital signature is attached only by the PCS
himself.

B. Professional misconduct in relation to members of the Institute in service (Part II of the

First Schedule
Part II of First Schedule to the Act deals with professional misconduct of a member of the
Institute (other than a member in practice) if he is an employee of any company, firm or
person
Part II is made for the members in employment and provides them to observe a code of
conduct as well. To be in ‘employment’ connotes to be in a ‘contract of service’ and not
‘contract for service’. These four factor indicated contract for service:
a. master’s power of selection of his servant
b. payment of wages or other remuneration
c. master’s right to control the method of doing the work; and
d. the master’s right of suspension or dismissal

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 Clause 1 of Part II of the First Schedule provides that a member of the Institute (other
than member in practice) shall be deemed to be guilty of professional misconduct, if he,
being an employee of any company, firm or person— “pays or allows or agrees to pay,
directly or indirectly, to any person any share in the emoluments of the employment
undertaken by him.”
A member in employment shall not share emoluments of the employment with any other
person, not even a member. Both direct and indirect sharing of the emoluments is prohibited.
However, it may be noted that under Part I of the First Schedule, a member in practice can
share the fee, commission or brokerage or profits with any other member of the Institute who
is his partner.
Clause 2 of Part II of the First Schedule provides that a member of the Institute (who is
in service) shall be deemed to be guilty of professional misconduct, if he, being an
employee of any company, firm or person— “accepts or agrees to accept any part of fees,
profits or gains from a lawyer, a Company Secretary or broker engaged by such company,
firm or person or agent or customer of such company, firm or person by way of commission
or gratification.”
It is an implied term of any employment that the employee concerned shall not secretly benefit
from the employment

C. Professional misconduct in relation to members of the Institute generally (Part III of the
First Schedule to the Act)
Clause 1 of Part lll of the First Schedule provides that a member of the Institute whether
in practice or not shall be deemed to be guilty of professional misconduct, if he— “not
being a Fellow of the Institute, acts as a Fellow of the Institute.
This clause prohibits the practice of styling oneself as a Fellow, while in fact he is not a Fellow
member

Clause 2 of Part III of the First Schedule provides that a member of the Institute whether
in practice or not, shall be deemed to be guilty of professional misconduct, if he— “does
not supply the information called for or does not comply with the requirements asked for

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 by the Institute, Council or any of its Committees, Director (Discipline) Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority.”
It is the duty of a member to supply information called for or by the Council or any of its
Committees and other authorities. Non-compliance with this clause would tantamount to breach
of code of conduct.

Clause 3 of Part III of the First Schedule provides that a member of the Institute, whether
in practice or not, shall be deemed to be guilty of professional misconduct, if he— “while
inviting professional work from another Company Secretary or while responding to tenders
or enquiries or while advertising through a write up, or anything as provided for in items
(6) and (7) of Part I of this Schedule, gives information knowing it to be false.”

D. Other Misconduct in relation to members of the Institute generally (Part IV of the First
Schedule)
Clause 1 of Part IV A member of the Institute, whether in practice or not, shall be deemed to
be guilty of other misconduct, if he is held guilty by any civil or criminal court for an offence
which is punishable with imprisonment for a term not exceeding six months.

Clause 2 of Part IV A member of the Institute, whether in practice or not, shall be deemed to
be guilty of other misconduct, if in the opinion of the Council, he brings disrepute to the
profession or the institute as a result of his action whether or not related to his professional
work.

Following may amount to misconduct under Clause 2 of Part IV of the First Schedule:
a. Sending an e-mail to number of members (e-groups) criticizing the decisions of the Council
in derogatory and filthy language.
b. Discussing through e forums failures of the Council/ president/ secretary by using derogatory
and filthy language.
c. Writing letter(s) in an aggressive, loud and filthy language to the Ministry of Corporate Affairs,
about working of ROC offices/ MCA site, inability to upload forms etc.

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 d. Arranging DHARANA/ agitations at the gates of the Govt. Offices/Institute’s offices in a
manner not befitting a professional.
e. Instigating Students or other members by creating a pandemonium in or around Institute’s
offices by raising issues pertaining to syllabus, training, examination or any other reason what
so ever.
f. Misusing the confidential data available with the offices of the Institute for personal purposes.
g. Inviting Govt. Officers for Chapter’s / Regional Council’s Programs by spending heavily on their
travel & stay arrangements, with an intention to get personal mileage.
h. Tampering with the Books of Accounts/ Minutes of the meetings of the Managing Committees
of Chapter/ Regional Councils.

E. Part I of the Second Schedule to the Act Section 21(3), 21(B)(3) and 22) where the
matters are to be dealt with by the disciplinary committee constituted by the Council
i. Clause 1 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “Discloses information acquired in the course of his professional
engagement to any person other than the client so engaging him, without the consent of such
client, or otherwise than as required by any law for the time being in force.”
ii. Clause 2 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he– “certifies or submits in his name or in the name of his firm a
report of an examination of the matters relating to Company Secretarial practice and related
statements unless the examination of such statements has been made by him or by a partner
or any employee in his firm or by another Company Secretary in practice
iii. Clause 3 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “permits his name or the name of his firm to be used in
connection with any report or statement contingent upon future transactions in a manner
which may lead to the belief that he vouches for the accuracy of the forecast.”
iv. Clause 4 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “expresses his opinion on any report or statement given to
any business enterprise in which he, his firm or a partner in his firm has a substantial interest”
v. Clause 5 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “fails to disclose a material fact known to him in his report

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 or statement but the disclosure of which is necessary in making such report or statement,
where he is concerned with such report or statement in a professional capacity.”
vi. Clause 6 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “fails to report a material misstatement known to him and
with which he is concerned in a professional capacity.”
vii. Clause 7 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “does not exercise due diligence, or is grossly negligent in the
conduct of his professional duties.
viii. Clause 8 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material to negate the expression of
an opinion.”
ix. Clause 9 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “fails to invite attention to any material departure from the
generally accepted procedure relating to the secretarial practice.”
x. Clause 10 Provides that a Company Secretary in Practice shall be deemed to be guilty of
professional misconduct, if he— “fails to keep moneys of his client other than fees or
remuneration or money meant to be expended in a separate banking account or to use such
moneys for purposes for which they are intended within a reasonable time.

F. Professional misconduct in relation to members of the Institute generally (Part lI of the

Second Schedule to the Act)

Clause 1 Provides that a member of the Institute whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he— “contravenes any of the provisions
of this Act or the regulations made there under or any guidelines issued by the Council.”
It is necessary for all the members to understand the guidelines and follow the same in spirit
and letter. Following guidelines have been issued by the council so far:
a. Display of particulars on website
b. Approving firm’s name
c. Compulsory attendance at PDP

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 d. Dress Code
e. Issuing Compliance Certificate
f. Maintenance of Register of attestation services
g. Issue of advertisement by PCS
h. Change of Name of a Concern/Firm
i. Guideline for use of own Logo by PCS

Clause 2 of Part II of Second Schedule Provides that a member of the Institute whether
in practice or not, shall be deemed to be guilty of professional misconduct, if he— “being
an employee of any company, firm or person, discloses confidential information acquired
in the course of his employment, except as and when required by any law for the time
being in force or except as permitted by the employer.”
The confidential information, discussions, documents and data should be dealt with utmost
care and should not be shared or passed on to undesirable persons / outsiders under any
circumstances , directly or indirectly.

Clause 3 of Part II of Second Schedule Provides that a member of the Institute whether
in practice or not, shall be deemed to be guilty of professional misconduct, if he—
“includes in any information, statement, return or form to be submitted to the Institute,
Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board or the Appellate Authority any particulars knowing them
to be false.”
This clause covers situation where a member includes in any statement, return or form to be
submitted to the Council any particulars knowing them to be false

Clause 4 of Part II of Second Schedule Provides that: “a member of the Institute whether
in practice or not, shall be deemed to be guilty of professional misconduct, if he defalcates
or embezzles moneys received in his professional capacity.

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 G. Part III of the Second Schedule
This part is about other misconduct in relation to members of the Institute generally if a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable
with imprisonment for a term exceeding six months.

Regulation 15 of Company Secretaries Act: Complaints and Enquiries relating to

Professional or other Misconduct of Members
1. any complaint received against a member of the Institute under Section 21 shall be investigated,
and any enquiry relating to misconduct of such member shall be held, by the Disciplinary
Committee.
2. A complaint shall be made to the Council in the appropriate from, duly verified as required
therein.
3. Every complaint shall contain the following particulars, namely-
(a) the acts or omissions which, if proved, would render the member complained against guilty of
any professional or other misconduct
(b) the oral and/or documentary evidence relied upon in support of the allegations made in the
complaint.
4. Every complaint (Except a complaint made by or on behalf of the Central or any State
Government) shall be accompanied by a deposit of rupees fifty which shall be forfeited, Council
comes to the conclusion that no prima facie case is made or the complaint is either frivolous
or has been made with mala fide intention.
5. The Secretary shall return a complaint which is not in the proper form or does not contain the
aforesaid particulars or is not accompanied by the deposit of rupees fifty to the complainant
for resubmission after compliance with such requirements and within such time as the Secretary
may specify.
6. Within sixty days of the receipt of a complaint the Secretary shall,-
(a) if it is against an individual member send particulars of the acts of omissions alleged or a copy
of the complaint, to member at his address as entered in the Register.

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 (b) if it is against a firm, send particulars of the acts or omissions or a copy of the complaint, as
the case may be, to the firm concerned at the address of the head office of the firm as
entered in the Register of offices
7. A member who has been intimated of the complaint made against him shall, within fourteen
days, forward to the Secretary a written statement in his defence.
8. On a perusal of the complaint and written statement the Secretary may call for such additional
particulars or documents connected there with either from the complainant or the respondent,
as he may consider necessary or as may be directed by the President, for perusal of the
Council.
9. Where on a perusal of the complaint, the written statement, if any, of the respondent and
other relevant documents and papers, the Council is prima facie of opinion that any member
has been guilty of professional or other misconduct, the Council shall cause an enquiry to be
made in the matter by the Disciplinary Committee and where the Council is prima facie of
opinion that there is no case against the respondent, the case shall be dismissed.
10. Every notice issued by the Secretary or by the Disciplinary Committee under this Regulation
shall be sent to the member or the firm concerned by registered post with acknowledgement
due.
11. If the notice is returned unserved with an endorsement to the effect that the addressee had
refused to accept the notice, it shall be deemed to have been served.
12. If the notice is returned with an endorsement indicating that the addressee cannot be found
at the address given, the Secretary shall ask the complainant to supply to him the correct
address to the member or firm concerned and send a fresh notice to the member or firm at
the address so supplied.

Procedure in enquiry before the Disciplinary committee- Regulation 18 of the Company

Secretaries Regulation, 1982:
1. It shall be the duty of the Secretary to place before the Disciplinary Committee all facts
brought to his knowledge which are relevant for the purpose of any enquiry by the Disciplinary
Committee.

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 2. The Disciplinary Committee shall have the power to regulate its procedure in such manner as
it considers necessary and during the course of enquiry, may examine witnesses on oath and
receive evidences on affidavits
3. The Disciplinary Committee shall give the complainant and respondent a notice of the meeting
at which the case shall be considered by the Committee
4. Such complainant and respondent may be allowed to defend themselves before the Disciplinary
Committee either in person or through a legal practitioner or any other member of the Institute.
5. Where, in the course of a disciplinary enquiry, a change occurs in the composition of the
Disciplinary Committee, unless any of the parties to such enquiry makes a demand within
fifteen days of receipt of a notice of a meeting of such Disciplinary Committee, that the
enquiry be made de novo report of the Disciplinary Committee shall be called in question on
the ground that any member of the Disciplinary Committee did not possess sufficient knowledge
of the facts relating to such inquiry.
6. The Disciplinary Committee shall after investigation report the result of its enquiry to the
Council for its consideration.

Procedure in a hearing before the Council- Regulation 19 of the Company Secretaries Regulation,
1982.
1. The Council shall consider the report of the Disciplinary Committee and if in its opinion, a
further enquiry is necessary, may cause such further enquiry to be made and a further report
submitted by the Disciplinary Committee.
2. After considering such report or further report of the Disciplinary Committee, as the case may
be, where the Council finds that the respondent is not guilty of any professional or other
misconduct, it shall record its findings accordingly and direct that the proceedings shall be
filed or the complaint shall be dismissed as the case may be.
3. After considering such report or further report of the Disciplinary Committee, as the case may
be, where the Council finds that the respondent has been guilty of a professional or other
misconduct, it shall record its findings accordingly and shall proceed in the manner as laid
down in the succeeding sub- regulations.
4. Where the finding is that the member of the Institute has been guilty of a professional or
other misconduct, the Council shall afford to the member an opportunity of being heard before

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 orders are passed against him in the case. The Council after hearing the respondent, if he
appears in person or after considering the representations, if any, made by him, pass such
orders as it may think fit, as provided under Subsection (4) of Section 21.
5. The orders passed by the Council shall be communicated to the complainant and the
respondent.

11. UDIN
i. UDIN is a 17 digit system generated number which is used to verify the authenticity of
documents attested / certified by a Company Secretary in Practice. Quoting UDIN on
certifications, w.r.t the professional services has been made mandatory w.e.f 1st October, 2019
ii. A unique number for the identification of documents attested by Company Secretaries in
Practice shall be generated at the time of signing the Certificate/ Report which shall
mandatorily be mentioned in the Certificate / Report along with the CoP number.
iii. In case of e-Form-MGT 7 as mentioned in paragraph 3 (b) (xiv) of the ICSI UDIN Guidelines,
2019 or in case of any other e-Form(s), the UDIN shall be mentioned by way of attachment
in the optional attachment.
iv. UDIN shall be generated at the time of signing of Reports, Returns, Certificates and Other
Documents or can be generated seven days in advance of the date of such signing.
v. UDIN guidelines have been issued to:
a. Enable the stakeholders to verify the authenticity of various documents certified by Company
Secretaries in Practice
b. Prevent counterfeiting of various attestations / certifications
c. Provide ease of maintaining the Register of Attestation /Certification services rendered by
practicing members
d. Ensure compliance of the Guidelines issued by the Institute w.r.t ceilings on the number of
the various certification / attestation services
e. Auto-prefill details of Certification / Attestation services rendered by practicing members in of
the form for renewal of Certificate of Practice

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 12. ECSIN
i. eCSIN is a system- generated unique number for identification of the Company Secretaries
employed in a particular company which shall be generated by the Company Secretary at the
time of employment as a Company Secretary (KMP or otherwise), as well as at the time of
demitting office in any manner.
ii. It is an eighteen-digit system generated random unique alphanumeric number.

13. ICSI (GUIDELINES FOR ADVERTISEMENT BY COMPANY SECRETARIES), 2020

i. It became effective from 1st April, 2020 and shall be applicable to all advertisements by
members of the Institute rendering any advisory, consultancy or representation services whether
holding Certificate of Practice issued by the Council of the Institute or otherwise
ii. Only these are activities are permitted for a CS in practice for advertisement.
a. Display the scope of work on his/her own website.
b. Creating a visual identity in compliance with the Guidelines for use of Individual Logo issued
by the Council of ICSI.
c. Display of Location and décor of the workplace, meeting rooms, etc.
d. Display of Firm name, Logo or any other identity on Uniform, Office/s, office stationary&
equipments/ material and providing Training to Staff.
e. Professional Updates and Write ups in any mode.
f. Appearing on local radio or television.
g. Giving speeches/lectures at any platform including Seminars, Conferences, training programmes,
Workshops, Conventions, etc so organised by any forum.
h. Holding professional seminars, conferences and workshops.
i. Sponsoring any event (cultural, professional or otherwise) or helping with community
programmes or doing voluntary work as a professional for charitable organizations.
j. Use of social media like Facebook, Instagram, Linkedin, Twitter, Youtube, WeChat, Telegram
and Whatsapp or and other media of similar nature.

No advertisement shall be made in :

i. Violation of provisions of Company Secretaries Act, 1980
ii. false or misleading

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 iii. claim superiority over any or all other Company Secretaries
iv. indecent, sensational or otherwise of such nature which may bring disrepute to the profession
or the Institute.
v. contain fabricated or false testimonials or endorsements concerning the Company Secretary
vi. refer the Company Secretaries in the terms such as “specialists” or “experts”; Explanation:
The advertisements shall not be self-laudatory and not include the words such as “best,”
“better” or “cheapest;”
vii. represent that the quality of the professional services to be performed is greater than the
quality of professional services performed by other professionals. Statements comparing one
professional’s services to that of another are not allowed
viii. constitute a guarantee, warranty, or prediction regarding the outcome of any professional
assignment;
ix. in no way indicate that the charging of a fee is contingent on outcome, or that no fee will be
charged in the absence of the desired outcome
x. not contain any reference to past successes or results which indicates a guarantee, warranty
or prediction of result of future professional assignments. eg. We made M/s. Xxx win the case,
Meet the master
xi. not be designed for “pleasing customers,” which might mislead or eventually harm customers
or third parties
xii. not contain any humorous slogans. E.g. Save Rs. Xxxx Come to us, we will tell you how

CS Muskan Gupta | YES ACADEMY for CS & Law 8888 235 235 4.29
 Thoda Extra gyaaannnn……… Swaaad Anusaaar
(Short Note)
 CS or a firm of CS should not list his/her service(s)
on any aggregator website such as Sulekha, Olx,
Urbanclap, JustDial, Quikr.
 CS or a firm of CS shall not join or project
himself/herself/itself as a member of any
networking association(s) or any Multi-Level
Marketing Association(s) (“MLM”) or any other
organisation which require his/her Company
Secretary member to add other person as member
of the organisation.

14. PROFESSIONAL LIABILITIES

There are certain liabilities applicable on the company secretary.
as an officer of the company, it is peculiar to work in interest of company and avoid situations
leading to conflict of interest and always opt for independent judgment because a Company
Secretary may or may not be officer bearer as director, but they will often be accounted for
breach of duty in the same manner as Board of Directors.
Various sections in the Companies Act, 2013 provide that, where there is a failure of compliance,
‘an offence is committed by every officer of the company who is in default’. If the Company
Secretary is the person with main responsibility for the task, he will be the person in default
and liable to the fine/penalty.

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 LET’S UNDERSTAND THIS:
For instance, default in filing annual return of company within sixty
days from the date on which the annual general meeting is held, then
every officer who is in default shall be liable to a penalty of ten
thousand rupees and in case of continuing failure, with further penalty
of one hundred rupees for each day during which such failure
continues, subject to a maximum of two lakh rupees in case of a
company and fifty thousand rupees in case of an officer who is in
default. Further, if a company secretary in practice certifies the annual
return otherwise than in conformity with the requirements of this
section or the rules made thereunder, he shall be liable to a penalty of
two lakh rupees

Liability of Company Secretaries can be categorized in two ways:

Statutory Liabilities Contractual Liabilities

i. Maintenance of all records and i. Liable for breaching or exceeding

documents of the company its authority
ii. Arranging a statutory meetings of ii. Liable for disclosing secret
the company information of the company to
iii. Issuing share certificates, dividend outsiders
warrants, and bonus share iii. Liable for frauds etc.
certificates to the shareholders iv. Liable to abide by all terms and
iv. Preparation of minutes of various conditions of the service contract
meetings and maintaining minute v. Protect the interest of the
books, company.

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 Saumil Dilip Mehta v. State of Maharashtra
The court clarified that directors of public and private limited companies have the right
to unilaterally resign. However, the formal process, including completion of forms and
communication to the ROC, is the responsibility of the company secretary. The resignation
letter should be presented in a board meeting, and the decision of the board should be
appropriately documented. The court emphasized the role of the company secretary in
ensuring compliance with legal requirements and maintaining accurate
company records after a director’s resignation.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 5 – VALUES, ETHICS AND PROFESSIONAL CONDUCT

1. INTRODUCTION:
i. India has a very strong history and deep roots of culture, principles and ethics which have come
down to us across generations, through the immortal Shrimad Bhagavad Gita which is useful in
getting answers to various complex situations and ethical dilemmas.
ii. The great epic, Ramayana is also a very important document which has thrown light on aspects
like values and character.
iii. The teachings of Arya Chanakya (Chanakya Neeti) cannot be ignored while talking of character,
ethical practices, values and good governance. Aesop’s Fables, Panchatantra and Hitopadesh are
also fictional sources of moral codes.

iv. Today’s doing business is full of temptations and distractions driven by greed to earn unlimited
profits, market share, and of late, this attitude and temperament believing the philosophy “the
ends justify the means” has led to a substantial depletion of good character, ethical standards,
practices and good governance. This has led to loss of humanity, and ultimately, happiness of
self and society.
v. The term “ethics” is derived from the Greek word “ethos” which refers to character or customs
or accepted behaviours.
vi. In the world of intense competition, every professional work on certain principles and beliefs
which are nothing but the values. Likewise, ethics is implemented in the organisation to ensure
the protection of the interest of stakeholders like customers, suppliers, employees, society and
government.

2. TYPES/BRANCHES OF ETHICS

The four main

branches of ethics
include

Descriptive Normative
Meta-ethics Applied ethics
ethics ethics

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 i. Descriptive Ethics deals with what people actually believe (or made to believe) to be right or
wrong and accordingly holds up the human actions acceptable or not acceptable or punishable
under a custom or law.

Descriptive ethics: What do people think is right?

ii. Normative Ethics deals with “norms” or set of considerations how one should act. Thus, it is a
study of “ethical action” and sets out the rightness or wrongness of the actions. It is also called
prescriptive ethics because it rests on the principles which determine whether an action is right
or wrong.

Normative (prescriptive) ethics: How should people act?

iii. Meta-Ethics or “analytical ethics” deals with the origin of the ethical concepts themselves. It
does not consider whether an action is good or bad, right or wrong. Rather, it questions – what
goodness or rightness or morality itself is. It is basically a highly abstract way of thinking about
ethics.

Meta-ethics: What does “right” even mean?

Applied Ethics. This branch of ethics is most important for professionals in different walks of
life including doctors, teachers, administrators, rulers and so on.
There are six key domains of applied ethics viz.
i. Decision ethics- ethical decision-making process
ii. Professional ethics- for good professionalism
iii. Clinical Ethics- good clinical practices
iv. Business Ethics- good business practices
v. Organizational ethics- ethics within and among organizations
vi. social ethics.

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 Applied ethics: How do we take moral knowledge and put it into practice?

Business Ethics is one of the branches of Applied Ethics which is mostly used in various
organizations & Corporates. It can be defined as, “The application of a moral code of conduct to
the strategic and operational management of a business.”

3. KEY DIFFERENCES BETWEEN ETHICS AND VALUES

The fundamental differences between ethics and value are described in the given below points:

ETHICS VALUES

Ethics refers to the guidelines for conduct, that Value is defined as the principles and ideals,
address question about morality. which helps them in making the judgement of
what is more important.

Ethics is a system of moral principles. In contrast to values, which is the stimuli of

our thinking.

Ethics compels to follow a particular course of On the other hand, Values strongly influence
action. the emotional state of mind. Therefore it acts
as a motivator.

Ethics are consistent in nature. Whereas values are different for different
persons, i.e. what is important for one person,
may not be important for another person.

Ethics helps us in deciding what is morally Values tell us what we want to do or achieve
correct or incorrect, in the given situation. in our life.

Ethics determines to what extent our options As opposed to values, which defines our
are right or wrong. priorities for life.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar
(Short Note)
 Ethics are consistently applied over the period and
remains same for all the human beings.
 Ethics are moral principles that govern the behavior
of individuals and organizations.
 Values have an individualistic approach, i.e. it varies
from person to person but remains stable
 Values are the principles and beliefs that guide the
behavior and decision-making of individuals and
organizations.

Examples of ethics:

1. Professional ethics: ethical standards that guide the conduct of professionals in various fields
such as medicine, law, accounting, engineering, and journalism.
2. Business ethics: moral principles and values that guide the behavior of individuals and
organizations in the business world.
3. Environmental ethics: ethical considerations related to the relationship between humans and
the environment, and the responsibility to protect and preserve the natural world.
4. Social ethics: principles and values that guide the behavior of individuals and organizations in
relation to social issues such as poverty, inequality, and social justice.
5. Religious ethics: moral principles and values that guide the behavior of individuals and
organizations within religious contexts.

Examples of values:
1. Respect: treating others with dignity and courtesy.
2. Integrity: acting in a way that is consistent with one’s values and beliefs.
3. Responsibility: being accountable for one’s actions and decisions.

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 4. Honesty: telling the truth, not lying or deceiving others.
5. Empathy: showing concern and understanding for others.
6. Courage: standing up for what is right even in the face of difficulty or opposition.
7. Fairness: treating people equally and impartially.
8. Diversity: valuing and respecting differences in culture, ethnicity, gender, and other
characteristics.
9. Sustainability: promoting responsible use of natural resources to protect the environment for
future generations.

These are just a few examples of values, and different individuals and organizations may have
their own unique values that guide their behavior and decision-making. Values can be both
personal and cultural, and can play an important role in shaping the way we interact with the
world around us.

4. ETHICAL PRACTICES
i. Beneficence: The principle of beneficence guides the decision maker to do what is right and
good. This principle stipulates that ethical theories should strive to achieve greatest amount of
good because people benefit from the most good.
ii. Least Harm: This theory deals with situations in which no choice appears beneficial. In such
cases, decision makers seek to choose to do the least harm possible and to do harm to the
fewest people.
iii. Utilitarian: This is a normative ethical theory that places the locus of right and wrong solely on
the outcome or consequences of choosing one action/policy over other. As such, it moves beyond
the scope of one’s own interest and takes into account the interest of others.
iv. Autonomy: This principle states that decision making should focus on allowing people to be
autonomous; that is, to be able to make decisions that apply to their own workplace or lives. In
other words, people should have control over their own selves as much as possible because they
are the only people who completely understand their chosen type of work/life style.
v. Justice: The justice ethical principle states that decision makers should focus on actions that
are fair to all those involved. This means that ethical decisions should be consistent with the
ethical theory unless extenuating circumstances that can be justified and exist in the case. This

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 also means that cases with extenuating circumstances must contain a significant and vital
difference from other similar cases that justify the inconsistent decision.

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short

Note)
The schedule VI of the Companies Act, 2013 also states to
uphold ethical standards by independent directors. It states
Independent Directors shall:
 uphold ethical standards of integrity and probity
 act objectively and constructively while exercising his duties
 exercise his responsibilities in a bona fide manner in the
interest of the company

5. PROFESSIONAL ETHICS
i. Ethics arises from three main factors, moral attitudes as a result of consciousness or awareness-
raising, culture as a result of education and the use of know-how and the application of standards
as a result of learning and training.
ii. The professionals being exclusive custodian of expertise need to profess high ethical and moral
values and to redeem their noble traditions.
iii. Every professional should desire for introspection and a dynamic movement to promote a value
revolution with deeper conviction and creative consciousness, leading himself to be good
professional.
iv. The principles which govern the conduct of a professional broadly encompasses, Integrity,
Professional independence, Professional competence, Objectivity, Ethical behaviour, Conformance
to technical standards, if any and Confidentiality of information acquired in the course of
professional work.
v. The professionals are expected to conduct themselves in such a manned so as to uphold the
grace, dignity and professional standing of the institute.

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 In Re Mahesh Chand Agrawal
the case describes a legal proceeding where a registered valuer, Mr. M had
concealed charges and information related to FIRs filed against him by the CBI,
which was in violation of professional ethics and relevant regulations. As a result,
his registration as a registered valuer was recommended for cancellation..

Companies in the India have begun to fulfill their corporate social responsibility, either voluntarily
or in compliance with mandates or statutes, respecting social ethics, thereby, setting up healthy
and sensible corporate ethics on the following parameters:
 Complying with the laws of land where business is conducted and engaging in fair practices in
the light of social ethics.
 Aiming to become a sensible corporate citizen and striving for harmony with local society.
 Disclosing information in a timely manner and engaging in honest and transparent
communications mode.
 Protecting the irreplaceable earth and contributing to the preservation of the environment.
 Respecting fundamental human rights and individuality and building up a corporate culture with
a broad vision which fosters the spirit of corporate ethics.

6. MODEL ETHICAL PRINCIPLES FOR COMPANY SECRETARIES

i. Professionalism is the, conduct, aim, value or quality that characterize or marks a profession or
professional person; it implies quality of workmanship or service.
ii. Professionals like the Company Secretaries are highly valued by their profession. For any
professional the below can be the Golden Rules of Ethics for Professionals.
iii. It is recommended to apply these Golden Rules of Professionalism for enjoying a reputable,
professional and prosperous career in providing service to the client/ organization:

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 Strive for excellence: This is the first step to achieving greatness in whatever endeavor one
undertakes; it is the quality that marks one’s work to stand-out. Excellence is a quality of
service which is remarkably good and so it surpasses ordinary standards, it should be made a
habit to make a good impression on clients and colleagues.

 Be trustworthy: In today’s society trust is an issue and one who exhibits trustworthiness is on
a fast track to professionalism. It is all about fulfilling an assigned task, not letting down the
client’s expectations, it is being dependable and reliable when called upon to deliver service. In
order to earn this trust, worthiness and integrity it must be sustainably proven over a time-
span.

 Be accountable: It implies that one should be able to stand tall and be counted upon for all
actions undertaken; this is also construed as a quality of being credible and responsible for
actions performed and their consequences - good or bad.
 Be courteous and respectful: Courteousness is more than being friendly, polite and well-
mannered with a gracious consideration towards others. It makes social interactions in the
workplace run smoothly; avoid conflicts and earn respect. Respect is a positive feeling of esteem
or deference for a person or organization; it is built over span of time and can be lost with one
single inconsiderate action; continual courteous interaction is required to be maintained to
enhance the respect gained.
 Be honest, open and transparent: Honesty is a facet of moral character that connotes positive
and virtuous attributes such as truthfulness, straightforwardness, good conduct, loyalty, fairness,
sincerity, openness in communication and generally operating in a manner for others to notice
the perfection with which actions are performed; a virtue highly appreciated and valued by
clients, employers and colleagues because it builds trust and personal reputation.

 Be competent and improve continually: Competence is the core ability of a professional to do

a job properly. It is a combination of quality of knowledge, skill, acumen and behaviour used to
perform. Competency grows through experience and to the extent one is willing to learn and
adapt. Continuous self-development is a pre-requisite in offering professional service at all times.

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 Be ethical: Ethical behaviour is acting within certain moral codes in accordance with the
generally accepted code of conduct or rules. It is always safe for a professional to “play by the
rules” where the rule book is inadequate; and acting with a clear moral conscience is the right
way to adopt.

 High Integrity: Honourable action is behaving in a way that portrays “nobility of soul,
magnanimity of person” derived from virtuous conduct and integrity in adherence to the dictum
of “wholeness or completeness” of character in line with certain values, beliefs and principles
with consistency in action and outcome.

 Be respectful of confidentiality: Confidentiality is respecting the set of rules or promises that

restricts one from further or unauthorized dissemination of information. Over the course of one’s
career, information will come to be possessed in strict confidence - either from the organization
or from colleagues; and it is important to be true to such confidentiality. One gains trust and
respect of those confiding and enhances professional credibility within the organization.

 Set Good Examples: Applying the foregoing rules helps one to improve traits of professionalism
by imparting knowledge to those around and below the rank and file. One ought to show and
lead by setting good exemplary life all along. Modern corporate governance rightly demands a
comprehensive, interdisciplinary approach to the management and control of companies.
Therefore, professionals need to practice with a sense of responsibility the evolving principles of
good corporate governance across the globe on a continual basis.

The ICSA (UK) Code of Professional Ethics and Conduct comprises four core principles to
which all Fellows, Associates, graduates, students and affiliated members registered need to
follow.

1. Integrity
Integrity is the quality of being honest and having strong moral principles. The term has been
described judicially as connoting “moral soundness, rectitude, and steady adherence to an ethical

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 code”. It requires that members are impartial, independent and informed. Displaying integrity
includes:
 acting professionally in your business dealings;
 displaying a proper understanding and appreciation of your role and responsibilities;
 being respectful of others at all times;
 not accepting or offering improper gifts, hospitality or other inducements;
 avoiding conflicts of interest, or, where a conflict arises, making sure that everyone involved is
aware of the interest;
 recognising and considering the ethical issues arising from, and the interests of the groups or
 stakeholders who may be affected by, your choices, decisions and actions;
 avoiding involvement in any unethical, misleading, illegal or covert behaviour;
 not knowingly ignoring (or turning a blind eye to) unethical, misleading, illegal or obscure
behaviour;
 and avoiding bringing the profession into disrepute.

2. High standard of service/professional competence

A high standard of service or professional competence should be delivered throughout one’s
working life. This involves an understanding of relevant technical, professional and business
developments. Professional competence also takes account of the wider implications and
expectations of our members. This includes:
 maintaining professional knowledge and skills which are required to perform the role which you
are employed to carry out;
 completing CPD as required by the UKRIAT Committee (this does not apply to students);
communicating effectively and promptly with your clients, colleagues and stakeholders to ensure
that they are able to make informed decisions;
 acting within your level of competence; if this requires an admission to your client that you are
unable to perform a task then this should be communicated effectively;
 upholding the requirements of the Royal Charter and byelaws made under it;
 and respecting the confidentiality of information acquired through professional relationships save
where there is a legal or regulatory requirement to disclose or report that information.

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3. Transparency
Transparency requires that members are clear and open in their business and professional
conduct. This includes:
 being open and frank in any business dealings;
 not being underhand in any business transaction;
 and treating all work as if it was reported in the public domain.

4. Professional behaviour
Professional behaviour requires that members act in a way which conforms to the relevant laws
of the jurisdiction in which they are residing and/or undertaking business transactions. It requires
them also to pay regard to all regulations which may have a bearing on their actions and to
adhere to the byelaws, specifically byelaw which states that the following actions or inactions
may result in disciplinary proceedings:
 becoming bankrupt or insolvent;
 being convicted of an offence which might bring discredit on the Institute or the profession;
failing to uphold the code of professional conduct and ethics;
 behaving, by doing something or not doing something, in a way considered by the Disciplinary
Tribunal to bring the Institute or the profession into disrepute;
 disobeying any decisions of the Council or of one of its Divisional Committees;
 breaking any of the Institute’s byelaws or Charter or Regulations;
 failing to comply or co-operate with a disciplinary investigation;
 or failing to comply with a decision or any conditions made by a Disciplinary or Appeal Tribunal.

The Singapore Association of the Institute of Chartered Secretaries and Administrators (ICSA)
requires members to observe the highest standards of professional conduct and ethical
behaviour in all their activities.
As the conduct of an individual member can reflect upon the wider profession of corporate
management and the Institute’s membership as a whole, the Code sets out what are deemed
to be appropriate standards of professional conduct:
 Members are required to uphold the Institute’s Charter and comply with the Bye-laws.

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 Members shall at all times be cognisant of their responsibilities as professional people toward
the wider community.
 Members shall at all times safeguard the interests of their employers, colleagues or clients
provided that Members shall not knowingly be a party to any illegal or unethical activity.
 Members shall not enter into any agreement or undertake any activity which may be in conflict
with the legitimate interest of their employer or client or which would prejudice the performance
of their professional duties.
 Members shall not use any confidential information obtained in the performance of their duties
for personal gain nor in a manner which would be detrimental to their employer, client or any
other party.
 Members shall ensure the currency of their knowledge, skills and technical competencies in
relation to their professional activities.
 Members shall refrain from conduct or action which detracts from the reputation of the Institute.

Recent disciplinary case studies on values, ethics and professional conduct:

1. In 2021, the Securities and Exchange Board of India (SEBI) barred a company secretary from
practicing for three years for submitting false documents and failing to conduct due diligence
in relation to the issuance of securities by a company bwcausw CS violated the code of conduct
for company secretaries.
2. In 2020 SEBI on receipt of an examination report from the National Stock Exchange (NSE),
conducted investigation in the dealings in the scrip of EFSL(Edelweiss Financial Services
Limited) in order to examine possible violations of SEBI (Prohibition of Insider Trading)
Regulations, for the period of January 2017 to April, 2017. , it was observed that ECap Equities,
a wholly-owned subsidiary of EFSL, had acquired Alternative Investment Market Advisors Pvt
Ltd (AIMIN), a financial technology company, on April 5, 2017, by entering into a share
purchase agreement. The same was disclosed by EFSL to the NSE and the BSE on the same
day. The acquisition of AIMIN by ECap was a pricesensitive information that had come into
existence on January 25, 2017, upon signing of term sheet. However, Mr. Renganathan, being
the compliance officer of the company, failed to close the trading window during the period of
January 25, 2017 to April 5, 2017. Hence, SEBI barred company secretary from practicing for
three years and imposed a penalty of 5 Lacs.

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3. In January 2022, the Disciplinary Committee of ICSI imposed a penalty of R. 10000 and
reprimanded the company secretary on account of founding him guilty of professional
misconduct under clause (7) of Part II of the Second schedule to the Companies Secretaries
Act, 1980 for not exercising due diligence while issuing compliance certificate by stating that
there were no allotment/transfer/transmission of securities during the financial year and
wrongly certified nominal value per share of the company.
4. In 2018, the Institute of Company Secretaries of India (ICSI) suspended a company secretary
from its membership for a period of three months for professional misconduct. The company
secretary was found to have issued a certificate without proper verification of documents, which
violated the ICSI’s code of conduct.
5. In 2021, the Securities and Exchange Board of India (SEBI) imposed a penalty of Rs 10 lakhs
on a company secretary for failing to disclose certain material information to the stock
exchanges in a timely manner. The company secretary had violated the SEBI’s listing obligations
and disclosure requirements regulations.
6. In 2020, the Institute of Company Secretaries of India (ICSI) suspended a company secretary
from its membership for three months for professional misconduct. The company secretary was
found to have violated the ICSI’s code of conduct and professional ethics, including making
false statements and failing to maintain the confidentiality of client information

Ethical Decision Worksheet:

This worksheet is designed for assisting in making ethically responsible decision:

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 Is there an ethical Understand the
Start
question? facts

Understand the Check your

Test your opinion
consequence options available

Explain your Reflect an

Take the action
option outcome

i. Analyse the situation- Analyse the situation? Check whether you have choices? What is at
stake?
ii. Understand the facts- What are the facts? Is anything required to be done?
iii. Understand the options available- What options are available? Do any
Rule/regulation/laws/professional ethics influence your options?
iv. Understand the consequences of the options- What are the consequences of each available
option? Who will be affected by each available option? How will the parties be affected by
these option?
v. Test the option you plan to take- Identify the best option. Review the difficulty level of
preferred option: Is the option difficult for others to understand? Can I justify my actions on
that option? How to implement the decision?
vi. Explain the option you have decided upon- Explain the actions – you should be able to
justify them in a logical manner You should have kept records of your decision.
vii. Act on the chosen option- Make a plan to implement your decision?
viii. Reflect on the outcome- How did my decision turn out? Who was affected and how?

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7. ICSI CODE OF CONDUCT
The purpose of Code of Conduct is to lay down certain ground rules to promote ethical conduct
and good practices to deter wrong-doing and also to make the relationship mutually pleasant
and productive and to enhance the sense of community with common values and mission.
The matters covered under the Code are of utmost importance to the Institute of Company
Secretaries of India (“Institute”), its members, students and other stakeholders including
Government, Regulators, Trade and Industry and other users of services of the Company
Secretaries.

Fundamental duties of Professional

Not exploiting undue No Misuse of

Maintaining
Fair Dealing Professional Mistakes of Other
Confidentiality
Opportunity Solicitor

Making Inadvertent Honour Undertakings Maintaining Integrity

Avoid Conflicts
Disclosure of professionals of evidence

Due care while Promote Anti-

Dealing with other
dealing with Client discrimination and Dealing with Media
persons
documents Anti-Harassment

1. Fair Dealing
Each member of the institute should endeavour to deal fairly with the Clients, other members
and students. No Member of the Institute should take unfair advantage of anyone through
manipulation, concealment, abuse of privileged information, misrepresentation of material facts,
or any other unfair dealing practice.
A Professional must also:
 act in the best interests of a client in any matter in which he represents the client;
 be honest and courteous in all dealings in the course of legal practice;

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 deliver legal services competently, diligently and as promptly as reasonably possible;
 avoid any compromise to their integrity and professional independence;
 and comply with applicable Rules and the law.

2. Professional Opportunity
The professional should not exploit for their own personal gain, opportunities that are discovered
through third party, information or position unless the opportunity is disclosed fully in writing
and permits to pursue such opportunity.

3. Mistakes of Other Solicitor

A professional must not take unfair advantage of the obvious error of another professional or
other person, if to do so would obtain for a client a benefit which has no supportable foundation
in law or fact.

4. Confidentiality
The client’s confidential information is a valuable asset. All confidential information must be
used for the benefit and in the best interest of client. Every professional must safeguard the
confidentiality as above. The confidential information, discussions, documents and data should
be dealt with utmost care and should not be shared or passed on to any person/outsider under
any circumstances.

A professional must not disclose any information which is confidential to a client and acquired
by him during the client’s engagement to any person who is not:
− a partner, promoter, director, or employee of the firm of the professional; or
− a professional or an employee of, or person otherwise engaged by, the firm of professional or by
an associated entity for the purposes of delivering or administering legal services in relation to
the client, except the following:
 the client expressly or impliedly authorises disclosure;
 the professional is permitted or is compelled by law to disclose;
 the professional discloses the information in a confidential setting, for the sole purpose of
obtaining advice in connection with the solicitor’s legal or ethical obligations;

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  the professional discloses the information for the sole purpose of avoiding the probable
commission of a serious criminal offence;
 the professional discloses the information for the purpose of preventing imminent serious physical
harm to the client or to another person; or the information is disclosed to the insurer of the
professional or its associated entity.

5. Inadvertent Disclosure
A professional who reads part or all of the confidential material before becoming aware of its
confidential status must:
 notify the same or the other person immediately;
 and not read any more of the material. If a professional is instructed by a client to read
confidential material received in error, the solicitor must refuse to do so.

6. Conflicts
Each professional should avoid any conflict of interests with that of the client. A ‘conflict of
interest’ exists where the interests or benefits of one person or entity conflict with the interests
or benefits of the client. The professional must avoid situations involving actual or potential
conflict of interest. Any situation that involves or may involve a conflict of interest must be
promptly disclosed.
A professional must not act for a client where there is a conflict between the duty to serve the
best interests of a client.
A professional must not borrow any money, nor assist an associate to borrow money, receiving
a financial benefit from a third party in relation to any dealing where the professional represents
a client, or from another service provider to whom a client has been referred by the professional,
provided that the professional advises the client:
(i) that a commission or benefit is or may be payable to the professional in respect of the dealing
or referral and the nature of that commission or benefit;
(ii) that the client may refuse any referral and the client has given informed consent to the
commission or benefit received or which may be received.

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7. Undertakings
A professional who has given an undertaking in the course of legal practice must honour that
undertaking and ensure the timely and effective performance of the undertaking, unless released
by the recipient or by a court of competent jurisdiction.

8. Integrity of evidence
A professional must not:
 advise or suggest to a witness that false or misleading evidence should be given nor condone
another person doing so;
 or coach a witness by advising what answers the witness should give to questions which might
be asked;

A professional will not have breached by:

 expressing a general admonition to tell the truth;
 questioning and testing in conference the version of evidence to be given by a prospective
witness;
 or drawing the witness’s attention to inconsistencies or other difficulties with the evidence, but
must not encourage the witness to give evidence different from the evidence which the witness
believes to be true.

9. Client documents
A professional with designated responsibility for a client’s matter, must ensure that, upon
completion or termination of the law practice’s engagement:
 the client or former client, or another person authorised by the client or former client, is given
any client documents, (or if they are electronic documents copies of those documents), as soon
as reasonably possible when requested to do so by the client, unless there is an effective lien.
 a professional may destroy client documents after a period of 7 years has elapsed since the
completion or termination of the engagement, except where there are client instructions or
legislation to the contrary.

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10. Dealing with other persons
A professional must not in any action or communication associated with representing a client:
 make any statement which grossly exceeds the legitimate assertion of the rights or entitlements
of the client, and which misleads or intimidates the other person;
 threaten the institution of criminal or disciplinary proceedings against the other person if a civil
liability to the client is not satisfied; or
 use tactics that go beyond legitimate advocacy and which are primarily designed to embarrass
or frustrate another person.
 In the conduct or promotion of a professional practice, the solicitor must not seek instructions
for the provision of legal services in a manner likely to oppress or harass a person who, by reason
of some recent trauma or injury, or other circumstances, is, or might reasonably be expected to
be, at a significant disadvantage in dealing with the solicitor at the time when the instructions
are sought.

11. Anti- discrimination and Harassment

A professional must not in the course of practice, engage in conduct which constitutes:
 discrimination;
 sexual harassment;
 workplace bullying – “bully by proxy”.

12. Dealing with the Media

 A professional must not publish or take steps towards the publication of any material concerning
current proceedings which may prejudice a fair trial or the administration of justice.
 To adhere to practice promotion, advertising and solicitation rules, codes and legislation in use
and avoid Conflicts of interest.
 Maintaining public confidence and faith in the profession.

8. ETHICAL DILEMMA

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 i. Dilemma means a situation in which a difficult choice has to be made between two courses of
action, either of which entails contravening a moral principle.
ii. An ethical dilemma or ethical paradox is a decisionmaking problem between two possible moral
imperatives, neither of which is unambiguously acceptable or preferable.
iii. An “absolute” or “pure” ethical dilemma only occurs when two (or more) ethical standards
apply to a situation but are in conflict with each other.
iv. In ethical dilemma, if we obey one decision then it would bring about disobeying another.
v. Ethical dilemma is also known as moral dilemma.
vi. Ethical dilemmas make the situations too difficult. A person has to choose only one way from
two of them - a moral or an immoral way.
vii. Ethical dilemmas can be seen everywhere in daily lives. However, everybody has their own
particular experience towards ethical dilemma.

Some examples of ethical dilemmas include:

 A secretary discovers her boss has been laundering money, and she must decide whether or not
to turn him in.
 A doctor refuses to give a terminal patient morphine, but the nurse can see the patient is in
agony.
 While responding to a domestic violence call, a police officer finds out that the attacker is the
brother of the police chief, and the police chief tells the officer to “make it go away”
 A government contractor discovers that intelligence agencies have been spying on its citizens
illegally, but is bound by contract and legalities to keep his confidentiality about the discovery.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short Note)
Narayana Murthy Committee, ‘Report of the SEBI Committee on Corporate
Governance’, has conceptualized the concept of corporate governance,
“Corporate Governance is about ethical conduct in business. Ethics is concerned with
the code of values and principles that enables a person to choose between right and
wrong, and therefore, select from alternative courses of action. Further, ethical
dilemmas arise from conflicting interests of the parties involved. In this regard,
managers make decisions based on a set of principles influenced by the values, context
and culture of the organization.

Common Causes of Loss of Ethics and Values

1. Unclear Policies in some cases: Managers and employees exhibit poor ethical behaviour because
the company does not offer a clear model of ethics. Some businesses have no formal ethical
policy documents and offer no guidance at all.

2. Conflict between Organisational & Individual Goal: When the Organizational & Individual Goals
overlap, it becomes difficult to balance things. The problem arises when one thing has to be
sacrificed for the sake of others. To achieve Organisational goal, Individual goal, has to be
compromised and vice versa so this leads to Ethical Dilemma.

3. Cultural Value & Background: Every individual decision is based on background. For some people
it may be ethical to give priority for self and then decide about others but for some others it
may be other way round. Thus background & value system creates the ethical Dilemma.

4. Situation when a decision is taken by a manager: Each Company’s culture is different, but
some companies stress profits and results above all. In these environments, management may
turn a blind eye to ethical breaches if a worker produces results, given the firm’s mentality of
“the end justifies the means.” are not beneficial for all but will benefit the company alone.
Example - Automation of a plant.

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5. Dynamic & Different Human Nature: Ethical Dilemma arises due to difference of the opinion
among the group of people. Whatever is ethical for one person, may be unethical for another.

6. Ambition and Discrimination: Individual workers may be under financial pressure or simply
hunger for recognition. If they can’t get the rewards they seek through accepted channels, they
may be desperate enough to do something unethical, such as falsifying numbers or taking credit
for another person’s work to get ahead. Though diversity is an important part of business, some
people may not be comfortable with people from different backgrounds and possibly be reluctant
to treat them fairly. This kind of discrimination is not only unethical but illegal and still remains
common.

7. Pressure from Management: Each company’s culture is different, but some companies stress
profits and results above all. In these environments, management may turn a blind eye to ethical
breaches if a worker produces results, given the firm’s mentality of “the end justifies the
means.”

8. Negotiation Skills: While these factors can cause ethical dilemmas for workers within their own
companies, doing business with other firms can also present opportunities for breaches. Pressure
to get the very best deal or price from another business can cause some workers to negotiate
in bad faith or lie to get a concession.

9. Conflicting Values: Ethical dilemmas may occur because of conflicting values between two or
more people in an organization. One manager may value product quality over quantity while
another may value thriftiness. These managers may discuss changing to a cheaper supplier for
a material used in production because of the potential to save money. However, the first manager
may object because he knows the cheaper material will produce a product of lesser quality, which
is not good for customers. Without a culture of shared values, the least ethical choice may be
approved.

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 Organisation for Economic Co-operation and Development (OECD) has also described various
principles on “Corporate Governance” one of these Principle includes Disclosure and Transparency,
which states “The Corporate Governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company.”

An Organization Transparency checklist includes the below mentioned traits:

 Board meetings (Dates, times and locations of Board meetings are conveyed at least one week
in advance of the meetings)
 Financial disclosure statements (Non-profits should consider posting their audited financial
statements on their website)
 Freedom of information legislation (Rules that guarantee access to data held by the state; they
establish a “right-to-know” legal process where requests can be made for government-held
information)
 Budgetary reviews
 Annual audits
 Annual Reports (Posted on the organization’s website for easy access)
 Strategic plans and priorities
 Board of Directors and names of key staff as well as their contact information (Posted on the
organization’s website)
 Straight talking leadership
 Open culture and operations (many voices on behalf of the organization)
 Disclosed partnerships
 Frank, open communications including the good and bad
 Core values & Code of conduct.

9. HOW TO RESOLVE ETHICAL DILEMMA

Think about outcomes if you find yourself in a situation when this approach doesn’t work, you
can resolve a right versus right dilemma by finding the highest “right.” Kidder wrote that there
are three ways to make the best choice when faced with these types of dilemmas:

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 Resolving Ethical dilemma

Ends-based: Select the option Rule-based: Choose as if you’reCare-based: Choose as if you

that generates the most good creating a universal were the one most affected
for the most people. standard. Follow the standard by your decision. Once you’ve
that you want others to follow. identified an ethical right versus
right dilemma, lay out
your options according to these
three principles.
One approach will immediately
present itself as the
“most right”.

10. STRATEGY FOR OVERCOMING FROM THE EVILS

For any organization the systematic and rigorous approach coupled with efforts is necessary to
keep governance standards at the highest level by nurturing of ethical values and standards well
embedded from the inception of the organization. It needs further conscious cultivation during
the growth phase.
It is equally important to remember that organizations or institutions act through its own
employees. Therefore, the human beings need proper and rigorous grooming. Thus, it is necessary
that any attempt to address ethical issues is to be handled by human beings and not machines.
The human traits and characteristics shape human behavior and a few probable solutions are
explained below:
i. Satisfaction
To achieve happiness it is essential that the culture of ‘being satisfied’ is developed. However, the
most challenging and unanswerable question on satisfaction is “How much is Enough”. The issue
is very difficult to resolve especially in the corporate field where expansion is the prime direction
in which it is supposed to move; yet it is the need of the hour to understand and remain satisfied
with what is achieved within the validly available means.

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 ii. Ends not to justify the means
It is often said that the results matter and what was done to achieve the same is of no
consequence. The statement may appear encouraging; but reading between the lines it is not the
intention to achieve results by compromising ethics and values. The need of compromising ethics
and values arises when there is a dearth of valid means to achieve the end-result. The thirst to
succeed, vaulting ambition and flawed education are equally responsible elements. It is essential
to note that however worth the cause may be, the means to achieve the same should also be
equally valid. An irregular or an unethical action leading to a good outcome may not necessarily
justify the method of achieving the goal.

iii. Ethical Leadership

The Professional should lead the organisation like Krishna as he led Pandvas to success by guiding
them to fight morally. It is the duty of the leader driving the organization to ensure use of proper
and ethical means in his conduct. It is equally essential that the leader walks the talk and sets
an example of good governance and ethical leadership.

iv. Character Professional should always consider the old idiom:

If Character Is Lost Everything Is Lost. The idiom amply highlights the importance of good
character. Character is generally built or earned by virtues like courage, honesty, values and ethics.
Great leaders and eminent personalities are judged by their character. A good character is
synonymous to reliability.

Recent Cases on Values, Ethics and Professional conduct:

1. Punjab National Bank Case
Punjab National Bank is one of the largest public sector banks in India. The scam of Rs. 11,300
crores in the Punjab National Bank scam has come into the limelight. The PNB scam and
irregularities, forgery commenced in the year 2011 and continued for six long years with the
knowledge of a few banking officials of PNB. It is a case where Letter of Undertaking (LOU)
from Punjab National Bank was taken by Nirav Modi without having a sanctioned credit limit or

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 collaterals. The dispute mainly started due to illegal LOUs issued to Nirav Modi by few PNB
banking officials.

The chronological dates on which the events and transaction concerning the scam took place is
briefed as under:
 Punjab National Bank filed an FIR against Nirav Modi, Mehul Chowskhi and other charged with
criminal conspiracy and cheating amounting to the tune Rs 11,300 Crores.
 Central Bureau of Investigation (CBI) was handed over the investigation into the matter.
 The Enforcement Directorate (ED) had registered a money laundering case against Nirav Modi
and others under the provisions of PMLA based on the FIR registered by CBI under Sections 120-
B r/w 420 of IPC, 1860 read with Section 13(2) read with 13(1)(d) of PC Act, 1988
 The Enforcement Directorate seized some movable assets like diamond, gold and jewellery worth
Rs. 56.74 billion from the house of Nirav Modi and his office CBI after an investigation into the
matter arrested two employees of Punjab National Bank and detained one representation of Nirav
Modi Group. Simultaneously, Government of India suspended passport of Nirav Modi and Mehul
Choskwi for the involvement in the PNB Scam.

 Subsequently, the Central Bureau of Investigation arrested the Chief Financial Officer (CFO) and
two Senior Executives of Nirav Modi firm. It also sealed the Nirav Modi farmhouse at Alibaug,
Mumbai.
 CBI seized nine luxurious cars which belong to Nirav Modi and his firm which worth crores of
money.
 The Magistrate Court issued first bailable arrest warrant against Nirav Modi and Mehul Chowski.
Enforcement Directorate on the same day filed a petition before the Special Court, Mumbai for
seeking issuance of a non– bailable warrant (NBW) against the diamantaire – Nirav Modi and
his firm.
 Enforcement Directorate moves before the Special Court to issue extradition proceeding against
Nirav Modi.
 Government of India sent a letter requesting the UK authorities to initiate extradition proceeding
against Nirav Modi.

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 CBI officials requested Interpol Manchester to detain Nirav Modi about Nirav Modi presence in
the country.
 UK authorities confirm the presence of the accused – Nirav Modi in the country.
 In a British newspaper named as UK Daily Telegraph which published a report on Nirav Modi
presence and roaming in London streets. After knowing the incident Enforcement Directorate
requested the Government of UK to take further action on the extradition proceeding of Nirav
Modi in the UK court.
 Government of UK took action on the request of the Government of India and the Westminister
Court, London issued an arrest warrant against Nirav Modi Nirav Modi was arrested in London by
Scotland Yard Officers and produced before the Westminister Court. He applied for which was
rejected by the Court. The accused Nirav Modi was sent to Her Majesty’s Prison (HMP),
Wandsworth till 29th March, 2019.
 The Westminister Court rejected the bail petition of the accused /fugitive offender – Nirav Modi
on the ground that he may not appear before the Court on the fixed dates for further hearing of
the matter. ( 29th March ,2019)
 After the plea made by Enforcement Directorate, Nirav Modi has been declared as Fugitive
Offender by the Mumbai Court under the Fugitive Offender Act ,2018. Nirav Modi is currently in
Wandsworth Prison in London, from where he is fighting for extradition charges.
 Action taken by RBI after detection of PNB Fraud Reserve Bank of India discontinued the practice
of LOUs/ FLCs for trade credits for imports into India.
 RBI also ordered all the banks to reconcile transactions in Nostro accounts on a real-time basis
so that unrecorded and illegal transactions can be identified immediately.

2. YES Bank Crisis

YES Bank was once the country’s fifth-largest private lender by market capitalization. YES Bank
was founded by Rana Kapoor and Ashok Kapoor in 2004. Fraud led to the unexpected and sudden
fall of YES Bank which was emerging as a good competition to other private banks. The bank
had a differentiated business model, with focus on technology, branches network, retail loans etc.
and was ranked number 1 bank in the Business TodayKPMG Best Banks Annual Survey 2008.

What has led to a crisis at YES Bank?

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 i. Promoter of the bank, Rana Kapoor had, over a short period of time, built an overwhelming image
in the industry and had developed contacts with top industrialists of the country.
ii. Most of the decision making on key matters including large loans was centralised in his hands.
He had the ambition to make YES Bank the largest private bank of the country. It was this
ambition which perhaps led to the sharp downfall in fortunes of the bank, steeper than its rise
to an eminent position in the banking industry.
iii. The bank’s loan book on March 31, 2014, was Rs 55,633 crore, and its deposits were Rs 74,192
crore. Since then, the loan book has grown to nearly four times as much, at Rs 2.25 trillion as
on September 30, 2019.
iv. While deposit growth failed to keep pace and increased at less than three times to Rs 2.10 trillion.
The bank’s asset quality also worsened and it came under regulator RBI’s scanner.
v. Yes bank was lending aggressively disregarding the risk limits and also under-reporting the bad
loans. They were lending to corporates that were already in very risky businesses and facing some
challenges in their business like the Anil Ambani-led Reliance group, DHFL and IL&FS. All this
happened in Rana Kapoor’s tenure.
vi. The exposure of loans to such bad performing companies was huge in Yes Bank’s case, and to
add up they were hiding the NPAs or misreporting the same.
vii. After the above fiasco, Ravneet Gill took charge of Yes Bank but struggled to revive as deposits
kept depleting and he wasn’t able to raise enough capital given the loss of confidence in the
market. The tipping point came when one of the bank’s independent directors Uttam Prakash
Agarwal, resigned from the board in January 2020 citing governance issues.

Several reasons behind the crisis of YES bank were:

a. NPAs: YES Bank ran into trouble following the central bank’s asset quality reviews in 2017 and
2018, which led to a sharp increase in its impaired loans ratio and uncovered significant governance
lapses that led to a complete change of management. The bank subsequently struggled to address
its capitalisation issues. YES Bank suffered a dramatic doubling in its gross NPAs between April
and September 2019 to Rs 17,134 crore.
b. NBFC crisis: The crisis in India’s shadow-banking space started with the unravelling of
Infrastructure Leasing & Financial Services (IL&FS) and then extended to Dewan Housing Finance
Limited (DHFL). YES Bank’s total exposure to IL&FS and DHFL was 11.5 per cent as of September

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 2019. In April 2019, the bank had classified about Rs 10,000 crore of its exposures, representing
4.1 per cent of its total loans under watch list, as potential non-performing loans over the next
12 months.
c. Governance issue: YES Bank faced several governance issues that led to its decline. On January
10, independent director Uttam Prakash Agarwal quit citing deteriorating corporate governance
standards and compliance failure at the lender. In 2018-19, the bank under-reported NPAs to the
tune of Rs 3,277 crore, prompting RBI to dispatch R Gandhi, one of its former deputy governors,
to the board of the bank. Rana Kapoor, who was instrumental in building YES Bank from scratch,
was asked to step down as chief executive in January 2019.
d. Excessive withdrawals: YES Bank’s financial condition dissuaded many depositors from keeping
funds in the bank over a longer term. The bank showed a steady withdrawal of deposits, which
burdened its balance sheet and added to its woes. The bank had a deposit book of Rs 2.09 trillion
at the end of September 2019.

Steps taken by RBI against YES Bank

i. RBI has taken over the YES Bank management
ii. The central has imposed a moratorium on the lender
iii. RBI announced a draft ‘Scheme of Reconstruction’ that entails SBI investing capital to acquire a
49% stake in the restructured private lender.
3. Infrastructure Leasing & Financial Services Limited (IL&FS) Case
i. IL&FS is a systemically important Core Investment Company with the Reserve Bank of India and
is engaged in the business of giving loans and advances to its group companies (and holding an
investment in such companies).
ii. IL&FS has a large number of group companies across various sectors such as Energy,
Transportation, Financial Services. IL&FS Group, which had approximately over Rs. 91,000 crores in
debt, was facing a severe liquidity crisis. Between July 2018 and September 2018, two of the
subsidiaries of IL&FS Group reported having trouble in paying back loans and inter- corporate
deposits to banks/lenders.
iii. In July 2018, the road arm of IL&FS was facing difficulty in making repayments due on its bonds.
Further, in early September 2018, one of the subsidiaries of IL&FS Group was unable to repay a
short-term loan of Rs. 1,000 crore taken from Small Industries Development Bank of India (SIDBI).

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 Also, certain group companies defaulted in repayments of various short and long-term deposits,
intercorporate deposits, and commercial papers.
iv. IL&FS failed continuously to service its debt and the imminent possibility of a contagion effect
in the financial market led the Central Government to move an application under Sections 241
and 242 of the Companies Act, 2013 before the NCLT (National Company law Tribunal). Section
241 deals with the cases of mismanagement and oppression by company’s management.
v. The NCLT suspended IL&FS board members and management and restrained the suspended
members from alienating their personal assets.
vi. In view of the prima facie findings of ICAI and the SFIO interim report dated November 30, 2018,
the Central Government filed a petition before the NCLT, Mumbai Bench under Section 130 of
the Companies Act, seeking re-opening of the books of account of IL&FS and its group companies
for the past five financial years.
vii. The NCLT vide its judgment dated January 1, 2019, allowed the petition of the Central Government.
viii. Upon an application filed by PTC India Financial Services Ltd, the NCLAT has, without going into
the rival contention of the parties, made it clear that due to non-payment of dues by IL&FS or
its entities including the ‘Amber Companies’, no financial institution will declare the accounts of
IL&FS or its entities as NonPerforming Assets (NPA) without its prior permission.
ix. By its order dated May 2, 2019, NCLAT allowed the banks to declare as nonperforming assets the
accounts of IL&FS and its group companies that have defaulted on payments. However, the
tribunal clarified that the banks cannot initiate the recovery process and debit money.
x. On May 30, 2019 SFIO submitted a chargesheet against 30 parties, including two auditor firms,
for concealing information by not flagging the alleged criminal conspiracy and misreporting the
financial statements of the IL&FS firms.
xi. MCA moved against the auditors, Deloitte Haskins and Sells as well as BSR and Associates LLP
and their former auditors, under Section 140(5) of the Companies Act, for their role in
“perpetuating the fraud” at IFIN, a subsidiary of IL&FS. The Ministry sought debarment of these
audit firms and their audit partners. It also sought interim attachment of their properties, including
bank accounts and lockers.
xii. On June 4, the Supreme Court allowed the SFIO to reopen and recast accounts of IL&FS and two
of its subsidiary companies for the last five years. The MCA had approached the Supreme Court

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 seeking a vacation of the stay imposed by the Supreme Court through its order passed on April
29.

Reasons for Failure

i. IL&FS hadn’t disclosed bad loans on its books for years despite a big part of its loan book having
soured.
ii. As it was the shadow bank or NBFC, “Unscrupulous, negligent and dormant management decisions
were the main root cause of failure.
iii. Poor fund management and controls as IL&FS lent funds to insolvent entities and troubled
projects.
iv. “Deficient audit” by the auditors as they failed to issue warnings.
v. The auditors did not highlight the Reserve Bank of India’s (RBI’s) inspection report, which had
labelled IFIN as over-leveraged, besides failing to report negative cash flows and adverse key
financial ratios.
vi. RBI or any other entity did not strictly regulated NBFCs. The IL&FS crisis has raised concerns
over the management of such entities.

Steps taken by RBI

i. RBI is constantly monitoring NBFC’s to prevent systemic shocks.
ii. RBI is monitoring top 50 NBFCs more closely. These 50 NBFCs represent 75% of the sector.
iii. Wherever necessary, RBI is making deep dive into their books, their balance sheet and other
numbers.

4. DHFL Case
Dewan Housing Finance Corporation Limited (DHFL) is a leading housing finance company,
headquartered in Mumbai with branches in major cities across India. Mr. Rajesh Kumar Wadhawan
is the Founder of DHFL.
i. DHFL has sanctioned and paid funds in unsecured and dubious loans.

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 ii. Loan amounting to thousands of crores of rupees were given to newly incorporated shell companies.
The said loans were provided without any security or collateral and the proceeds were utilized by
for private asset creation.
iii. DHFL has not adequately disclosed the terms of loan and repayment in the financial statements.
They also ensured that most of the shell companies have hidden the name of the lender i.e.
DHFL.
iv. Approximately 6 lacs dummy accounts were established at one branch, using the names of
borrowers who had already repaid their loans. These accounts were used to issue loans to promoter
firms, which were then used to syphon funds. These loans turned out to be non-recoverable in
the end.
v. The act of DHFL ensured that the recovery of such dubious loans would be impossible since the
companies or their directors themselves do not own any assets.
vi. The promoters and their associates used these dubious loans to acquire personal assets which
were completely ring-fenced from the recovery process since the companies or their directors
themselves do not own any of these assets.
vii. Due to poor Corporate Governance concerns, the Reserve Bank of India (RBI) superseded the
board of debt-laden DHFL.
viii. RBI has initiated the process of resolution of the Company under the Insolvency and Bankruptcy
(Insolvency and Liquidation Proceedings of Finance Service providers and Application to
Adjudicating Authority rules, 2019.
Reasons for failure:
DHFL case is absolute failure of Corporate Governance.
The act of promotors in diversion of loan amounts to shell company without scrutiny or security
shows a complete deviation from the corporate governance policies.

5. Hero MotoCorp
i. The country’s largest two-wheeler maker Hero MotoCorp has sacked around 30 employees for
violation of the company’s code of conduct, These executives were found fudging travel expense
bills, accepting personal favours, gifts and other benefits from some of vendors, suppliers and
dealers in violation of the company’s internal ‘code of conduct’.

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 ii. The executives were given marching orders after “thorough investigations” into the allegations
against them, all due legal procedures were followed before taking the final action.
iii. Third-party independent investigators were appointed to look into these cases once the anomalies
were detected in the activity record of these executives.
iv. Hero MotoCorp’s management was unanimous in its view that the concerned employees could not
continue in the company, once it was established.
v. The employees were given due opportunities to present their cases.
vi. When confronted with evidence, they owned up to the wrongdoing, official said. He, however,
declined to share the names and designations of the sacked employees.

6. Volkswagen’s Emissions Scandal:

i. In 2015, it was discovered that Volkswagen had installed “defeat devices” in its diesel cars that
enabled the vehicles to cheat emissions tests.
ii. Many VW cars being sold in America had a “defeat device” - or software - in diesel engines that
could detect when they were being tested, changing the performance accordingly to improve
results. The German car giant has since admitted cheating emissions tests in the US.
iii. The scandal resulted in a significant fine for the company and criminal charges for several
executives.
iv. The case raised questions about ethical behaviour and values within the automotive industry, as
well as the need for stricter regulations and enforcement.

7. In 2020, the Securities and Exchange Commission (SEC) fined a major financial services company
[VALIC Financial Advisors Inc. (VFA)] for failing to disclose conflicts of interest in its investment
advice. The SEC charged VFA for making false and misleading statements about, and otherwise
failing to disclose, conflicts related to its receipt of millions of dollars of financial benefits from
client mutual fund investments. The SEC found that the company had recommended investments
that generated higher fees for the company, even if they were not in the best interests of their
clients. This violated the company’s fiduciary duty to act in the best interests of their clients.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 6- NON COMPLIANCES, PENALTIES AND ADJUDICATION

1. INTRODUCTION
Regulatory Framework:

Companies The Companies The SEBI Act, The Securities The FEMA Act,
Act, 2013 (Adjudication 1992 Contracts 199 (Regulation)
of Penalties) (Regulation) Act, 1956
Rules, 2014 Act, 1956

i. Non-compliance of law by any section of society will have deleterious effect on the economy,
particularly in the case of economic legislations like the Company Law, FEMA, Income-tax Act
etc. In order to check such tendencies, penal provisions form an integral part of any statute
and they are administered by the courts, tribunals etc.
ii. The Companies Act, 2013(‘Act’) provides for various compliance norms that are essential for
corporate operation and protecting the rights of stakeholders. Violations of such norms lead to
offences with associated penalties and other consequences.
iii. To understand these provisions, it is essential to understand the meaning of terms - civil law
and criminal law:

Particulars Civil Law Criminal Law

Deals with Private disputes or defaults. Offences that are committed

against the society

Objective To resolve or redress and to make good To punish the offender and is
the loss or damages suffered by one party reflection of the public policy
on account of any act or omission by other of a country
party
Power of Court Order can be passed for damage and In these cases the court is
compensation empowered to charge a fine,
imprison the guilty of a crime,
or discharge the defendant.

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 CAN YOU SOLVE THIS?
Companies Act is a Civil Law or a Criminal Law?

Solution:
The Companies Act, 2013 is mixture of both civil as well as criminal provisions. The civil and
criminal provisions under the Act can be identified by observing the language used by Act, for
consequences of non-compliances/contravention of its provisions. The words “liable to penalties”
denote civil nature of non-compliances, whereas the words “punishable with fine and/or
imprisonment and/or both” denote criminal nature of non-compliances

2. NON-COMPLIANCES UNDER COMPANIES ACT, 2013

i. Non-adherence of any of the provisions of the Companies Act attracts fine at the first place
for the delayed compliance and penalty at the second place for the violation / non-adherence
of the provisions of the Act.
ii. Delay in compliances with laws does not means that there is no violation. Violation is continued
unless the company complies with the law and attracts penalty under the provisions of the
Companies Act for the delay.
iii. Companies Act also provides the option of compounding for setting right the complaint, which
can be filed either suo motto or the Regulator could take the required action later.
iv. Difference between fine and penalty

Fine Penalty

A fine is a penalty of money that a court Penalty is “a punishment imposed for

of law or other authority decides has to breaking a law, rule, or contract.” In general
be paid as punishment for a crime or other language a penalty is imposed by an
offense. appropriate authority when a person have
not complied with the law but have not
committed any offence.

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 Fine has been used as punishment for Penalty has been used to indicate civil
criminal offence. offence

Fine can be imposed only by a court of Penalty may be imposed even by an

law. administrative officer

Fine is imposed as a punitive measure Penalty is imposed as a compensatory

measure or for breach of civil obligation.

3. OFFENCES TO BE NON-COGNIZABLE
i. As per Section 2(n) of the Code of Criminal Procedure, 1973 (CrPC), an Offence is defined as
“any act or omission made punishable by any law for the time being in force
ii. A non-cognizable offence as per section 2(l) of the CrPC means an offence for which, a police
officer has no authority to arrest without a warrant.
iii. An Offence in a company may be done either by connivance i.e. when the officers of the
Company are aware of an unlawful act being committed or by inadvertence i.e. when it was
done accidently or unknowingly. Section 439 of the Act prescribes that all the offences under
the Act shall be non-cognizable except for the offences prescribed under section 212(6) i.e.
those involving fraud.
iv. According to section 439 of the act:
 No court shall take cognizance of any offence under this Act which is alleged to have been
committed by any company or any officer thereof, except on the complaint in writing of the
Registrar, a shareholder or a member of the company, or of a person authorised by the Central
Government in that behalf (Provided that the court may take cognizance of offences relating
to issue and transfer of securities and non-payment of dividend, on a complaint in writing, by
a person authorised by the SEBI)
(Provided further that nothing in this sub-section shall apply to a prosecution by a company
of any of its officers.)

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  Where the complainant mentioned above is the Registrar or a person authorised by the Central
Government, the presence of such officer before the Court trying the offences shall not be
necessary unless the court requires his personal attendance at the trial.
 The provisions mentioned above shall not apply to any action taken by the liquidator of a
company in respect of any offence alleged to have been committed in respect of any of the
matters in Chapter XX or in any other provision of this Act relating to winding up of companies.

4. OFFENCES TO BE COGNIZABLE AND NON-BAILABLE UNDER SECTION 212(6)

i. As per Section 2(c) of the Code of Criminal Procedure, 1973 “cognizable offence” means an
offence for which, and a police officer may, in accordance with the First Schedule or under
any other law for the time being in force, arrest without warrant.
ii. Section 212(6) provides, offence covered under section 447 of the Companies Act, 2013 shall
be cognizable and no person accused of any offence under those sections shall be released on
bail or on his own bond unless-
 the Public Prosecutor has been given an opportunity to oppose the application for such release;
and
 where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not likely
to commit any offence while on bail.
iii. A person, who, is under the age of sixteen years or is a woman or is sick or infirm, may be
released on bail, if the Special Court so directs.
iv. However, the Special Court shall not take cognizance of any offence referred to this sub-
section except upon a complaint in writing made by –
 the Director, Serious Fraud Investigation Office;
 or any officer of the Central Government authorized, by a general or special order in writing in
this behalf by that Government.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar
Classification of offences:
 All the offences under Companies Act, 2013 are classified as:
a) fine only, or
b) fine or imprisonment, or
c) fine or imprisonment or both, or
d) imprisonment only or
e) fine and imprisonment
 For the purpose of punishment offences are categorised as
a) offences involving fraud
b) offences not involving fraud
 Offences can be further categorized to
a) Compoundable offences
b) Non-Compoundable offences
 wherever any section of the Act is silent on quantum of punishment or penalty
for non-compliances, Section 450 of the Act comes into play and makes all such
non-compliances are liable to a penalty of ten thousand rupees, and in case of
continuing contravention, with a further penalty of one thousand rupees for each
day after the first during which the contravention continues, subject to a
maximum of two lakh rupees in case of a company and fifty thousand rupees in
case of an officer who is in default or any other person.

5. DECRIMINALISATION OF OFFENCES UNDER THE COMPANIES ACT, 2013- REDUCTION IN

PENALTIES
i. The MCA has constituted a review committee under the chairmanship of Mr. Injeti Srinivas, to
review the offences which are prescribed under the Act and to analyse, examine and peruse
the need to decriminalize some of the offence by making recommendation to the Central

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 Government inter-alia on re-categorisation of certain ‘acts’ punishable as compoundable
offences to ‘acts’ carrying civil liabilities, improvements to be made in the in-house adjudication
mechanism etc.
ii. Based on the recommendations made by the Committee, the Central Government brought in
relevant changes by passing of the Companies (Amendment) Act, 2019.
iii. Despite the ease in penal pressure brought about by the above enactment, the Government
continued to feel the acute need to further liberalise and relax the stringent penal provisions
of the Act.
iv. Considering this the urge to promote ease of doing business and to foster growth of corporates,
led to the constitution of the Company Law Committee in September 2019, which recommended
decriminalisation of Companies Act, 2013.
v. The Companies (Amendment) Act, 2020 removes the imprisonment for certain offenses,
substitutes fine by penalty in and reduces amount of payable as penalty across the board. In
certain minor omissions, etc. penal consequence has been omitted.
vi. Default or non-compliance may lead to restrictions of withdrawl of benefits, For e.g., default
or failure in compliance with the provisions of section 92 (Annual Return) and/or section 137
(filing of financial statements) might result into:
a. withdrawal of exemptions available to a private company
b. company becoming ineligible to undertake buy-back of its equity shares or other specified
securities
c. disqualification of directors, and
d. company being classified into an inactive company etc.

6. SECTION 447-PUNISHMENT FOR FRAUD

Corporate fraud is a fraud in relation to affairs of a company or any corporate body as
defined in Section 447 of Companies Act 2013, includes-
 any act,
 omission
 concealment of any fact or
 abuse of position
committed with any person or any other person with connivance

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  with intent to deceive
 to gain undue advantage
 injure the interests of
o company
o Shareholders
o Creditors or
o any other person
Whether or not there is any wrongful gain or loss

Wrongful Gain Wrongful Loss

“wrongful gain” means the gain by “wrongful loss” means the loss by
unlawful means of property to which the unlawful means of property to which the
person gaining is not legally entitled. person losing is legally entitled.

If amount involved in the fraud

 imprisonment from six months to ten years and
is at least ten lakh rupees or
 fine ranging from the amount involved in the fraud to
one percent of the turnover, three times such amount
whichever is less, (If the fraud involves public interest, the imprisonment
will not be less than three years)

If the amount involved is less

 imprisonment up to five years or
than ten lakh rupees or one
 fine up to fifty lakh rupees or
percent of the turnover and
 both
the fraud does not involve
public interest

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 Komal Chadha Vs. Serious Fraud Investigation Office,
The case outlines a legal case where the accused-petitioner, Komal Chadha, is seeking regular bail in
a matter involving allegations of fraudulent activities conducted by a company she was a director of.
The case revolves around violations of the Companies Act, including financial misconduct and
diversion of funds.
The gravamen of the offences alleged under section 447 of the Companies Act, 2013 was that the
company, which was engaged in the trade of plastic granules, indulged in cash sales, in fictitious sale
of food grain and in creation of accommodation/adjustment accounting entries, apart from misuse of
cheque discounting facilities. It was also alleged that the company manipulated financial statements,
to project substantial growth in its revenues, to mislead banks, so as to induce them to extend and
enhance credit limits, which monies were not used towards the business activity of the company but
were diverted and siphoned-off to other entities, with no genuine underlying business transactions,
thereby indulging in fraudulent diversion of funds to sister concerns.

SFIO filed complaint against petitioner making petitioner the officer in default, since the petitioner
was the director of the company and was liable for the affairs of the company.
It was held that since there was no allegation against petitioner either intimidating any witnesses or
tampering with evidence or otherwise interfering in course of investigation, she was to be admitted
to regular bail

7. PUNISHMENT FOR FALSE STATEMENT

If in any return, report, certificate, financial statement, prospectus, statement or other
document required by, or for, the purposes of any of the provisions of this Act or the rules
made thereunder, any person makes a statement,—
i. which is false in any material particulars, knowing it to be false; or
ii. which omits any material fact, knowing it to be material,
he shall be liable under section 447

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 Usha Martin Telematics Ltd. Vs. Registrar of Companies
In the instant case, the petitioner company applied to Reserve Bank of India for being registered as
Core Investment Company (CIC) pursuant to Core Investment Companies (Reserve Bank) Directions,
2011 following which Reserve Bank of India sought certain clarifications and documents from petitioner
company.
A meeting of Board of Directors of company was held and in course of preparing minutes of said
meeting in compliance with section 118(1), it was erroneously recorded in minutes that company
submitted application with Reserve Bank of India for its de-registration as NBFC and registration as a
CIC. Such recording was an inadvertent/typographical error as company was not a registered Non-
Banking Financial Company (NBFC) at relevant time and question of de-registration as NBFC did not
arise, however, said error was detected by company subsequently and in a meeting of its Board of
Directors said error was rectified.
A complaint case was filed by opposite party before Special Court, for offence punishable under section
118, read with section 448.
It was held that the typographical/inadvertent error in recording of minutes which was rectified
subsequently could not be termed as offence The complaint lodged by opposite party did not prima
facie reflect intent to deceive, gain undue advantage or injure interest of company or any person
connected, hence the complaint was quashed.

8. PUNISHMENT FOR FALSE EVIDENCE

If any person intentionally gives false evidence –
i. upon any examination on oath or solemn affirmation, authorized under this Act; or
ii. in any affidavit, deposition or solemn affirmation, in or about the winding up of any company
under this Act, or about any matter arising under this Act,
He shall be punishable with imprisonment for a term which shall not be less than three years
but which may extend to seven years and with fine which may extend to ten lakh rupees.

9. PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS PROVIDED

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 i. If a company or any officer of a company or any other person contravenes any of the provisions
of this Act, rules or any condition, limitation or restriction subject to which any approval,
sanction, consent, confirmation, recognition or exemption in any matter has been granted, and
for which no penalty or punishment is provided elsewhere in this Act, the company and every
officer of the company who is in default or such other person shall be liable to a penalty of
ten thousand rupees,
ii. In case of continuing contravention, with a further penalty of one thousand rupees for each
day after the first during which the contravention continues, subject to a maximum of two
lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in
default or any other person.

Doha Brokerage & Financial Services Ltd. Vs. Registrar of Companies

In the instant case, it was held that the petitioner sought compounding of offence punishable under
section 450, wherein petitioner-company allotted equity shares to its subsidiary company in violation
of section 19 (Subsidiary Company not to Hold Shares in its Holding Company), each officer in default
as members of Board of Directors was to be subjected to a fine of Rs. 5000 as a deterrent for not
repeating default in future and offence was ordered to be compounded subject to remittance of
compounding fee imposed.

10. PUNISHMENT IN CASE OF REPEATED DEFAULT.

If a company or an officer of a company commits an offence punishable either with fine or
with imprisonment and where the same offence is committed for the second or subsequent
occasions within a period of three years, then, that company and every officer thereof who is
in default shall be punishable with twice the amount of fine for such offence in addition to
any imprisonment provided for that offence.

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 Pahuja Takii Seed Ltd. Vs. Registrar of Companies
In the instant case, it was held that there is no bar on preferring a single application for compounding
same offence committed during different financial years by company and its officers

11. PUNISHMENT FOR WRONGFUL WITHHOLDING OF PROPERTY

i. If any officer or employee of a company –
 wrongfully obtains possession of any property, including cash of the company; or
 having any such property including cash in his possession, wrongfully withholds it or knowingly
applies it for the purposes other than those authorised by this Act,
He shall, on the complaint of the company or of any member or creditor or contributory, be
punishable with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees.
ii. The Court trying an offence under sub-section (1) may also order such officer or employee to
deliver up or refund, within a time to be fixed by it, any such property or cash wrongfully
obtained or wrongfully withheld or knowingly misapplied, the benefits that have been derived
from such property or cash or in default, to undergo imprisonment for a term which may
extend to 2 years.
iii. Imprisonment of such officer or employee, shall not be ordered for wrongful possession or
withholding of a dwelling unit, if the court is satisfied that the company has not paid to
that officer or employee, any amount relating to-
 provident fund, pension fund, gratuity fund or any other fund for the welfare of its officers
or employees, maintained by the company;
 compensation or liability for compensation under the Workmen’s Compensation Act, 1923 in
respect of death or disablement

12. PUNISHMENT FOR IMPROPER USE OF “LIMITED” OR “PRIVATE LIMITED”

If any person trade or carry on business under any name or title, of which the word “Limited”
or the words “Private Limited” are the last words, that person shall, unless duly incorporated
with limited liability, or unless duly incorporated as a private company with limited liability,

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 punishable with fine which shall not be less than five hundred rupees but may extend to two
thousand rupees for every day for which that name or title has been used.

13. COMPREHENSIVE LIST OF PENALTIES UNDER THE COMPANIES ACT, 2013

Provided at the end of the chapter.

14. ESTABLISHMENT OF SPECIAL COURTS

i. In the Report of Companies Law Committee chaired by Shri Tapan Ray dated February 1, 2016
noted that the establishment/designation of Special Courts under the Act would result in
faster prosecution of defaulting companies. The Committee recommended the early
establishment/ designation of the Special Courts
ii. Section 435(1) stipulates that the Central Government may, for the purpose of providing
speedy trial of offences under this Act, except under section 452, by notification establish or
designate as many Special Courts as may be necessary
iii. Section 435 to 438 & 440 deals with provisions related to special courts.
iv. A Special Court should consist of:
 a single judge holding office as Session Judge or Additional Session Judge, in case of offences
punishable under this Act with imprisonment of two years or more; and
 a Metropolitan Magistrate or a Judicial Magistrate of the First Class, in the case of other
offences.
v. Special Court is appointed by Central Government in Consultation with Chief Justice of High
Court.

15. OFFENCES TRIABLE BY SPECIAL COURTS

i. All offences specified under section 435(1) shall be triable only by the Special Court established
for the area in which the registered office of the company in relation to which the offence is
committed or where there are more Special Courts than one for such area, by such one of
them as may be specified in this behalf by the High Court concerned.
ii. Where a person accused of, or suspected of the commission of, an offence under this Act is
forwarded to a Magistrate under section 167 of the Code of Criminal Procedure, 1973, such
Magistrate may authorise the detention of such person in such custody as he thinks fit for a

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 period not exceeding 15 days in the whole where such Magistrate is a Judicial Magistrate and
7 days in the whole where such Magistrate is an Executive Magistrate. However, where such
Magistrate considers that the detention of such person upon or before the expiry of the period
of detention is unnecessary, he shall order such person to be forwarded to the Special Court
having jurisdiction.
iii. The Special Court may exercise the same power as a Magistrate may exercise under section
167 of the Code of Criminal Procedure, 1973 in relation to an accused person who has been
forwarded to him under that section; and
iv. A Special Court may, upon perusal of the police report of the facts constituting an offence
under this Act or upon a complaint in that behalf, take cognizance of that offence without
the accused being committed to it for trial.

Thoda Extra gyaaannnn……… Swaaad Anusaaar

Power of Special Court
 The Special Court may, if it thinks fit, try in a summary way any offence
under this Act which is punishable with imprisonment for a term not
exceeding three years provided, in case of any conviction in a summary trial,
no sentence of imprisonment for a term exceeding 1 year shall be passed.
 Further, when at the commencement of, or in the course of, a summary
trial, it appears to the Special Court that the nature of the case is such
that the sentence of imprisonment for a term exceeding 1 year may have to
be passed or that it is, for any other reason, undesirable to try the case
summarily, the Special Court shall, after hearing the parties, record an order
to that effect and thereafter recall any witnesses who may have been
examined and proceed to hear or rehear the case in accordance with the
procedure for the regular trial

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 S. Satyanarayana Vs. Energo Masch Power Engineering & Consulting (P.) Ltd.
This case deals with the jurisdiction of a Special Court when multiple persons are accused of offenses
under both a special enactment (like the Companies Act) and the Indian Penal Code for the same
transaction or set of facts. The Supreme Court held that to avoid multiple proceedings, the Special
Court maintains jurisdiction to try all offenses arising from the same transaction, even if they fall
under different legal statutes. This decision ensures efficient legal proceedings and prevents confusion
due to the multiplicity of cases.

SFIO v. Rahul Modi & ors

As per the provisions of Section 212(3) of the Companies Act, any investigation ordered to SFIO is
supposed to be completed on the specified time. But the issue is , if investigation is not completed on
time, what are the consequences and if any investigation is conducted after the given time whether it
is legal.
Court while deciding declared that no it is not illegal. The time frame mentioned is to complete the
investigations in a time bound manner but the said time can be extended from time to time by the
same authority.

16. ADJUDICATION OF OFFENCES-(Genesis of Adjudication)

i. Adjudication is the process by which a judge reviews arguments and evidences of both the
parties and after providing them an opportunity of being heard passes all necessary decisions.
ii. Section 454 of the Act read with the Companies (Adjudication of Penalties) Rules, 2014 deals
with the manner and procedure of adjudication of penalties.
iii. The Registrar of Companies (ROC) has been shouldered with the responsibility of adjudicating
officer for their respective jurisdiction.

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 iv. Earlier the penal provisions which were in existence in many of the sections could not be
implemented due to lack of judicial or quasi-judicial powers with the administrative authorities.
The show cause notice issued by ROC on the defaulting company or the officers in default led
to legal proceedings against them before a Magistrate.
v. The J.J. Irani Committee Report which is essentially the backbone of the Companies Act, 2013,
recommended in house adjudication and empowerment of the Registrar of Companies in levying
penalties for offences under various sections of the Act, to simplify the legal process.
vi. Thus, was born the formal adjudicating power which got vested with the Central Government
in the form of section 454.

17. ADJUDICATION PROCESS UNDER THE COMPANIES ACT, 2013

Step 1
ISSUE OF SHOW CAUSE NOTICE TO COMPANY AND OFFICER IN
DEFAULT

i. Before adjudging penalty, the adjudicating officer will issue a show cause notice to the company
or officer in default, which is for not less than 15 days and maximum 30 days, to show cause
why the penalty should not be imposed on it or him.
ii. Every notice issued, shall clearly indicate the nature of non-compliance or default under the
Act alleged to have been committed by such company or officer in default and draw attention
to the relevant penal provisions of the Act and the maximum penalty which can be imposed
on the company, and each of the officers in default.
iii. Reply to such notice should be received in the specified days in electronic mode only.
(Adjudicating Officer might extend the time period by 15 days if there is a sufficient cause)

Step 2
ENQUIRY BY ADJUDICATION OFFICER- NOTICE FOR HEARING

i. If after submitting the reply by company or officer in default the adjudicating officer is of the
opinion that physical appearance is required, he shall issue a notice, within a period of ten
working days from the date of receipt of reply fixing a date for the appearance of such
company, through its authorised representative, or officer of such company, or any other person.

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 ii. If any person, to whom a notice is issued, desires to make an oral representation, whether
personally or through his authorised representative and has indicated the same while submitting
his reply in electronic mode, the adjudicating officer shall allow such person to make such
representation after fixing a date of appearance.

MCA Compliance Monitoring system

i. Compliance Monitoring System (MCACMS Portal) is an Artificial Intelligence initiative under
system in MCA 21 by Ministry of Corporate Affairs to make compliance process easier and to
ensure regular enforcement of Compliance requirements under Companies Act. 2013.
ii. Purpose: issuing show cause notices electronically for non compliances under Companies Act,
2013 and submitting replies from companies / directors with their clarifications and submissions.
iii. Based on the replies / submissions, the Register of Companies, Ministry of Corporate Affairs
shall initiate penal actions for violations referred in the show cause notices.
iv. Following are the steps for filing reply to the SCN

1) Visit the MCA CMS portal

2) Click on ‘Reply for Show Cause Notice Tab;
3) Click the relevant section for which SCN has been issued
4) Fill the CMS Reference number written on the SCN & click search. The system will validate
the number.
5) After validation click on ‘Send OTP’ tab.
6) OTP will be sent on the email id on which SCN was received;
7) Click on ‘Submit Reply’ tab and reply once submitted cannot be altered;
8) The system will show a confirmation message and the ‘Action’ tab will show reply status.

STEP 3
DATE OF HEARING

i. On the date fixed for hearing and after giving a reasonable opportunity of being heard to the
person concerned, the adjudicating officer may pass the order in writing as he thinks fit
including an order for adjournment.

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 ii. After hearing, adjudicating officer may require the concerned person to submit his reply in
writing on certain other issues related to the notice, relevant for determination of the default

STEP 4
ORDER OF ADJUDICATING AUTHORITY

i. The adjudicating officer shall pass the order within 30 days where physical appearance was not
required and within ninety days of the date of issue of notice where any person appeared
before the adjudicating officer.
ii. In case the order is passed after the given duration, the reasons for delay shall be recorded in
writing and order shall not be invalid merely because it was passed after the expiry of 30 days
or 90 days.
iii. Every order of the adjudicating officer shall be duly dated and signed by him and shall clearly
state the reasons for requiring the physical appearance.
iv. The adjudicating officer shall send a copy of the order passed to the concerned company,
officer who is in default or any other person, to the Central Government and a copy of the
order shall also be uploaded on the website.

Power of Adjudicating Authority

To summon and enforce the To order for evidence or to

attendance of any person produce any document, which
acquainted with the facts and in the opinion of the
circumstances of the case after adjudicating officer, may be
recording reasons in writing. relevant to the subject
matter.

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 Penalty Imposed by Adjudicating Authority
i. The adjudicating officer may impose penalty on company or officer in default or order the
company or officer in default to rectify the default.
ii. If any person fails to reply or neglects or refuses to appear as required before the adjudicating
officer, the adjudicating officer may pass an order imposing the penalty.
iii. While adjudging quantum of penalty, the adjudicating officer should consider following factors:
a. size of the company
b. nature of business carried on by the company
c. injury to public interest
d. nature of the default
e. repetition of the default
f. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a
result of the default; and
g. the amount of loss caused to an investor or group of investors or creditors as a result of the
default
iv. In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer
shall impose that fixed sum
v. Penalty shall be paid through Ministry of Corporate Affairs portal only
vi. All sums realized by way of penalties under the Act shall be credited to the Consolidated Fund
of India.
vii. In case the default relates to non-compliance of sub-section (4) of section 92 or sub-section
(1) or subsection (2) of section 137 and such default has been rectified either prior to, or
within thirty days of, the issue of the notice by the adjudicating officer, no penalty shall be
imposed in this regard and all proceedings under this section in respect of such default shall
be deemed to be concluded.
viii. The adjudicating officer shall, before imposing any penalty, give a reasonable opportunity of
being heard to such company, the officer who is in default or any other person.

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 18. APPEAL AGAINST THE ORDER OF ADJUDICATING OFFICER

Appeal in 60 days

ROC REGIONAL
DIRECTOR
 Appeal should be made in writing
 Appeal is made in FORM ADJ
specifying the grounds of appeal
 accompanied by a certified copy of
the order against which the appeal
is sought.
 Where the party is represented by
an authorised representative, a copy
of such authorisation.

19. REGISTRATION OF APPEAL Where the appeal is

found to be
1)Endorsment of date of appeal 2) Registration/Admission defective, the
office of the Regional Director If, on scrutiny, the appeal is found Regional Director
shall endorse the date on such to be in order, it shall be duly may allow the
appeal and shall sign such registered and given a serial appellant a time of
endorsement number. 14 days, to rectify
the defects

3) If the appellant fails to 4) Extension of period of rectification of

rectify the defects defects
The Regional Director may decline The Regional Director may, extend the period
to register such appeal and referred to in the first proviso by a further period
communicate such refusal to the of fourteen days if an appellant satisfies that there
appellant within a period of seven was a sufficient cause.
days.

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 20. DISPOSAL OF APPEAL BY REGIONAL DIRECTOR
i. Copy of Notice to Adjudication officer: On admission of appeal, Regional Director will serve
a 21 days’ notice to adjudicating officer, against whom appeal has been filed, to file his reply
within the given time period. RD may extend the period with 21 days if there is sufficient
cause for delay.
ii. Reply of Adjudication officer: A copy of every reply, application or written representation
filed by the adjudicating officer before the Regional Director shall be forthwith served on the
appellant by the adjudicating officer.
iii. Intimation of Date of Hearing by RD: The Regional Director shall notify the parties, the
date of hearing of the appeal which shall not be a date earlier than thirty days following the
date of such notification for hearing of the appeal.
iv. Hearing by RD: On the date fixed for hearing the Regional Director may, subject to the
reasons to be recorded in writing, pass any order as he thinks fit including an order for
adjournment of the hearing to a future date.
v. Ex-parte hearing: In case the appellant or the adjudicating officer does not appear on the
date fixed for hearing, the Regional Director may dispose of the appeal ex-parte.
vi. Setting aside ex-parte order: Where the appellant appears afterwards and satisfies the
Regional Director that there was sufficient cause for his non-appearance, the Regional
Director may make an order setting aside the ex-parte order and restore the appeal.
vii. Order: The Regional Director may, after giving the parties to the appeal an opportunity of
being heard, pass such order as he thinks fit, confirming, modifying or setting aside the order
appealed against.
viii. Signing of Order: The Regional Director may, after giving the parties to the appeal an
opportunity of being heard, pass such order as he thinks fit, confirming, modifying or setting
aside the order appealed against.
ix. Communication of order: A certified copy of every order passed by the Regional Director
shall be communicated to the adjudicating officer and to the appellant forthwith and to the
Central Government.
x. Fine: Where company fails to comply with the order within a period of ninety days from the
date of the receipt of the copy of the order, the company shall be punishable with fine

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 which shall not be less than twenty-five thousand rupees but which may extend to five lakh
rupees.

21. SOME RECENT ORDERS OF ADJUDICATING AUTHORITY

Kodagu Heritage
i. In this case, M/s Kodagu Heritage, a private limited company, was found to have violated
Section 12 of the Companies Act, 2013. The violation pertained to the company's failure to
furnish the verification of its registered office within the stipulated timeframe as required by
Section 12(2) of the Companies Act, 2013.
ii. As per Section 12(2) of Companies Act, 2013 the company, as soon as it is incorporated,
shall furnish to the registrar the verification of registered office within thirty days in
Form INC-22. But the company filed the form after the three years that’s on January
1, 2019.
iii. The company and its officers in default had admitted that they have violated the provision
of Section 12(2) of Companies Act, 2013.
iv. The adjudicating authority issued a notice to the company and its officers in default to
appear before the authority along with their representatives before September 5, 2019, in
the chamber of a registrar of the company.
v. The adjudicating authority determined that the company and its officers in default should
each pay a penalty of INR 1 lakh. The authority justified this decision by invoking Section
454(1) and (3) of the Companies Act, 2013. Additionally, the authority considered the delay
in compliance, which amounted to 621 days.

Ms Joy Ice Cream (Bangalore) Private Limited

i. In the case of Ms. Joy Ice Cream (Bangalore) Private Limited, the company was found to be
in violation of Section 12(1) of the Companies Act, 2013. This section requires that a newly
incorporated company must establish a registered office within thirty days of its incorporation.
The registered office must be capable of receiving and acknowledging all communications and
notices addressed to the company. If there is any change in the registered office's address,
the company must notify this change within thirty days of incorporation and submit Form
INC 22 to the registrar.

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 ii. On the verification of the record, the authority came to the conclusion that it has not filed
the Form INC 22.
iii. When the office issued a letter on July 27, 2018, for seeking reply with regard to complaints
received against the company. The letter was returned unserved with no such firm.
iv. The adjudicating authority issued a notice to the company and the officers in default under
section 454 of Companies Act, 2013 for violation of Section 12 of Companies, Act 2013.
v. Non appearance: The Company and its officers in default were called upon along with the
representatives to present before the registrar of companies. But none of them was present on
the said date.
vi. Penalty Imposed: In response to the company's non-compliance and absence, the adjudicating
authority, under Section 454(3) of the Companies Act, 2013, imposed a penalty of INR 1 lakh
on each director and the company itself. These penalties were required to be paid through the
Ministry of Corporate Affairs (MCA) portal, and proof of payment was to be provided within
thirty days from the date of receiving the order.
vii. Consequences of Non-Payment: If the company fails to pay the penalty within ninety days,
as specified under Section 454(8) of the Companies Act, 2013, it becomes liable to pay a fine.
This fine can range from a minimum of INR 25,000 to a maximum of INR 5 lakhs. Additionally,
officers in default or any other individuals involved in the default can face penalties that
include imprisonment for up to six months or a fine ranging from INR 25,000 to INR 1 lakh,
or both.

Narangs International Hotels Private Limited

In the matter of Narangs International Hotels Private Limited, the company filed an application
for adjudication of penalties under Section 454 of the Companies Act, 2013, citing a violation
of Section 173(1) of the same Act. Section 173(1) mandates that every company should hold
its first Board of Directors meeting within thirty days of its incorporation and subsequently
conduct a minimum of four such meetings each year with not more than one hundred and
twenty days between consecutive meetings.

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 Facts of the Case:
 Narangs International Hotels Private Limited failed to hold the required minimum of four Board
of Directors meetings during the financial year ending in 2020-21.
 An extension of the allowed interval between consecutive meetings to 180 days was granted
by the Ministry of Corporate Affairs (MCA) through a circular dated 24.03.2020.
 However, the company's actual interval between two consecutive meetings of the Board of
Directors, from 13.12.2019 to 11.09.2020, was 273 days, exceeding the prescribed 180 days even
with the extension.
 The delay in conducting the Board meetings was calculated from 10.06.2020, as per the
extension granted by the Ministry, resulting in a delay of 943 days.

Adjudication Process:
 The Regional Director, in line with the powers conferred by sub-Section 3 of Section 454 of
the Companies Act, 2013, issued a hearing notice on 18.03.2021 to the company and the
officers in default. This provided them with an opportunity to present their case.
 In response to the hearing notice, the company's representative appeared on 25.03.2021 and
consented to the necessary orders being passed according to the provisions of the Companies
Act, 2013.
Factors Considered for Penalty
 The amount of disproportionate gain or unfair advantage, if quantifiable, resulting from the
default.
 The amount of loss incurred by investors or groups of investors due to the default.
 The repetitive nature of the default.
Order:
 After considering the case, the Adjudicating Officer imposed a penalty of Rs. 25,000/- (Rupees
Twenty-Five Thousand only) on each of the company's directors for violating the provisions of
Section 173 of the Companies Act, 2013.
 It was noted that there was no available information on disproportionate gain or loss caused
to investors as a result of the default, making it difficult to quantify these aspects in this
particular case.

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 Sunshakti Solar Power Projects Private Limited
In the matter of Sunshakti Solar Power Projects Private Limited, the case involves a violation
of Section 39(4) of the Companies Act, 2013, read with Rule 12(1) of the Companies
(Prospectus and Allotment of Securities) Rules, 2014. Here is a summary of the case:
Facts of the Case:
 The company and its director(s) initially filed an application for compounding of an offense
under Section 441 of the Companies Act, 2013.
 However, as the matter was under adjudication under Section 454 of the Act, the company
submitted a letter to the office, dated 12.04.2022, requesting that the previously filed
application for compounding (e-form GNL-1) be treated as filed for adjudication.
 The company explained that during the financial year ending on 31.03.2018, they issued 37,500
10% Compulsorily Convertible Debentures (CCDs) on a private placement basis, with a face
value of Rs. 10,000 each, totaling Rs. 37,50,00,000. This issuance was made in compliance with
Section 62 and Section 42 read with the Companies (Prospectus and Allotment of Securities)
Rules, 2014.
 The company approved the issuance of these CCDs through a special resolution in its Annual
General Meeting on 30.09.2017.
 The CCDs were allotted to Sky Power Southeast Asia III Investment Limited on 06.01.2018,
after receiving the subscription money in the company's escrow account.
 While the Return of Allotment (Form PAS-3) for the CCDs was filed on 31.03.2018, the Letter
of Offer (in PAS-4) and the related documents were filed with delays of 151 days and 69
days, respectively.
Adjudication Process:
 The company and its officers in default submitted their replies to the show cause notice issued
by the office on 20th June 2022.
 An authorized representative of the company appeared for a hearing on 09.11.2022.
Penalty Adjudication:
 The delay in filing the Return of Allotment (Form PAS-3) and the Letter of Offer (in PAS-
4) resulted in a default. However, the default related to the late filing of the Return of
Allotment was not subject to penalty under Section 42(10) of the Act at the time of the
default.

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  Therefore, the penalty was imposed under Section 39(5) for the violation of Section 39(4)
read with Rule 12(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Order:
 In consideration of the facts and responses received, the Regional Director imposed a penalty
on the company and its officers in default for the violation of Section 39(4) read with Rule
12(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

22. PENALTIES AND ADJUDICATION UNDER SEBI ACT, 1992

SEBI has been authorised to levy penalties for adjudication of matter if it finds any statutory
contravention has occurred. However, if a person is aggrieved by the orders passed by the SEBI
it can make an appeal to Securities Appellate Tribunal. Securities Appellate Tribunal is a
statutory body established under the provisions of Section 15K of the Securities and Exchange
Board of India Act, 1992 to hear and dispose of appeals against orders passed by the Securities
and Exchange Board of India or by an adjudicating officer under the Act; and to exercise
jurisdiction, powers and authority conferred on the Tribunal.
The Enforcement Department is responsible for handling Appeals against SEBI orders filed
before the Hon’ble Securities Appellate Tribunal (SAT), Appeals filed against the SAT order in
the Hon’ble Supreme Court, Criminal Complaints filed by SEBI in appropriate Courts and
Settlement Proceedings.
The Enforcement Directorate consists of mainly three divisions:
i. SAT Litigation Division
ii. Prosecution Division
iii. Settlement Division

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 SAT LITIGATION DIVISION PROSECUTION SETTLEMENT DIVISION
The Settlement Division is responsible for
1. This division handle appeals DIVISON
handling Registration of Settlement
against orders of SEBI and its This division
Application, Calculation of Settlement
Adjudicating officers made to handles the work
amount as per the Settlement
SAT. relating to filing
Regulations, organizing Internal
2. It collaborates with senior prosecution
Committee Meeting between the
advocates, law firms to represent proceedings under
Applicants and Internal Committee
SEBI or Adjudicating officers in the Court.
Members for formulating the settlement
front of SAT.
amount/terms, Organizing High Powered
3. It assist SEBI in filing
Advisory Committee (HPAC) Meeting,
affidavits/written submissions, as
placing the recommendation of HPAC
and when needed, while
before the Panel of Whole Time Members
attending hearings.
for approval.

CAN YOU SOLVE THIS?

Whether adjudicating officer can impose penalty on non-compliance
or default under the provisions of Companies Act, 2013?

Solution
Yes, as per Section 454(3) Adjudicating officer can impose penalty on non-compliance or
default under the provisions of Companies Act, 2013 and direct such Company, or officer who
is in default, or any other person, as the case may be to rectify the default, wherever he
considers fit. Only in cases of Section 92(4) or Section 137, if non compliance is rectified
prior to, or within 30 days of, the issue of notice by the Adjudicating officer, no penalty
shall be imposed

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 CAN YOU SOLVE THIS?
Arun, an individual shareholder of M/s. BEL Ltd. is holding 2% of
the voting rights. He made a complaint before the Adjudicating
Authority that investments proposed to be made by the Company are
without any adequate security and prayed for injunction to restrain
the company from making such investments. Whether Arun will
succeed in his attempt ? Explain with decided case law.

Solution
Where the directors representing the majority of shareholders perform an illegal or ultra vires
act, an individual shareholder has right to bring an action. The majority of shareholders have
no right to confirm an illegal or ultra vires transaction of the company. In such case a
shareholder has the right to restrain the company by an order or injunction of the court from
carrying out an ultra vires act.
In Bharat Insurance Ltd. vs. Kanhya Lal, the plaintiff was a shareholder of the Bharat Insurance
Company. One of the objects of the company was “To advance money at interest on the
security of land, houses, machinery and other property situated in India...” The plaintiff
complained that “several investments had been made by the company directors on behalf of
the company without adequate security and contrary to the provisions of the memorandum and
therefore, prayed for perpetual injunction to restrain it from making such investments” The
court observed that although company is the best judge of its affairs but since directors are
acting ultra vires, case will be maintained. Hence, Arun will succeed.

Power of SEBI to issues directions and levy penalty

If SEBI is satisfied after making or causing to be made an enquiry, that it is necessary in the
interest of investors or to prevent the affairs of any intermediary or other persons being
conducted in a manner detrimental to the interests of investors or securities market to secure
the proper management of any such intermediary or person, SEBI may issue directions to any
person or class of persons, or associated with the securities market or to any company in
respect of matters relating to issue of capital, transfer of securities and other matter incidental

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 thereto, as may be appropriate in the interests of investors in securities and the securities
market.

Penalties under SEBI

Penalty for failure to furnish information, return, etc. penalty which shall not be
15A (a)person fails to furnish return or furnishes any false less than one lakh rupees
documents or statements or fails to maintain any books of but which may extend to
accounts one lakh rupees for each
day during which such
failure continues subject to
a maximum of one crore
rupees
shall be liable to a penalty
(b) to file any return or furnish any information, books or other which shall not be less than
documents within the time specified therefor in the regulations, one lakh rupees but which
fails to file return or furnish the same within the time specified may extend to one lakh
therefor in the regulations or who furnishes or files false, rupees for each day during
incorrect or incomplete information, return, report, books or other which such failure continues
documents, subject to a maximum of one
crore rupees

penalty which shall not be

(C) to maintain books of account or records, fails to maintain less than one lakh rupees
the same. but which may extend to
one lakh rupees for each
day during which such
failure continues subject to
a maximum of one crore
rupees
Penalty for failure by any person to enter into agreement

15B with clients. penalty which shall not be

less than one lakh rupees

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 if any intermediary, suppose to enter into an agreement but which may extend to
with the client, fails to enter into such agreement one lakh rupees for each
day during which such
failure continues subject to
a maximum of one crore
rupees
Penalty for failure to redress investors’ grievances.

15C if a company fails to address the grievances of investors penalty which shall not be
less than one lakh rupees
but which may extend to
one lakh rupees for each
day during which such
failure continues subject to
a maximum of one crore
rupees
Penalty for certain defaults in case of mutual funds.

15D (a)If a person carrying on collective investment scheme penalty which shall not be
fails to obtain a certificate, or comply with the conditions less than one lakh rupees
of the certificate or fails to invest money collected through but which may extend to
the collective investment scheme as specified one lakh rupees for each
day during which such
failure continues subject to
a maximum of one crore
(b)registered with the Board as a collective investment scheme, rupees
including mutual funds, for sponsoring or carrying on any he shall be liable to a penalty
investment scheme, fails to comply with the terms and which shall not be less than
conditions of certificate of registration. one lakh rupees but which
may extend to one lakh
rupees for each day during
which such failure continues
subject to a maximum of one
crore rupees;

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 (c)registered with the Board as a collective investment scheme, shall be liable to a penalty
including mutual funds, fails to make an application for listing which shall not be less than
of its schemes as provided for in the regulations governing such one lakh rupees but which
listing. may extend to one lakh
rupees for each day during
which such failure continues
subject to a maximum of one
crore rupees;
(d) registered as a collective investment scheme, including he shall be liable to a penalty
mutual funds, fails to despatch unit certificates of any scheme which shall not be less than
in the manner provided in the regulation governing such one lakh rupees but which
despatch. may extend to one lakh
rupees for each day during
which such failure continues
shall be liable to a penalty
(e) registered as a collective investment scheme, including which shall not be less than
mutual funds, fails to refund the application monies paid by the one lakh rupees but which
investors within the period specified in the regulations. may extend to one lakh
rupees for each day during
which such failure continues
subject to a maximum of one
crore rupees

he shall be liable to a penalty

which shall not be less than
(f) registered as a collective investment scheme, including one lakh rupees but which
mutual funds, fails to invest money collected by such collective may extend to one lakh
investment schemes in the manner or within the period specified rupees for each day during
in the regulations. which such failure continues
subject to a maximum of one
crore rupees
Penalty for failure to observe rules and regulations by an shall be liable to a penalty
asset management company. which shall not be less than

15E one lakh rupees but which

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 where any asset management company of a mutual fund may extend to one lakh
registered under this Act, fails to comply with any of the rupees for each day during
regulations providing for restrictions on the activities of the asset which such failure continues
management companies, such asset management company. subject to a maximum of one
crore rupees.
Penalty for default in case of alternative investment funds,
infrastructure investment trusts and real estate investment
trusts.
where any person fails to comply with the regulations made by shall be liable to penalty
15EA
the Board in respect of alternative investment funds, which shall not be less than
infrastructure investment trusts and real estate investment one lakh rupees but which
trusts or fails to comply with the directions issued by the Board, may extend to one lakh
rupees for each day during
which such failure continues
subject to a maximum of one
crore rupees or three times
the amount of gains made out
of such failure, whichever is
higher.

Penalty for default in case of investment adviser and

research analyst

15EAB where an investment adviser or a research analyst fails to comply shall be liable to penalty
with the regulations made by the Board or directions issued by which shall not be less than
the Board, such investment adviser or research analyst. one lakh rupees but which
may extend to one lakh
rupees for each day during
which such failure continues
subject to a maximum of one
crore rupees.
a) Penalty for default in case of stock brokers.
15F b) (a)If broker fails to issue a contract note penalty which shall not be
c) If broker fails to deliver any security or fails to make less than one lakh rupees
payment of the amount due to the investor but which may extend to

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 one lakh rupees for each
day during which such
failure continues subject to
a maximum of one crore
rupees.

(b) charges an amount of brokerage which is in excess of penalty which shall not be
the brokerage specified less than one lakh rupees
but which may extend to
five times the amount of
brokerage charged in excess
of the specified brokerage,
whichever is higher.

he shall be liable to a penalty

(c) fails to deliver any security or fails to make payment of which shall not be less than
the amount due to the investor in the manner within the period one lakh rupees but which
specified in the regulations, he shall be liable to a penalty which may extend to one lakh
shall not be less than one lakh rupees but which may extend to rupees for each day during
one lakh rupees for each day during which such failure continues which such failure continues
subject to a maximum of one crore rupees; subject to a maximum of one
crore rupees;

Penalty for insider trading.

15G (a)If any insider communicates any un-published price penalty which shall not be
sensitive information less than ten lakh rupees
OR but which may extend to
(b)either on his own behalf or on behalf of any other person, twenty-five crore rupees or
deals in securities of a body corporate listed on any stock three times the amount of

profits made out of insider

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 exchange on the basis of any unpublished price-sensitive trading, whichever is
information; OR higher.
(c)communicates any unpublished price-sensitive information to
any person, with or without his request for such information
except as required in the ordinary course of business or under
any law;
Penalty for non-disclosure of acquisition of shares and
takeovers.

15H if any person, who is required under this Act or any rules shall be liable to a penalty
or regulations made thereunder, fails to,— which shall not be less than
(i) disclose the aggregate of his shareholding in the body ten lakh rupees but which
corporate before he acquires any shares of that body may extend to twenty-five
corporate; or crore rupees or three times
the amount of profits made
(ii) make a public announcement to acquire shares at a
out of such failure, whichever
minimum price; or
is higher
(iii) make a public offer by sending letter of offer to the
shareholders of the concerned company; or
(iv) make payment of consideration to the shareholders
who sold their shares pursuant to letter of offer,
Penalty for fraudulent and unfair trade practices.
if any person indulges in fraudulent and unfair trade practices shall be liable to a penalty
15HA
relating to securities. which shall not be less than
five lakh rupees but which
may extend to twenty-five
crore rupees or three times
the amount of profits made
out of such practices,
whichever is higher.

Penalty for alteration, destruction, etc., of records and failure

to protect the electronic database of Board.

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 15HAA (a) knowingly alters, destroys, mutilates, conceals, falsifies, or Penalty which shall not be
makes a false entry in any information, record, document less than one lakh rupees
(including electronic records), which is required under this Act but which may extend to
or any rules or regulations made thereunder, so as to impede,
ten crore rupees or three
obstruct, or influence the investigation, inquiry, audit, inspection
times the amount of
or proper administration of any matter within the jurisdiction of
profits made out of such
the Board.
act, whichever is higher.
Explanation.—For the purposes of this clause, a person shall be
deemed to have altered, concealed or destroyed such information,
record or document, in case he knowingly fails to immediately
report the matter to the Board or fails to preserve the same till
such information continues to be relevant to any investigation,
inquiry, audit, inspection or proceeding, which may be initiated
by the Board and conclusion thereof.
(b) without being authorised to do so, access or tries to access,
or denies of access or modifies access parameters, to the
regulatory data in the database;
(c) without being authorised to do so, downloads, extracts,
copies, or reproduces in any form the regulatory data maintained
in the system database;
(d) knowingly introduces any computer virus or other computer
contaminant into the system database and brings out a trading
halt;
(e) without authorisation disrupts the functioning of system
database;
(f) knowingly damages, destroys, deletes, alters, diminishes in
value or utility, or affects by any means, the regulatory data in
the system database; or
(g) knowingly provides any assistance to or causes any other
person to do any of the acts specified in clauses (a) to (f),
shall be liable to a penalty which shall not be less than one lakh
rupees but which may extend to ten crore rupees or three times
the amount of profits made out of such act, whichever is higher.

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 Explanation.—In this section, the expressions “computer
contaminant”, “computer virus” and “damage” shall have the
meanings respectively assigned to them undersection 43 of the
Information Technology Act, 2000
penalty for contravention where no separate penalty has
been provided.
15HB penalty which shall not be
where no provision has been provided for the contravention:
less than one lakh rupees
but which may extend to
one crore rupees.

23. POWER TO ADJUDICATE

i. For the purpose of adjudging, the Board may appoint any officer not below the rank of a
Division Chief to be an adjudicating officer for holding an inquiry and imposing any penalty.
ii. Adjudicating officer so appointed has the power to call for any other information, documents
or issue summons to any other person who is well aware of the facts of the case. If the person
fails to comply with the order of the officer then he may levy penalty for the same.
iii. Board can anytime call for the order of the officer and if it is found that the order passed by
the officer is wrong to such an extent that it is not in favor of securities market, board may,
after making enquiry increase the amount of penalty. (It is mandatory for the Board to give
an opportunity of being heard).

Holding of Enquiry
i. AO will issue a notice of atleast 14 days to show cause why an inquiry should not be held
against him.
ii. If, after considering the cause, if any, shown by such person, the Board or the adjudicating
officer is of the opinion that an inquiry should be held, he shall issue a notice fixing a date
for the appearance of that person either personally or through his lawyer or other authorised
representative.
iii. On the date fixed, the Board or the adjudicating officer shall explain to the person proceeded
against or his lawyer or authorised representative, the offence, alleged to have been committed
by such person.

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 iv. AO will give an opportunity to the party to produce evidence relevant for inquiry.
v. While holding an inquiry under this rule the Board or the adjudicating officer shall have the
power to summon and enforce the attendance of any person acquainted with the facts and
circumstances of the case to give evidence or to produce any document.
vi. If any person fails, neglects or refuses to appear before the Board or the adjudicating officer,
the Board or the adjudicating officer may proceed with the inquiry in the absence of such
person after recording the reasons.

24. FACTORS TO BE TAKEN INTO ACCOUNT WHILE ADJUDGING QUANTUM OF PENALTY

i. The amount of disproportionate gain or unfair advantage made as a result of the default.
ii. The amount of loss caused to an investor or group of investors as a result of the default.
iii. The repetitive nature of the default.

All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund
of India.

25. SETTLEMENT OF ADMINISTRATIVE AND CIVIL PROCEEDINGS

i. Any person, against whom any proceedings have been initiated or may be initiated under section
11, section 11B, section 11D, sub-section (3) of section 12 or section 15-I, may file an application
in writing to the Board proposing for settlement of the proceedings initiated or to be initiated
for the alleged defaults.
ii. The Board may, after taking into consideration the nature, gravity and impact of defaults,
agree to the proposal for settlement, on payment of such sum by the defaulter or on such
other terms as may be determined by the Board.
iii. The settlement proceedings under this section shall be conducted in accordance with the
procedure specified in the regulations made under this Act.
iv. All settlement amounts, excluding the disgorgement amount and legal costs, realised under this
Act shall be credited to the Consolidated Fund of India.
v. No appeal should lie against the order of settlement

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 26. PENALTIES UNDER SECURITIES CONTRACTS (REGULATION) ACT, 1956
1. 23 Section 23 Any person who- (a) shall, without prejudice to any award
without reasonable excuse (the of penalty by the Adjudicating Officer
burden of proving which shall be on or the Securities and Exchange Board
him) fails to comply with any of India under this Act, on conviction,
requisition made under sub-section be punishable with imprisonment for
(4) of section 6; or (b) enters into a term which may extend to ten years
any contract in contravention of or with fine, which may extend to
any of the provisions contained in twenty-five crore rupees, or with both.
section 13 or section 16; or (c)
contravenes the provisions
contained in section 17 or section
17A, or section 19; or (d) enters into
any contract in derivative in
contravention of section 18A or the
rules made under section 30; (e)
owns or keeps a place other than
that of a recognised stock exchange
which is used for the purpose of
entering into or performing any
contracts in contravention of any of
the provisions of this Act and
knowingly permits such place to be
used for such purposes; or (f)
manages, controls, or assists in
keeping any place other than that
of a recognised stock exchange
which is used for the purpose of
entering into or performing any
contracts in contravention of any of
the provisions of this Act or at
which contracts are recorded or
adjusted or rights or liabilities
arising out of contracts are

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 adjusted, regulated or enforced in
any manner whatsoever; or (g) not
being a member of a recognised
stock exchange or his agent
authorised as such under the rules
or bye-laws of such stock exchange
or not being a dealer in securities
licensed under section 17 wilfully
represents to or induces any person
to believe that contracts can be
entered into or performed under this
Act through him; or (h) not being
a member of a recognised stock
exchange or his agent authorised as
such under the rules or bye-laws of
such stock exchange or not being a
dealer in securities licensed under
section 17, canvasses, advertises or
touts in any manner either for
himself or on behalf of any other
persons for any business connected
with contracts in contravention of
any of the provisions of this Act; or
(i) joins, gathers or assists in
gathering at any place other than
the place of business specified in
the bye-laws of a recognised stock
exchange any person or persons for
making bids or offers or for entering
into or performing any contracts in
contravention of any of the
provisions of this Act
2. 23 A If any person fails to furnish any penalty which shall not be less
books, return, information than one lakh rupees but which

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 document etc or fails to may extend to one lakh rupees for
maintain books of account etc each day during which such failure
continues subject to a maximum of
one crore rupees.
(b) to maintain books of account shall be liable to a penalty which shall
or records, as per the listing not be less than one lakh rupees but
agreement or conditions, or bye- which may extend to one lakh rupees
laws of a recognised stock for each day during which such failure
exchange, fails to maintain the continues subject to a maximum of
same, one crore rupees
3. 23 B If any person is required to enter penalty which shall not be less
into an agreement with its than one lakh rupees but which
clients, fails o enter into such may extend to one lakh rupees for
agreement each day during which such failure
continues subject to a maximum of
one crore rupees.
4. 23 C If any broker or company, listed penalty which shall not be less
on stock exchange fails to than one lakh rupees but which
redress the grievances of its may extend to one lakh rupees for
investors each day during which such failure
continues subject to a maximum of
one crore rupees.
5. 23 D If a broker or sub-broker fails to penalty which shall not be less
segregate the money of its than one lakh rupees but which
clients and uses that money for may extend to one lakh rupees for
its own purpose each day during which such failure
continues subject to a maximum of
one crore rupees.
6. 23 E If a company or any person penalty which shall not be less
managing collective investment than five lakh rupees but which
scheme or mutual fund or real may extend to twenty-five crore
estate investment trust or rupees.

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 infrastructure investment trust
or alternative investment fund],
fails to comply with the listing
conditions or delisting conditions
or grounds or commits a breach
thereof,
7. 23 F If any issuer dematerialises penalty which shall not be less
securities more than the issued than five lakh rupees but which
securities of a company or may extend to twenty-five crore
delivers in the stock exchanges rupees.
the securities which are not
listed in the recognised stock
exchange
8. 23 G If a recognised stock exchange penalty which shall not be less
fails or neglects to furnish than five lakh rupees but which
periodical returns or furnishes may extend to twenty-five crore
false, incorrect or incomplete rupees.
periodical returns to the
Securities and Exchange Board of penalty which shall not be less
India than five crore rupees but which
9 23GA Where a stock exchange or a may extend to twenty-five crore
clearing corporation fails to rupees or three times the amount
conduct its business with its of gains made out of such failure,
members or any issuer in whichever is higher.
accordance with rules and
regulations made by SEBI
9. 23 H When a person fails to comply penalty which shall not be less
with the provisions of this act, than one lakh rupees but which
and no penalty has been provided may extend to one crore rupees
for the same

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 Power to Adjudicate under SCRA
Same as above .

Factors to be taken into account while adjudging quantum of penalty.

Same as above .
Recovery of Amounts
- If any person fails to pay the penalty or fails to comply with the order of disgorgement or
fails to pay fees due to the board, the recovery officer may draw a certificate specifying the
amount due and shall proceed to recover the same through following modes:
i. attachment and sale of the person’s movable property;
ii. attachment of the person’s bank accounts;
iii. attachment and sale of the person’s immovable property;
iv. arrest of the person and his detention in prison;
v. appointing a receiver for the management of the person’s movable and immovable properties.
- Recovery officer means any officer of the Board authorised by the Board to act as recovery
officer.
- Recovery of amounts by a recovery officer will have priority over any other claim against such
person.

Continuance of proceedings
i. When a person dies, his legal representative will be liable to pay any sum which the deceased
would have been liable to pay, if he was not dead.
ii. Any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer
under this Act, except a proceeding for levy of penalty, initiated against the deceased before
his death shall be deemed to have been initiated against the legal representative, and may be
continued against the legal representative from the stage at which it stood on the date of the
death of the deceased.
iii. Any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer
under this Act, except a proceeding for levy of penalty, which could have been initiated against

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 the deceased if he had survived, may be initiated against the legal representative and all the
provisions of this Act shall apply accordingly.
iv. If legal representative, while he was liable to pay any sum on behalf of deceased, creates a
charge on the estate of the deceased, he shall be personally liable for any sum payable by him
limited to the value of charge created.
v. The liability of a legal representative under this section shall, be limited to the extent to which
the estate of the deceased is capable of meeting the liability.
Appeal to Securities Appellate Tribunal
i. Every person aggrieved by the orders of Adjudicating authorities or SEBI can make an appeal
to Securities Appellate Tribunal (SAT) within 45 days from date of receiving order by SEBI or
AO.
ii. The Securities Appellate Tribunal may entertain an appeal after the expiry of the said period
of forty-five days if it is satisfied that there was sufficient cause for not filing it within that
period.
iii. SAT on receiving an application will give an opportunity of being heard to both the parties and
pass an order to confirm, modify or set aside any order.
iv. Copy of order is send to both the parties.
v. Appeal filed before SAT has to be disposed off as soon as possible and finally within 6 months
from date of receipt of appeal.

Offences & Composition of certain offences

 If any person contravenes or attempts to contravene or abets the contravention of the provisions
of this Act or any rules or regulations or bye-laws for which no punishment is provided
elsewhere in this Act, he shall be punishable with imprisonment for a term which may extend
to ten years, or with fine, which may extend to twenty-five crore rupees or with both.
 If any person fails to pay the penalty imposed by the adjudicating officer or SEBI he shall be
punishable with imprisonment for a term which shall not be less than one month but which
may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with
both.
 Any offence punishable under this Act, not being an offence punishable with imprisonment
only, or with imprisonment and also with fine, may either before or after the institution of

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 any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such
proceedings are pending.

Power to grant immunity

i. If on recommendation of SEBI, central government is of the opinion that any person who has
violated any provisions of this act has made a full disclosure, then it may grant to such person,
subject to certain restrictions, immunity from prosecution of any offence under this act and
penalty.
a. no such immunity shall be granted by the Central Government in cases where the proceedings
for the prosecution for any such offence have been instituted before the date of receipt of
application for grant of such immunity.
b. recommendation of the Securities and Exchange Board of India shall not be binding upon the
Central Government.
ii. Central government can anytime revoke this immunity if it is satisfied that terms and
conditions on the basis of which immunity was given have not been complied with or the
person has attained immunity by presenting false evidences.

27. THE SECURITIES CONTRACTS (REGULATION) (PROCEDURE FOR HOLDING INQUIRY AND
IMPOSING PENALTIES) RULES, 2005.
i. Appointment of Adjudicating Officer for holding Inquiry: SEBI may appoint any of its officers
not below the rank of Division Chief to be an adjudicating officer for holding an inquiry
whenever SEBI is of the opinion that there are grounds for adjudging penalties and adjudication
under SEBI Act, 1992.
ii. Show cause Notice: In holding an inquiry SEBI or adjudicating officer shall first issue a notice
to such person requiring him to show cause within such period as may be specified in the
notice (being not less than fourteen days from the date of service thereof) why an inquiry
should not be held against him.
iii. Content of Notice: Every notice to any such person shall indicate the nature of offence alleged
to have been committed by him.

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 iv. Date of Appearance: If the SEBI or adjudicating officer is of the opinion that an inquiry
should be held, he shall issue a notice fixing a date for the appearance of that person either
personally or through his lawyer or other authorised representative.
v. Personal Hearing: On the date fixed the SEBI or adjudicating officer shall explain to the person
proceeded against or his lawyer or authorised representative, the offence, alleged to have been
committed by such person indicating the provisions of the Act, rules or regulations in respect
of which contravention is alleged to have taken place.
vi. Opportunity to produce Evidence: The SEBI or adjudicating officer shall then give an
opportunity to such person to produce such documents or evidence as he may consider relevant
to the inquiry and if necessary, the hearing may be adjourned to a future date and in taking
such evidence the SEBI or the adjudicating officer shall not be bound to observe the provisions
of the Evidence Act, 1872.
vii. Enforcement of Attendance: While holding an inquiry the SEBI or adjudicating officer shall
have the power to summon and enforce the attendance of any person acquainted with the
facts and circumstances of the case to give evidence or to produce any document which in the
opinion of the SEBI or adjudicating officer, may be useful for or relevant to the subject matter
of the inquiry.
viii. If any person fails, neglects or refuses to appear before the adjudicating officer, the SEBI or
adjudicating officer may proceed with the inquiry in the absence of such person after recording
the reasons for doing so.

Order of the Board or the adjudicating officer

i. Imposition of Penalty: If, upon consideration of the evidence produced before the adjudicating
officer, the SEBI or adjudicating officer is satisfied that the person has become liable to
penalty, he may, by order in writing, impose such penalty as he thinks fit in accordance with
the provisions of the relevant section or sections specified in the Act.
ii. Quantum of Penalty: The amount of Penalty should be imposed on the basis of :
a. the amount of disproportionate gain or unfair advantage
b. the amount of loss caused
c. the repetitive nature of the default

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 iii. Content of Order: Every order made shall specify the provisions of the Act in respect of which
default has taken place and shall contain brief reasons for such decisions.
iv. Date & Sign: Every such order shall be dated and signed by the SEBI or adjudicating officer.
v. Rectification of Error: The SEBI or the adjudicating officer who has passed an order, may
rectify any error apparent on the face of record on such order, either on its own motion or
where such error is brought to his notice by the affected person within a period of fifteen
days from the date of such order.
vi. The SEBI or adjudicating officer shall send a copy of every order made by it to the person
concerned and to the SEBI

28. CONTRAVENTION AND PENALTIES, ADJUDICATION AND APPEAL UNDER FOREIGN

EXCHANGE MANAGEMENT ACT (FEMA), 1999
Penalties
Person contravenes any provision of this Act, or penalty up to thrice the sum
contravenes any rule, regulation, notification, involved in such contravention
direction or order issued in exercise of the powers where such amount is
under this Act, or contravenes any condition subject quantifiable, or
to which an authorisation is issued by the Reserve up to two lakh rupees where
Bank the amount is not
quantifiable, and
where such contravention is
a continuing one, further
penalty which may extend to
five thousand rupees for every
day after the first day during
which the contravention
continues

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 Person is found to have acquired any foreign penalty up to three times the
exchange, foreign security or immovable property, sum involved in such
situated outside India, of the aggregate value contravention and confiscation
exceeding the threshold prescribed under the Act of the value equivalent,
situated in India, the Foreign
exchange, foreign security or
immovable property.
in addition to the penalty
person shall be punishable with
imprisonment for a term which
may extend to five years and
with fine
If any person is found to have acquired any foreign shall be, in addition to the
exchange, foreign security or immovable property, penalty imposed under sub-
situated outside India, of the aggregate value section (1A), punishable with
exceeding the threshold prescribed under the proviso imprisonment for a term which
to subsection (1) of section 37A, may extend to five years and
with fine.

Any Adjudicating Authority adjudging any

contravention under sub-section (1), may, if he
thinks fit in addition to any penalty which he may
impose for such contravention direct that any
currency, security or any other money or property in
respect of which the contravention has taken place
shall be confiscated to the Central Government and
further direct that the foreign exchange holdings, if
any, of the persons committing the contraventions
or any part thereof, shall be brought back into India
or shall be retained outside India in accordance with
the directions made in this behalf

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 . Explanation.– For the purposes of this sub-section,
“property” in respect of which contravention has
taken place, shall include – (a) deposits in a bank,
where the said property is converted into such
deposits; (b) Indian currency, where the said
property is converted into that currency; and (c)
any other property which has resulted out of the
conversion of that property.
If the Adjudicating Authority and if the Director of Enforcement, deems fits, he may, after
recording the reasons in writing, recommend for the initiation of prosecution by filing a Criminal
Complaint against the guilty person.

Enforcement of the orders of Adjudicating Authority

i. If any person fails to make full payment of the penalty imposed on him within a period of
ninety days from the date on which the notice for payment of such penalty is served on him,
he shall be liable to civil imprisonment.
ii. No order for the arrest and detention of a defaulter shall be made unless the Adjudicating
Authority has issued and served a notice upon the defaulter, calling him to appear before him
on the date specified in the notice and to show cause why he should not be committed to the
civil prison.
iii. A warrant for the arrest of the defaulter may be issued by the Adjudicating Authority if the
Adjudicating Authority is satisfied, by affidavit or otherwise, that with the object or effect of
delaying the execution of the certificate the defaulter is likely to abscond or leave the local
limits of the jurisdiction of the Adjudicating Authority.
iv. Every person arrested by a warrant of arrest shall be brought before the Adjudicating Authority
issuing the warrant as soon as practicable, within twenty-four hours of his arrest. However,
if the defaulter pays the amount due to the officer arresting him, such person shall be
immediately released.
v. When a defaulter appears before the Adjudicating Authority pursuant to a notice to show cause
or is brought before the Adjudicating Authority after issuing warrant of arrest, the Adjudicating

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 Authority shall give the defaulter an opportunity showing cause why he should not be granted
civil imprisonment.
vi. Upon the conclusion of the inquiry, the Adjudicating Authority may make an order for the
detention of the defaulter in the civil prison and if he is not already under arrest, shall cause
him to be arrested.
vii. When the Adjudicating Authority does not make an order of detention under sub-section (9),
he shall, if the defaulter is under arrest, direct his release.
viii. A person is detained in the civil prison on execution of certificate:
a) where the certificate is for a demand of an amount exceeding rupees one crore: up to three
years, and
b) in any other case: up to six months.
ix. A defaulter released from detention under this section shall not, merely by reason of his release,
be discharged from his liability for the arrears, but he shall not be liable to be arrested under
the certificate in execution of which he was detained in the civil prison.

Power of recover arrears of penalty

The Adjudicating Authority may, by order in writing, authorise an officer of Enforcement not
below the rank of Assistant Director to recover any arrears of penalty from any person who
fails to make full payment of penalty imposed on him under section 13 within the period of
ninety days from the date on which the notice for payment of such penalty is served on him.

Appointment of Adjudicating Authority

i. The Central Government may, may appoint as many officers of the Central Government as it
may think fit, as the Adjudicating Authorities for holding an inquiry after giving a reasonable
opportunity of being heard to the person alleged to have committed contravention.
ii. Central Government while appointing the adjudicating officers will specify the jurisdiction.
iii. No Adjudicating Authority shall hold an enquiry under sub-section (1) except upon a complaint
in writing made by any officer authorized by a general or special order by the Central
Government.
iv. The said person may appear either in person or take the assistance of a legal practitioner or a
chartered accountant of his choice for presenting his case before the Adjudicating Authority

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 v. Powers of adjudicating authority will be same as civil court.
vi. Every Adjudicating Authority shall deal with the complaint as expeditiously as possible and
endeavour shall be made to dispose of the complaint finally within one year from the date of
receipt of the complaint.
vii. If the order cannot be disposed of in the said period, the AO shall record the reasons in writing.

Appeal to Special Director (Appeals)

i. Appeal against the orders of Central Government will be made to special director of appeals.
ii. Every appeal shall be filed within forty-five days from the date on which the copy of the
order made by the Adjudicating Authority is received by the aggrieved person. Provided that
the Special Director (Appeals) may entertain an appeal after the expiry of the said period of
forty-five days, if he is satisfied that there was sufficient cause for not filing it within that
period.
iii. Special director (appeals) would provide reasonable opportunity of being heard to both the
parties and pass any necessary order confirming, modifying or setting aside the order appealed
against.
iv. A copy of order will be sent to both the parties.

Appellate Tribunal & Appeal to Appellate Tribunal

i. The Appellate Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976, shall be the appellate Tribunal for FEMA.
ii. Central Government or any person aggrieved by the order of the adjudicating authority or
special director (appeals) can make an appeal to the Appellate Tribunal. However, the person
filing appeal has to deposit the amount of penalty levied by such authorities. If Appellate
Tribunal is of the opinion that deposit of penalty would cause undue hardship, it may dispense
with such deposit subject to conditions as it may deem fit.
iii. Every appeal has to be made within 45 days from the date of receiving the order.
iv. Tribunal would provide reasonable opportunity of being heard to both the parties and pass any
necessary order confirming, modifying or setting aside the order appealed against. A copy of
order will be sent to both the parties.

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 v. Tribunal will make an attempt to dispose off the cases as soon as possible but not later than
one hundred eighty days from the date of filing of appeal.

Procedure & Powers of Appellate Tribunal & Special Director (Appeals)

The Appellate Tribunal and Special Director (Appeals) will have same power as vested with the
civil courts under Civil Procedure Code. Powers of Civil Courts are as following:
1. summoning and enforcing the attendance of any person and examining him on oath;
2. requiring the discovery and production of documents
3. receiving evidence on affidavits
4. subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872 (1 of 1872),
requisitioning any public record or document or copy of such record or document from any
office
5. issuing commissions for the examination of witnesses or documents;
6. reviewing its decisions
7. dismissing a representation of default or deciding it ex parte
8. setting aside any order of dismissal of any representation for default or any order passed by
it ex parte and
9. any other matter which may be prescribed by the Central Government.

The Tribunal and Special Director (Appeals) are not bound by any procedure laid down under
Civil Procedure Code. They are guided by the provisions of natural justice.

Civil Court not to have jurisdiction

Civil Court does not have jurisdiction to entertain the suit or proceeding in respect of any matter
which an Adjudicating Authority or the Appellate Tribunal or the Special Director (Appeals) is
empowered.

Appeal to High Court

Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to
the High Court within sixty days from the date of communication of the decision or order of
the Appellate Tribunal to him on any question of law arising out of such order. Provided that

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 the High Court may, if it is satisfied that the appellant was prevented by sufficient cause
from filing the appeal within the said period, allow it to be filed within a further period not
exceeding sixty days.

Appeal to Special Director (Appeals)

1. Appeal shall be in Form I, in triplicate, accompanied by three copies of the order appealed
against and a fee of Rupees five thousand in the form of cash or demand draft payable in
favour of the Special Director (Appeals).
2. Grounds of appeal should be presented and numbered consecutively.
3. Where the appeal is presented after the expiry of the period of forty-five days it shall be
accompanied by a petition, in triplicate, duly verified and supported by the documents, showing
cause how the applicant had been prevented from preferring the appeal within the said period
of forty five days.

Procedure before Special Director (Appeals)

i. Shall send a copy of the appeal, together with a copy of the order appealed against, to the
Director of Enforcement.
ii. Issue notices to the applicant and the Director of Enforcement fixing a date for hearing of the
appeal.
iii. On the date fixed the applicant as well as the presenting officer of the Directorate of
Enforcement shall be heard.
iv. If the date fixed is adjourned and the applicant fails to present the appeal , the Special Director
(Appeals) may decide the appeal on the merits of the case within one hundred and eighty
days from the date of such appeal.

Service of notices, requisitions or orders

i. by delivering or tendering the notice or requisition or order to that person or his duly authorised
person
ii. by sending the notice or requisition or order to him by registered post with acknowledgment
due to the address of his place of residence or his last known place or residence or the place
where he carried on or last carried on, business or personally works or last worked for gain.

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 iii. by affixing it on the outer door or some other conspicuous part of the premises in which the
person resides or is known to have last resided or carried on business or personally works or
last worked for gain and that written report thereof should be witnesses by two persons
iv. if the notice or requisition or order cannot be served under clause (a) or clause (b) or clause
(c), by publishing in a leading newspaper (both in vernacular and in English) having wide
circulation of area or jurisdiction in which the person resides or is known to have last resided
or carried on business or personally works or last worked for gain.

Appeal to the Appellate Tribunal

1. Appeal shall be in form II, signed by the applicant, in triplicate accompanied by 3 copies of
order appealed against.
2. Appeal shall be accompanied by a fee of Rupees 10000
3. The appeal should specify the grounds of objection to the order appealed against, which shall
be numbered consecutively.
4. Where the appeal is presented after the expiry of the period of forty-five days, it shall be
accompanied by a petition, in triplicate showing cause how the applicant had been prevented
from preferring the appeal within the said period of forty-five days.

Procedure before Appellate Tribunal

i. The Appellate Tribunal shall send a copy of the appeal together with a copy of the order
appealed against, to the Director of Enforcement.
ii. The Appellate Tribunal shall, then, issue notices to the applicant and the Director of
Enforcement fixing a date for hearing of the appeal.
iii. On the date fixed, the applicant as well as the officer of Directorate of Enforcement will be
heard.
iv. If the applicant or the officer fails to present, the appeal the Appellate Tribunal may decide
the appeal on the merits of the case.

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 29. FOREIGN EXCHANGE MANAGEMENT (ADJUDICATION PROCEEDINGS AND APPEAL) RULES,
200
The Central Government has made the Foreign Exchange Management (Adjudication Proceedings
and Appeal) Rules, 2000 for holding enquiry for the purpose of imposing penalty.

Appointment of Adjudicating Authority (Rule 3)

Central Government will appoint the adjudicating authorities for holding inquiries under the Act.

Holding of inquiry (Rule 4)

Adjudicating authority shall issue the notice to show cause (being not less
Issue of Show
than ten days from the date of service thereof) why an inquiry should not be
Cause Notice
held against him.

Content of Every notice shall indicate the nature of contravention alleged to have been
Notice committed by him.

Date of If after considering the reply AO is of the opinion that an inquiry should be
held he shall issue a notice fixing a date for the appearance of that person.
Appearance

On the date fixed, the Adjudicating Authority shall explain to the person,
Personal
contravention committed .
Hearing

AO will give an opportunity to produce evidence relevant for the inquiry & shall
Opportunity to
not be bound to observe the provisions of the Indian Evidence Act, 1872.
produce
Evidence
The Adjudicating Authority shall have the power to summon and enforce
Power to
attendance of any person acquainted with the facts and circumstances of the
summon and
case to give evidence or to produce any document which in the opinion of the
enforce
Adjudicating Authority may be useful for or relevant to the subject matter of
attendance the inquiry.
If the person fails to appear, the AO may proceed with the adjudication in
absence of such person.

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  If AO is satisfied that there is contravention, he may pass the necessary
Order by the
order and impose such penalty as he thinks fit.
Adjudicating
 Every order made under sub-rule (8) of the rule 4 shall specify the
Authority
provisions of the Act or of the rules and shall contain reasons for such
decisions.
 Order shall be dated and signed.

30. PENALTY FOR REPEATED DEFAULT

Where a company or an officer of a company or any other person having already been subjected
to penalty for default under any provisions of this Act, again commits such default within a
period of three years from the date of order imposing such penalty passed by the adjudicating
officer or the Regional Director, he shall be liable for the second or subsequent defaults for an
amount equal to twice the amount of penalty provided for such default under the relevant
provisions of this Act

31. DIFFERENCES BETWEEN SECTION 441 AND SECTION 454 UNDER THE COMPANIES ACT, 2013
Compounding (Section 441) Adjudication (Section 454)
Regional Director or on an authorized officer There are no monetary limits
of the Central Government can compound
offence upto Rs. 25 Lakhs; and NCLT can
compound offence above Rs. 25 Lakhs
Compounding is with consent of both the Order is more arbitrary and not on consensus,
parties and compounding authority has the though a reasonable opportunity may be given
final say on the quantum of penalty to the company and the officer in default
before imposing penalty.
compounding order is generally not appealable. Appeal can be filed against the order of
adjudicating officer.

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 CAN YOU SOLVE THIS?
1. Under what circumstances can adjudication be ordered u/s 454? Or in
short what triggers an action u/s 454? Is it on the findings of the MCA
that an offence has occurred following an inspection u/s 206 or on
scrutiny of the Balance Sheet or from the statutory auditors’ report or
from the secretarial audit report?

Solution:
i. Section 454 is triggered when there is a default or non compliance with the provisions of
Companies Act, 2013.
ii. The default can be identified by the ROC or can be reported from inspection or inquiry under
section 206 or from Statutory and Secretarial Auditor’s Report.
iii. Those sections which have fine are not in the purview of section 454. Section 454(3) clearly
authorizes the adjudicating officer with a power to impose only penalty and it is implied that
he has to take cognizance of the penalty stipulated under the section which has been violated.
In whichever fines have been stipulated, the defaulting parties can take recourse to seeking
compounding of the offence whether a show-cause notice is issued or not.

CAN YOU SOLVE THIS?

2. Who orders adjudication proceedings u/s 454? Can the RoC himself order?
3.

Solution:
i. Either ROC himself on scrutiny of documents filed with him, or on conclusion of Inspection or
Inquiry under section 206 of Companies Act, 2013 or on the report of Statutory and Secretarial
Auditor conclude that there has been non compliance with the relevant provisions of Companies
Act, 2013 and identify the nature of non-compliance and default.
ii. In all these cases, he himself cannot initiate any adjudicating proceedings if he is the
adjudicating officer even as he may be clothed with a power of adjudication. Therefore, if

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 adjudicating powers are under his jurisdiction, any other officer who is independent of his office
has to identify the existence of violation. This is a grey area of law that needs to be addressed
by CG.
CAN YOU SOLVE THIS?
4. When there is a provision for compounding u/s 441 how does section 454
come into play? Does Section 454 override Section 441 since it is a later
section? Or do both sections play parallelly? Which section prevails?
5.

Solution:
i. Both these sections are independent of each other. The question of one section overriding the
other does not arise, as they operate concurrently.
ii. Section 441 deals with compounding and Section 454 deals with adjudication. The adjudicating
officer has no power to compound. The Regional Director alone can compound.
iii. The adjudicating officer u/s 454 can only adjudicate on the quantum of penalty. He has no
right to go into the merits and demerits of the default.

CAN YOU SOLVE THIS?

When a suo motto application for compounding is made, how does Section
454 come into play?
6.
Solution:
i. Prima facie section 454 will not come into play. The ROC who has forwarded the compounding
application to either of them with his report has to seek directions from the RD/NCLT in such
a case. The Regional Director/NCLT may agree for adjudication after giving justifiable reasons
for his choice for adjudication overriding the compounding application in a speaking manner.
But this decision can be challenged before the same RD under section 454(5) by the applicants
to a suo moto compounding application if the ROC, being the adjudicating officer exercises his
power u/s 454, on the grounds that the defaulting party itself has identified the non-
compliance.

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 ii. There is no contradiction between section 441 and 454 as they operate under their own separate
spheres. Section 454 gives administrative powers in the hands of ROC to impose penalty rather
than launching a criminal proceeding in the court of Magistrate, as was being done earlier,
unless the offence falls under the purview of Special Court established under section 435 of
Companies Act, 2013.
iii. On the other hand RD/NCLT are vested with the power of compounding under section 441 of
Companies Act, 2013

32. COMPLAINT BY REGISTRAR AND SERIOUS FRAUD INVESTIGATION OFFICE

i. SFIO is a multi-disciplinary organization under the Ministry of Corporate Affairs, consisting of
experts in the field of accountancy, forensic auditing, banking, law, information technology,
investigation, company law, capital market and taxation, etc. for detecting and prosecuting or
recommending for prosecution white-collar crimes/frauds.
ii. The SFIO is headed by a Director, who shall be an office not below the rank of a Joint
Secretary to Government of India having knowledge and experience in Corporate Affairs, and
consist of expertise in the fields of investigations, cyber forensics, financial accounting,
management accounting, cost accounting and any other fields as may be necessary for the
efficient discharge of Serious Fraud Investigation Office (SFIO) functions under the Act.
iii. The Headquarter of SFIO is in New Delhi, with five Regional Offices in Mumbai, New Delhi,
Chennai, Hyderabad & Kolkata
iv. Investigation is offered to SFIO under section 210 of Companies Act, 2013, where Govt is of
the opinion that it is necessary to investigate into the affairs of a company –
a. on receipt of a report of the Registrar or inspector under section 208 of the Companies Act,
2013
b. on intimation of a special resolution passed by a company that its affairs are required to be
investigated
c. in public interest, it may order an investigation into the affairs of the company
d. Where an order is passed by a court or the Tribunal in any proceedings before it that the
affairs of a company ought to be investigated, the Central Government shall order an
investigation into the affairs of that company.

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 Investigation by SFIO
SFIO investigates under section 212 in following cases:
a. on receipt of a report of the Registrar or inspector under section 208 of the Companies Act,
2013
b. on intimation of a special resolution passed by a company that its affairs are required to be
investigated
c. in public interest, it may order an investigation into the affairs of the company.
d. on request from any Department of the Central Government or a State Government.
i. The Central Government may, assign the investigation into the affairs of the said company to
the Serious Fraud Investigation Office and its Director, may designate such number of
inspectors, as he may consider necessary for the purpose of such investigation.
ii. Where case has been assigned to SFIO no other agency of government interfere and if the
case has already been initiated, will transfer all the documents and records to SFIO.
iii. The Director SFIO shall cause the affairs of the company to be investigated by an investigating
officer, who shall have the powers of the Inspector under section 217 of the Companies Act,
2013.
iv. It shall be the responsibility of the company, its officers and employees, who are or have been
in the employment of the company to provide all information, explanation, documents and
assistance to the investigating officer as he may require for conduct of business.
v. Section 212(6) provides, offence covered under section 447 of the Companies Act, 2013 shall
be cognizable and no person accused of any offence under those sections shall be released on
bail or on his own bond unless-
 the Public Prosecutor has been given an opportunity to oppose the application for such release;
and
 where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not likely
to commit any offence while on bail.
vi. A person, who, is under the age of sixteen years or is a woman or is sick or infirm, may be
released on bail, if the Special Court so directs.
vii. However, the Special Court shall not take cognizance of any offence referred to this sub-
section except upon a complaint in writing made by –

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  the Director, Serious Fraud Investigation Office;
 or any officer of the Central Government authorized, by a general or special order in writing in
this behalf by that Government.

Power to Arrest
i. If any officer, not below the rank of Additional Director, of SFIO has a reason to believe that
any person is guilty of any offence punishable under Section 447 of the Companies Act, 2013
on basis of material in his possession, the office can arrest that person and will inform him
the grounds of such arrest
ii. The copy of arrest order is forwarded to the officer of SFIO in sealed envelope.
iii. Every person arrested by the SFIO officer shall within twenty-four hours be taken to Special
Court or Judicial Court or Metropolitan Magistrate.

Companies (Arrests in connection with investigations by SFIO) Rules, 2017

i. Where the Director investigating into the affairs of a company other than a Government
company or foreign company has, reason to believe that any person has been guilty of any
offence punishable under section 212 of the Act, he may arrest such person.
ii. In case of an arrest being made by Additional Director or Assistant Director, the prior written
approval of the Director SFIO shall be obtained as Director SFIO shall be the competent
authority for all decisions pertaining to arrest.
iii. Where an arrest of a person is to be made in connection with a Government company or a
foreign company under investigation, such arrest shall be made with prior written approval of
the Central Government.
iv. The copy of arrest order along with the material in possession and all the other documents
including personal search memo, shall be forwarded to the office of Director SFIO in a sealed
envelope , so as to reach the office of the Director, SFIO within twenty four hours through the
quickest possible means.
v. An arrest register shall be maintained in the office of Director, SFIO and it should be ensured
that entries with regard to particulars of the arrestee, date and time of arrest and other
relevant information pertaining to the arrest are made in the arrest register.

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 vi. The office of Director, SFIO shall preserve the copy of arrest order together with supporting
materials for a period of five years, from the date of judgment or final order of the Trial Court,
in cases where the said judgment has not been impugned in the appellate court or from the
date of disposal of the matter before the final appellate court, in cases where the said judgment
or final order has been impugned, whichever is later.

Report to Central Government

i. SFIO will submit the interim report to the Central Government unless the investigation is
concluded and after the completion of investigation final report is submitted.
ii. On receipt of the Investigation Report, the Central Government will examine the report and
after taking legal advice, direct SFIO to initiate proceedings against the company and its
officers or employees, who have been directly or indirectly connected with the affairs of the
company.
iii. the Central Government may file an application before the Tribunal for appropriate orders with
regard to disgorgement of asset, property or cash and also for holding director, key managerial
personnel, other officer or any other person liable personally without any limitation of liability,
if it is found that directors or key managerial personnel have taken undue advantage from the
company.
iv. The investigation report filed with the Special Court for framing of charges against any person
shall deemed to be a report filed by a Police Officer under Section 173 of the Code of Criminal
Procedure, 1973.

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 33. TRIBUNALS
Qualification of president and members of Tribunal

Judicial Technical
President
Member Member

Is or has been a Is or has been:  Practiced as CA for 15 years, or

judge of High Court  Judge of High Court  Practiced as CMA for 15 years or
for 5 years. or  Practiced as a CS for 15 years or

 District Judge for at  person of proven ability, integrity and

standing having special knowledge and
least five years or
professional experience of not less than
 for at least ten years
fifteen years in industrial finance,
been an advocate of
industrial management, industrial
a court
reconstruction, investment and
accountancy or
 for at least five years, a presiding officer
of a Labour Court, Tribunal or National
Tribunal constituted under the Industrial
Disputes Act, 1947
 for at least fifteen years been a member
of the Indian Corporate Law Service or
Indian Legal Service and has been holding
the rank of Secretary or Additional
Secretary to the Government of India

Qualification of President and Members of Appellate Tribunal

i. The chairperson shall be a person who is or has been a Judge of the Supreme Court or the
Chief Justice of a High Court.
ii. A Judicial Member shall be a person who is or has been a Judge of a High Court or is a Judicial
Member of the Tribunal for five years.
iii. A technical member shall be a person of proven ability, integrity and standing having special
knowledge and professional experience of not less than twenty-five years in industrial finance,
industrial management, industrial reconstruction, investment and accountancy.

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 Selection of Members of Tribunal and Appellate Tribunal
i. The President of the Tribunal and the chairperson and Judicial Members of the Appellate
Tribunal, shall be appointed after consultation with the Chief Justice of India.
ii. The Members of the Tribunal and the Technical Members of the Appellate Tribunal shall be
appointed on the recommendation of a Selection Committee consisting of
(a) Chief Justice of India or his nominee—Chairperson
(b) a senior Judge of the Supreme Court or Chief Justice of High Court— Member
(c) Secretary in the Ministry of Corporate Affairs—Member; and
(d) Secretary in the Ministry of Law and Justice—Member.
iii. Where in a meeting of the Selection Committee, there is equality of votes on any matter, the
Chairperson shall have a casting vote.
iv. The Secretary, Ministry of Corporate Affairs shall be the Convener of the Selection Committee.
v. The Selection Committee shall determine its procedure for recommending persons under sub-
section (2).
vi. No appointment of the Members of the Tribunal or the Appellate Tribunal shall be invalid merely
by reason of any vacancy or any defect in the constitution of the Selection Committee

Term of Office of President, Chairperson and Other Members

i. The President and other members of Tribunal will hold the office for 5 years and will be eligible
for reappointment.
ii. President will hold the office until he attains the age of 67 years and members until they
attain the age of 65 years.
iii. The Chairperson and other members of Appellate Tribunal will hold the office for 5 years and
will be eligible for reappointment.
iv. Chairman will hold the office until he attains the age of 67 years and members until they
attain the age of 65 years.

Procedure Before Tribunal and Appellate Tribunal

i. Tribunal and Appellate Tribunal are bound by the procedure under Civil Procedure Code and are
guided by the principles of natural justice.

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 ii. Tribunal and Appellate Tribunal will exercise the same powers as are vested in a civil court
under the Code of Civil Procedure, 1908
a. summoning and enforcing the attendance of any person and examining him on oath
b. requiring the discovery and production of documents
c. receiving evidence on affidavits
d. subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872, requisitioning
any public record or document or a copy of such record or document from any office
e. issuing commissions for the examination of witnesses or documents
f. dismissing a representation for default or deciding it ex parte
g. setting aside any order of dismissal of any representation for default or any order passed by
it ex parte; and
h. any other matter which may be prescribed.
iii. All proceedings before the Tribunal or the Appellate Tribunal shall be deemed to be judicial
proceedings.

Form No. Particulars

NCLT-1 Petition or application or reference shall be filed with the Tribunal with
attachments thereto accompanied by Form No. NCLT.2

NCLT-4 The general heading for Proceedings

NCLT-6 General Affidavits verifying Petition

NCLT-5 Notice to be issued by the Tribunal to the opposite party

NCLT-12 Memorandum of Appearance

Orders of Tribunal
i. Tribunal will give a reasonable opportunity of being heard to both the parties and then pass
the necessary order.
ii. If there is a mistake apparent on record, Tribunal may rectify the mistake within 2 years and
amend the orders passed by it.
iii. No such amendment shall be made in respect of any order against which an appeal has been
preferred.

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 iv. Copy of order passed is sent to both the parties.

Appeal from Orders of Tribunal

i. Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal.
ii. No appeal shall lie to the Appellate Tribunal from an order made by the Tribunal with the
consent of parties.
iii. Every appeal shall be filed within a period of forty-five days from the date on which a copy
of the order of the Tribunal is made available to the person aggrieved.
iv. The Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-
five days, if there has been a sufficient cause for delay.
v. After giving reasonable opportunity of being heard, Tribunal may either confirm, modify or set
aside the order appealed against.
vi. Copy of order passed is sent to both the parties.

Appeal to Supreme Court

Any person aggrieved by any order of the Appellate Tribunal may file an appeal to the Supreme
Court within sixty days from the date of receipt of the order of the Appellate Tribunal to him
on any question of law arising out of such order. However, if there is sufficient cause for the
delay the time period will be extended from Sixty days.

34. SAT (Securities Appellate Tribunal)

Securities Appellate Tribunal (SAT) is a statutory body established under the provisions of
Section 15K of the Securities and Exchange Board of India Act, 1992 to hear and dispose of
appeals against orders passed by the Securities and Exchange Board of India or by an
adjudicating officer under the Act; and to exercise jurisdiction, powers and authority conferred
on the Tribunal by or under SEBI Act, 1992.

Additional Information- Penalties under Companies Act, 2013

Sections Particulars Penalty

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 1. Section 4(5) – Reservation of After reservation of the person making
Name name, if information application shall be
given is not correct liable to a penalty
then: If the company which may extend to
has not been Rs. 1 Lakh.
incorporated, the
reserved name shall be
cancelled; and
2. Section 10A -Commencement of If any default is made the company shall be
business etc. in complying with the liable to a penalty of
requirements of this Rs.50,000 and every
section officer who is in
default shall be liable
to a penalty of
Rs.1000 for each day
during which such
default continues but
not exceeding an
amount of Rs. 1 Lakh.
3. Section 12(8)- Registered office If any default is made the company and
of company in complying with the every officer who is in
requirements of this default shall be liable
section to a penalty of
Rs.1000 for every day
during which the
default continues but
not exceeding Rs. 1
Lakh.
4. Section 15(2)-Alteration of Default in noting the company and
Memorandum or Articles to be alteration made in the every officer who is in
noted in every copy memorandum or default shall be liable

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 articles of a company to a penalty of
in every copy of the Rs.1000 for every copy
memorandum or of the memorandum
articles or articles issued
without such
alteration.
5. Section 16(3)- Rectification of If a Company makes the Central
Name of Company any default in Government shall
registration of name allot a new name to
as in the opinion of the company in such
Central Government manner as prescribed
the name for and the Registrar
registration is shall enter the new
identical to the name name in the register
of company already of companies in place
registered of the old name and
issue a fresh
certificate of
incorporation with
the new name, which
the company shall
use thereafter
6. Section 17(2)- Copies of If on request of the company and
memorandum, articles, etc., to be member, company has every officer of the
given to members not provided them a company who is in
copy of: (i) MOA; (ii) default shall be liable
AOA; and (iii) every for each default, to a
agreement and every penalty of Rs.1000 for
resolution referred in each day during
sub-section (1) of which such default
section 117 continues or Rs. 1

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 lakh, whichever is
less
7. Section 33(3)- Issue of Any default in Company shall be
Application Forms for Securities complying with the liable to a penalty of
provisions of this Rs.50,000 for each
section default.
8. Section 39(5)-Allotment of (i) If the company the company and its
Securities by Company has not returned the officer who is in
application money default shall be liable
received (ii) If a to a penalty, for each
company having a default, of Rs.1000 for
share capital has not each day during
filed return of which such default
allotment with continues or Rs. 1
Registrar Lakh, whichever is
less.
9. Section 42(9)- Offer or Defaults in filing the the company, its
invitation for subscription of return of allotment promoters and
securities on private placement within the period directors shall be
prescribed liable to a penalty for
each default of
Rs.1000 for each day
during which such
default continues but
not exceeding Rs.25
Lakh.
10. Section 42(10)- Offer or If a company makes the company, its
invitation for subscription of an offer or accepts promoters and
securities on private placement monies in directors shall be
contravention of this liable for a penalty
section which may extend to

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 the amount raised
through the private
placement or Rs.2
Crore, whichever is
lower, and the
company shall also
refund all monies
with interest to
subscribers within a
period of thirty days
of the order imposing
the penalty
11. Section 53(3)-Prohibition on Failure of company to such company and
issue of shares at discount comply with the every officer who is in
provisions of this default shall be liable
section to a penalty which
may extend to an
amount equal to the
amount raised
through the issue of
shares at a discount
or Rs.5 Lakhs,
whichever is less, and
the company shall
also be liable to
refund all monies
received with interest
at the rate of 12%
per annum from the
date of issue of such
shares to the persons

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 to whom such shares
have been issued.
12. Section 56(6)- Transfer and If a Company make the company and
Transmission of Securities any default in the every officer of the
provisions of transfer company who is in
of Shares default shall be liable
to a penalty of
Rs.50,000.
13. Section 60(2)-Publication of If any default is made the company shall be
authorised, subscribed and paid- in complying with the liable to pay a
up capital provisions of penalty of Rs.10,000
publication of and every officer of
Authorised, Subscribed the company who is
and Paid-Up Capital in default shall be
on Companies letter liable to pay a
heads, business heads penalty of Rs.5000,
for each default.
14. Section 64(2)-Notice to be If a Company fails to such company and
Given to Registrar for Alteration send notice to every officer who is in
of Share Capital Registrar after default shall be liable
alteration of Share to a penalty of
Capital Rs.500 for each day
during which such
default continues,
subject to a
maximum of Rs.5
Lakh in case of a
company; and Rs.1
Lakh in case of an
officer who is in
default.

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 15. Section 86- Punishment for If a Company the company shall be
contravention of provisions of contravenes the liable to a penalty of
Charges provisions of Chapter Rs.5 Lakh; and every
VIRegistration of officer of the
Charges company who is in
default shall be liable
to a penalty of
Rs.50,000.
16. Section 88(5)- Register of If a company does not the company shall be
Members, etc. maintain a register of liable to a penalty of
members or Rs.3 Lakhs; and every
debenture-holders or officer of the
other security holders company who is in
or fails to maintain default shall be liable
them in accordance to a penalty of
with the provisions Rs.50,000.
of subsection (1) or
sub-section (2)
17. Section 89-Declaration in (i) If any person fails he shall be liable to a
Respect of Beneficial Interest in to make a declaration penalty of Rs.50000
any Share (ii) If a company, and in case of
required to file a continuing failure,
return under sub- with a further
section (6), fails to penalty of Rs.200 for
do so before the expiry each day after the
of the time specified first during which
therein such failure
continues, subject to
a maximum of Rs.5
Lakhs. the company
and every officer of

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 the company who is
in default shall be
liable to a penalty of
Rs.1000 for each day
during which such
failure continues,
subject to a
maximum of Rs. 5
Lakhs in the case of
a company and Rs. 2
Lakhs in case of an
officer who is in
default.
18. Section 90- Register of (i) If any person fails he shall be liable to a
significant beneficial owners in a to make a declaration penalty of Rs.50,000
company as required under sub- and in case of
section (1) (ii) If a continuing failure,
company, required to with a further
maintain register penalty of Rs.1000 for
under sub-section (2) each day after the
and file the first during which
information under such failure
subsection (4) or continues, subject to
required to take a maximum of Rs. 2
necessary steps under Lakhs. the company
sub-section (4A), shall be liable to a
fails to do so or denies penalty of Rs.1Lakh
inspection as provided and in case of
therein continuing failure,
with a further
penalty of Rs. 500 for

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 each day, after the
first during which
such failure
continues, subject to
a maximum of Rs. 5
Lakh; and every
officer of the
company who is in
default shall be liable
to a penalty of Rs.
25,000 and in case of
continuing failure,
with a further
penalty of Rs. 200 for
each day, after the
first during which
such failure
continues, subject to
a maximum of Rs. 1
Lakh.
19. Section 91(2)-Power to Close If the register of the company and
Register of Members or members or of every officer of the
Debenture-Holders or Other debenture-holders or company who is in
Security Holders. of other security default shall be liable
holders is closed to a penalty of
without giving the Rs.5000 for every day
notice as provided in subject to a
sub-section (1), or maximum of Rs.1
after giving shorter Lakh during which
notice than that so the register is kept
provided, or for a closed.

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 continuous or an
aggregate period in
excess of the limits
specified in that
subsection
20. Section 92(5)-Annual Return (i) If any company such company and its
fails to file its annual every officer who is in
return , before the default shall be liable
expiry of the period to a penalty of
specified therein (ii) Rs.10,000 and in case
If a company of continuing failure,
secretary in practice with further penalty
certifies the annual of Rs.100 for each day
return otherwise than during which such
in conformity with the failure continues,
requirements of this subject to a
section or the rules maximum of
made thereunder Rs.2Lakhs in case of
a company and
Rs.50,000 in case of
an officer who is in
default. he shall be
liable to a penalty of
Rs.2 Lakhs
21. Section 94(4)-Place of keeping If Company refuses to the company and
and Inspection of Registers, give copy of registers every officer of the
Returns, etc. or to take extract company who is in
thereof or deny default shall be liable,
inspection for each such default,
to a penalty of
Rs.1000 for every day

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 subject to a
maximum of Rs.1
Lakh during which
the refusal or default
continues.
22. Section 99-Punishment for If Company defaults the company and
default in complying with in holding meeting in every officer of the
provisions of sections 96 to 98. accordance with company who is in
Section 96, 97 or 98 default shall be
or in complying with punishable with fine
any directions of the which may extend to
Tribunal Rs.1 Lakh and in the
case of a continuing
default, with a
further fine which
may extend to
Rs.5000 for every day
during which such
default continues.
23. Section 102(5)-Statement to be if any default is made every promoter,
Annexed to Notice. in complying with the director, manager or
provisions of this other key managerial
section, personnel of the
company who is in
default shall be liable
to a penalty of
Rs.50,000 or five
times the amount of
benefit accruing to
the promoter,
director, manager or

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 other key managerial
personnel or any of
his relatives,
whichever is higher.
24. Section 105(3)-Proxies If any officer fails to every officer of the
annex a statement company who is in
along with notice with default shall be liable
regard to proxy. to penalty of Rs.5000
25. Section111(5)- Circulation of If any default is made the company and
Members’ Resolution in complying with the every officer of the
provisions of this company who is in
section default shall be liable
to a penalty of
Rs.25,000.
26. Section 117(2)-Resolutions and If any company fails such company shall
Agreements to be Filed to file the resolution be liable to a penalty
or the agreement of Rs.10,000 and in
under sub-section (1) case of continuing
before the expiry of failure, with a further
the period specified penalty of Rs.100 for
therein each day after the
first during which
such failure
continues, subject to
a maximum of Rs.2
Lakhs; and every
officer of the
company who is in
default including
liquidator of the
company, if any, shall

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 be liable to a penalty
of Rs.10,000 and in
case of continuing
failure, with a further
penalty of Rs.100 for
each day after the
first during which
such failure
continues, subject to
a maximum of
Rs.50,000
27. Section 118-Minutes of If Company is not the company shall be
proceedings of general meeting, complying with the liable to a penalty of
meeting of Board of Directors provisions of minutes Rs.25,000; and every
and other meeting and of general meeting, officer of the
resolutions passed by postal Board Meeting and company who is in
ballot other meeting and default shall be liable
resolutions passed by to a penalty of Rs.
postal ballot 5000.
28. Section 119-Inspection of minute- If Company refuses the company shall be
books of general meeting for inspection or copy liable to a penalty of
of minutes of general Rs.25,000; and every
meeting is not officer of the
furnished within the company who is in
time specified therein default shall be liable
to a penalty of
Rs.5000 for each
such refusal or
default, as the case
may be.

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 29. Section 121-Report on Annual If the company fails Company shall be
General Meeting to file the report to liable to a penalty of
the ROC before the Rs.1 Lakh and in case
expiry of the period of continuing failure,
specified therein with further penalty
of Rs.500 for each
day after the first
during which such
failure continues,
subject to a
maximum of Rs. 5
Lakhs; and Every
officer of the
company who is in
default shall be liable
to a penalty which
shall not be less than
Rs.25000 and in case
of continuing failure,
with further penalty
of Rs.500 for each
day after the first
during which such
failure continues,
subject to a
maximum of Rs. 1
Lakh.
30. Section 124(7)- Unpaid Dividend If a company fails to Company shall be
Account comply with any of liable to a penalty of
the requirements of Rs. 1 Lakh and in
this section case of

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 continuing failure,
with a further
penalty of Rs.500 for
each day after the
first during which
such failure
continues, subject to
a maximum of Rs. 10
Lakhs; and Every
officer of the
company who is in
default shall be liable
to a penalty
of twenty-five
thousand rupees and
in case of continuing
failure, with a further
penalty of one
hundred rupees for
each day after the
first during which
such failure
continues, su
31. Section 134(8)- Financial If a company is in Company shall be
Statement, Board’s Report, etc default in complying liable to a penalty of
with the provisions of Rs. 3 Lakhs; and
this section Every officer of the
company who is in
default shall be liable
to a penalty of Rs.
50,000

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 32. Section 135-Corporate Social If a company is in Company shall be
Responsibility default in complying liable to a penalty of
with the provisions of twice the amount
sub-section (5) or required to be
sub-section (6) of transferred by the
this Section company to the Fund
specified in Schedule
VII or the Unspent
Corporate Social
Responsibility
Account, as the case
may be, or Rs. 1
Crore, whichever is
less, and Every officer
of the company who
is in default shall be
liable to a penalty of
one-tenth of the
amount required to be
transferred by the
company to such
Fund specified in
Schedule VII, or the
Unspent Corporate
Social Responsibility
Account, as the case
may be, or Rs. 2
Lakhs, whichever is
less.

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 33. Section 136(3)- Right of If any default is made The company shall be
Member to Copies of Audited in complying with the liable to a penalty of
Financial Statement provisions of this Rs.25,000; and Every
section officer of the
company who is in
default shall be liable
to a penalty of
Rs.5000.
34. Section 137(3)- Copy of If a company fails to The company shall be
Financial Statement to be Filed file the copy of the liable to a penalty of
with Registrar financial statements Rs.10,000 and in case
under sub-section (1) of continuing failure,
or sub-section (2), as with a further
the case may be, penalty of Rs.100 for
before the expiry of each day during
the period specified which such failure
therein continues, subject to
a maximum of Rs.2
Lakhs; andThe
managing director
and the Chief
Financial Officer of
the company, if any,
and, in the absence
of the managing
director and the Chief
Financial Officer, any
other director who is
charged by the Board
with the
responsibility of

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 complying with the
provisions of this
section, and, in the
absence of any such
director, all the
directors of the
company, shall be
liable to a penalty of
Rs.10,000 and in case
of continuing failure,
with further penalty
of Rs.100 for each day
after the first during
which such failure
continues, subject to
a maximum of
Rs.50,000.
35. Section 140(3)- Removal, Failure of the auditor he or it shall be liable
Resignation of Auditor and Giving to intimate regarding to a penalty of
of Special Notice his resignation Rs.50,000 or an
amount equal to the
remuneration of the
auditor, whichever is
less, and in case of
continuing failure,
with further penalty
of Rs. 500 for each
day after the first
during which such
failure continues,
subject to a

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 maximum of Rs. 2
Lakhs
36. Section 143(15)- Powers and If any auditor, cost He shall: (a) in case
Duties of Auditors and Auditing accountant, or of a listed company,
Standards company secretary in be liable to a penalty
practice does of Rs.5 lakh; and (b)
not comply with the in case of any other
provisions of sub- company, be liable to
section (12) a penalty of Rs. 1
Lakh.
37. Section 157(2)- Company to If a company fails to Company shall be
Inform Director Identification furnish Director liable to a penalty of
Number to Registrar Identification Number Rs.25,000 and in case
of continuing failure,
with further penalty
of Rs. 100 for each
day after the first
during which such
failure continues,
subject to a
maximum of Rs. 1
Lakh, and Every
officer of the
company who is in
default shall be liable
to a penalty of not
less than Rs. 25,000
and in case of
continuing failure,
with further penalty
of Rs. 100 for each

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 day after the first
during which such
failure continues,
subject to a
maximum of Rs. 1
Lakh.
38. Section 159-Penalty for Default If any individual or Such individual or
of Certain Provisions director of a company director of the
makes any default in company shall be
complying with any of liable to a penalty
the provisions of which may extend to
section 152, section Rs. 50,000 and where
155 and section 156 the default is a
continuing one, with
a further penalty
which may extend to
Rs. 500 for each day
after the first during
which such default
continues.
39. Section 165- Number of If a person accepts an he shall be liable to a
Directorships appointment as a penalty of Rs. 2000
director in violation of for each day after the
this section first during which
such violation
continues, subject to
a maximum of Rs. 2
Lakhs.
40 Section 172- Penalty If a company is in Company and every
default in complying officer of the
with any of the company who is in

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 provisions of Chapter default shall be liable
X-Appointment and to a penalty of Rs.
Qualifications of 50,000, and in case of
Directors and for continuing failure,
which no specific with a further
penalty or punishment penalty of Rs. 500 for
is provided therein each day during
which such failure
continues, subject to
a maximum of Rs. 3
Lakhs in case of a
company and Rs. 1
Lakh in case of an
officer who is in
default
41 Section 173(4)- Meetings of Every officer of the Liable to penalty of
Board company whose duty Rs. 25,000
is to give notice under
this section and who
fails to do so
42 Section 178(8)- Nomination and In case of any Company shall be
Remuneration Committee and contravention of the liable to a penalty of
Stakeholders Relationship provisions of section Rs. 5 Lakhs; and
Committee 177 and 178 Every officer of the
company who is in
default shall be liable
to a penalty of Rs. 1
Lakh
43 Section 184(4)- Disclosure of If a director of the such director shall be
Interest by Director company contravenes liable to a penalty of
the provisions of Rs. 1 Lakh.

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 subsection (1) or sub-
section (2) of Section
184
44 Section 187(4)- Investments of If a company is in Company shall be
Company to be Held in its Own default in complying liable to a penalty of
Name with the provisions of Rs. 5 Lakhs; and
this section Every officer of the
company who is in
default shall be liable
to a penalty of Rs.
50,000.
45 Section 188(5)- Related Party Any director or any In case of listed
Transactions other employee of a company, be liable to
company, who had a penalty of Rs. 25
entered into or Lakhs; and In case of
authorised the any other company,
contract or be liable to a penalty
arrangement in of Rs. 5 Lakhs.
violation of the
provisions of this
section shall,
46 Section 189(6)- Register of Every director who Liable to a penalty of
Contracts or Arrangements in fails to comply with Rs. 25,000.
Which Directors are Interested the provisions of this
section and the rules
made thereunder shall
be
47 Section 190(3)- Contract of If any default is made Company shall be
Employment with Managing or in complying with the liable to a penalty of
WholeTime Directors provisions of sub- Rs. 25,000; and Every
section (1) or sub- officer of the

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 section (2) of this company who is in
section default shall be liable
to a penalty of Rs.
5000 for each defaul
48 Section 191(5)- Payment to If a director of the Such director shall be
Director for Loss of Office, etc., company makes any liable to a penalty of
in Connection with Transfer of default in complying Rs. 1 Lakh
Undertaking, Property or Shares with the provisions of
this section
49 Section 197(15)- Overall If any person makes He shall be liable to
Maximum Managerial any default in a penalty of Rs. 1
Remuneration and Managerial complying with the Lakh; and where any
Remuneration in Case of Absence provisions of this default has been
or Inadequacy of Profits section made by a company,
the company shall be
liable to a penalty of
Rs. 5 Lakhs
50 Section 203(5)- Appointment of If any company makes Company shall be
Key Managerial Personnel any default in liable to a penalty of
complying with the Rs. 5 Lakh; and Every
provisions of this director and key
section managerial personnel
of the company who
is in default shall be
liable to a penalty of
Rs. 50,000 and where
the default is a
continuing one, with
a further penalty of
Rs. 1000 for each day
after the first during

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 which such default
continues but not
exceeding Rs. 5 Lakhs
51 Section 204- Secretarial Audit If a company or any the company, every
for Bigger Companies officer of the officer of the
company or the company or the
company secretary in company secretary in
practice, contravenes practice, who is in
the provisions of this default, shall be liable
section to a penalty of Rs. 2
Lakhs.
52 Section 232(8)- Merger and If a company fails to the company and
Amalgamation of Companies. file a certified copy of every officer of the
the order with the company who is in
Registrar under sub- default shall be liable
section (5), to a penalty of Rs.
20,000 and where the
failure is a continuing
one, with a further
penalty of Rs.1000 for
each day after the
first during which
such failure
continues, subject to
a maximum of Rs. 3
lakhs.
53 Section 238- Registration of The director who liable to a penalty of
Offer of Schemes Involving issues a circular which Rs. 1 Lakh
Transfer of Shares has not been
presented for
registration and

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 registered under
clause (c) of sub-
section (1)
54 Section 247(3)-Valuation by If a valuer contravenes The valuer shall be
Registered Valuers. the provisions of this liable to a penalty of
section or the rules Rs. 50,000.
made thereunder
55 Section 378V-Meetings of Board The Chief Executive liable to a penalty of
and quorum of Producer Company shall give notice as Rs.5000
aforesaid not less
than seven days prior
to the date of the
meeting of the Board
and if he fails to do
so, he shall be
56 Section 378XSecretary of If a Producer Company the Company and
Producer Company fails to comply with every officer of the
the provisions of Company who is in
appointment of default, shall be liable
whole-time secretary to a penalty of Rs.
100 for every day
during which the
default continues
subject to a
maximum of Rs. 1
Lakh.
57 Section 403- Fee for Filing, etc. Where a company fails the company and the
or commits any officers of the
default to submit, file, company who are in
register or record any default, shall, without
document, fact or prejudice to the

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 information under liability for the
sub-section (1) before payment of fee and
the expiry of the additional fee, be
period specified in the liable for the penalty
relevant section or punishment
provided under this
Act for such failure or
default.
58 Section 405(4)-Power of Central If any company fails the company and
Government to Direct Companies to comply with an every officer of the
to Furnish Information or order made under sub- company who is in
Statistics. section (1) or sub- default shall be liable
section (3), or to a penalty of Rs.
furnishes any 20,000 and in case of
information or continuing failure,
statistics which is with a further
incorrect or penalty of Rs. 1000
incomplete in any for each day after the
material respect first during which
such failure
continues, subject to
a maximum of Rs. 3
Lakhs.
59 Section 446B-Penalty for small if penalty is payable such company, its
company and OPC for noncompliance of officer in default or
any of the provisions any other person, as
of this Act by a One the case may be,
Person Company, shall be liable to a
small company, start- penalty which shall
up company or not be more than
Producer Company, or one-half of the

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 by any of its officer in penalty specified in
default, or any other such provisions
person in respect of subject to a
such company, then maximum of Rs. 2
Lakhs in case of a
company and Rs. 1
Lakh in case of an
officer who is in
default or any other
person, as the case
may be
60 Section 450-Punishment Where If a company or any the company and
No Specific Penalty or officer of a company every officer of the
Punishment is Provided. or any other person company who is in
contravenes any of default or such other
the provisions of this person shall be liable
Act or the rules made to a penalty of Rs.
thereunder, or any 10,000, and in case of
condition, limitation or continuing
restriction subject to contravention, with a
which any approval, further penalty of Rs.
sanction, consent, 1000 for each day
confirmation, after the first during
recognition, direction which the
or exemption in contravention
relation to any matter continues, subject to
has been accorded, a maximum of Rs. 2
given or granted, and Lakhs in case of a
for which no penalty company and Rs.
or punishment is 50,000 in case of an
officer who is in

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 provided elsewhere in default or any other
this Act, person
61 Section 454A-Penalty for Where a company or it or he shall be liable
repeated default. an officer of a for the second or
company or any other subsequent defaults
person having already for an amount equal
been subjected to to twice the amount
penalty for default of penalty provided
under any provisions for such default
of this Act, again under the relevant
commits such default provisions of this Act.
within a period of
three years from the
date of order imposing
such penalty passed
by the adjudicating
officer or the Regional
Director, as the case
may be,

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 SUMMARISED VERSION (MIND MAP)

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.1
CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 7- RELIEF AND REMEDIES

1. INTRODUCTION
What is Compounding?
i. The term “Compounding” refers to the exercise of voluntarily admitting the contravention,
pleading guilty and seeking redressal for the same. Whereas, the term “Offence” mean any act
or omission made punishable by any law for the time being in force.
ii. Compounding of an offence is a settlement mechanism, by which, the offender is given an
option to pay money in lieu of his prosecution, thereby avoiding a prolonged litigation.
iii. There is no definition of the word “compounding” in the Companies Act 2013, however, the
legal meaning of compounding is “doing good the default/non-compliance”.
iv. A compounding of offense has three basic constituents i.e.
 Consciousness of offence
 The agreement not to prosecute
 The receipt of penalty.
v. The compounding authority (RD/NCLT) in case of the Companies Act, 2013 (the Act) may
compound the offence and ask the defaulter to deposit compounding fee.
vi. Once the offence has been compounded, the defaulter will no more be treated for the offence
which has been compounded.

What is an Offence?
Offence means any act or omission made punishable by any law for the time being in force.
Corporate offences are classified into civil and criminal offences. An offence may be
“Compoundable” or “Non-Compoundable”

2. COMPOUNDING OF OFFENCES PROVISIONS UNDER THE COMPANIES ACT, 2013

i. Section 441 of Companies Act, 2013 deals with Compounding of offences.
ii. The Companies Act, 2013 does not define compounding of offences. However, it provides
enabling provisions by which, the Company or its director or officers can apply for compounding
thereby avoiding the prolonged litigation.

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 PERSONS ELIGIBLE TO MAKE A COMPOUNDING APPLICATION

Company – any director authorized by the Officers in default of the company who are

BOD liable for prosecution under the respective

provisions for non-compliances

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Who is considered as officer in default?
i. whole-time director
ii. key managerial personnel
iii. where there is no key managerial personnel, director or
directors specified by the Board and has given his consent
in writing to the Board
iv. any person who, under the immediate authority of the
Board or any key managerial personnel, is charged with
any responsibility including maintenance, filing or
distribution of accounts or records, authorises, actively
participates in, knowingly permits, or knowingly fails to
take active steps to prevent, any default
v. any person in accordance with whose advice, directions or
instructions the Board of Directors of the company is
accustomed to act, other than a person who gives advice
to the Board in a professional capacity
vi. every director, who is aware of contravention because of
participation in proceedings without objecting to the same,
or where such contravention had taken place with his
consent or connivance.
vii. in respect of the issue or transfer of any shares of a
company, the share transfer agents, registrars and
merchant bankers to the issue or transfer.

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3. BENEFITS OF COMPOUNDING OF OFFENCES
i. Acts as a deterrent and prevents commission of offence
ii. Avoid heavy fines and penalty
iii. Keep the flow of business activity unhindered
iv. Help to maintain dignity
v. Does not burden court with cases
vi. Less time consuming and summary proceedings
vii. No disqualification for Directors, since fees payable on compounding are not treated as penalty.

4. WHICH OFFENCES CAN BE COMPOUNDED?

Compoundable Offence Non-Compoundable Offence

1. Fine only 1. Imprisonment only

2. Imprisonment or Fine 2. Imp & Fine
3. Imprisonment or Fine or 3. Investigation is pending
Both 4. Offence committed within 3 years
from the date on which similar
offence was compounded

Cibersites India (Pvt) Ltd

In the instant case when applicant filed an application for compounding it was held since
nature of violations committed were not criminal in nature and same were committed un-
intentionally, lenient view was to be taken and ad valorem fine for all offences/violations was
to be imposed

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 Capital Small Finance Bank Ltd Vs. Registrar of Companies
In the instant case when applicant filed an application for compounding it was held that
since company had inadvertently and under bona-fide mistake breached thresholds and there
were no complaints or investigation pending against the company, authority should compound
the suo moto application filed by the applicant.

5. WHEN COMPOUNDING CAN BE DONE?

i. Offenses committed by a company or its officers that are punishable with a fine may be
compounded.
ii. Example failure to file certain documents with the Registrar of Companies, failure to hold an
Annual General Meeting, or failure to maintain statutory registers.
iii. Compounding can be done either before (or) after the institution of any prosecution.

6. WHO ARE THE COMPOUNDING AUTHORITIES/WHO CAN COMPOUND THE OFFENCE?

1. Regional Director (Upto 25 lakhs)
2. Tribunal (Beyond 25 Lakhs)

UW International Training & Education Centre for Health Private Limited

The instant case demonstrates that when compounding an offense, the minimum amount of
fine specified in the penal clause of the relevant section may not be strictly applicable.
Compounding authorities have the flexibility to consider various actions beyond imposing fines,
such as admonishing the defaulter or issuing warnings.

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7. LIST OF OFFENCES COMPOUNDABLE IN NATURE (POWERS VESTED WITH REGIONAL
DIRECTOR)
i. Contravention of provisions relating to issue of a prospectus.
ii. Committing default in complying with the provisions regarding to variation of shareholders’
rights.
iii. Committing default in complying with the order of Tribunal relating to rectification of register
of members.
iv. Failure to publish the order of confirmation of the reduction of share capital by the Tribunal.
v. Contravening provisions relating to purchase by company or loans by company for purchase of
its own shares.
vi. Committing default in complying with the order of Tribunal relating to redemption of
debentures.
vii. Failure to maintain register of members or debenture-holders or other security holders as
prescribed.
viii. If a company secretary in practice certifies the annual return otherwise than in conformity
with the requirements of this section or the rules made thereunder.
ix. Failure to keep proper books of account.
x. Failure to keep proper financial statement.
xi. Default in complying with the provisions regarding financial statement and Board’s report.
xii. Failure of auditor to intimate to Central Government regarding fraud against the company by
officers or employees.
xiii. Functioning as a director after vacation of office.
xiv. Contravention of the provisions of sub-section 1 relating to loans, guarantee or security.
xv. Related party transaction in case of other company and listed company.
xvi. Forward dealing in securities of the company by Key Managerial personnel or director.

8. LIST OF OFFENCES COMPOUNDABLE IN NATURE (POWERS VESTED WITH THE TRIBUNAL)

i. Committing default in complying with the requirements relating to formation of companies
with charitable objects, etc.

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 ii. Committing default in complying with the provisions relating to securities to be dealt with in
stock exchanges.
iii. Fraudulently issuing of duplicate share certificates by a company.
iv. If a company fails to repay the deposit or part thereof or any interest thereon within the time
specified or such further time as may be allowed by the Tribunal.
v. Punishment for fraud involves an amount less than ten lakh rupees or one per cent. of the
turnover of the company, whichever is less and does not involve public interest.

9. LIST OF OFFENCES NON-COMPOUNDABLE IN NATURE

i. Deceitfully personating as an owner of any shares or interest in a company
ii. Contravention of an order of the Tribunal regarding the refusal of registration and appeal
against refusal.
iii. Contravening provisions relating to purchase by company or loans by company for purchase of
its own shares.
iv. Tampering with the minutes of the proceedings of meeting.
v. Failure to distribute dividend within thirty days.
vi. Failure of auditor to comply with the provisions of sections 139, 143, 144 and 145
vii. Political contribution made in contravention of the provision
viii. Contravention of the provisions relating to loans and investment
ix. Disobeys the direction issued by the Registrar or inspector
x. Disobeys the direction issued by the Registrar or inspector in relation to investigation
xi. Failure to provide information, books or papers, etc. to inspector during investigation
xii. Committing default in complying with the order of Tribunal
xiii. Contravention of the provisions by the valuer
xiv. Offences by officers of companies in liquidation
xv. Frauds by officers
xvi. Failure to keep proper books of account before winding up
xvii. Punishment for fraud If the fraud involves public interest
xviii. Intentionally gives false evidence
xix. Wrongful withholding of property

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 Pahuja Takii Seed Ltd. and Ors. Vs ROC
In the instant case an application was made for compounding on the grounds that they had
already taken corrective measures to rectify their offenses. However, the National Company
Law Tribunal (NCLT), New Delhi Bench-III, dismissed these applications in a common order.
Questions for Determination in Court of Law:
i. Whether the Companies Act, 2013 bars filing of a joint application for compounding of
offence by a defaulting company along with its officers in default?
The NCLAT observed that there was no specific bar against the "joinder of parties" or the
joining of separate causes of action in filing a compounding application. In the absence of any
such prohibition, the joinder of parties for the same offense is allowed.

ii. Whether the Companies Act, 2013 bars filing of a joint application for compounding of
the same offence committed in different years?
The NCLAT stated that there is no prohibition against filing a single application for
compounding the same offense committed in different financial years by the company and
its officers. Similarly, there is no bar on a joint application being preferred by a company
along with its officers in default. The NCLAT emphasized that procedures are considered
permissible unless expressly prohibited.

iii. Whether the Tribunal has jurisdiction to compound offences where the fine prescribed
for such offence are less than its monetary jurisdiction?
The NCLAT clarified that Section 441 of the Companies Act only restricts the power of the
Regional Director and authorized officers of the Central Government to compound offenses
where the maximum fine does not exceed a specified amount. However, no such restriction
has been imposed on the powers of the Tribunal, which is the primary forum for compounding
offenses. The Regional Director and officers of the Central Government represent alternative
forums with restrictions based on the quantum of punishment. The NCLAT affirmed that the
Tribunal has the authority to compound all offenses, irrespective of any pecuniary limit.

iv. How to quantify the limit of Rs. 25 lacs in order determine the jurisdiction of RD?

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 The NCLAT did not explicitly answer this question but reaffirmed the NCLT's observation that
the quantum of Rs. 25 lakhs should be determined based on each applicant and is not required
to be aggregated when joint applications are filed. In other words, for calculating the monetary
jurisdiction, the fine should be assessed separately for each applicant, and aggregation is not
necessary. If the fine on the company is less than Rs. 25 lakhs but the officer in default
faces a higher fine, either a joint application can be filed with the Tribunal, or the company
can file an application with the Regional Director while the officer in default files with the
Tribunal.

10. COMPOUNDING OF REPEATED OFFENCES

i. Section 441 provides that if a company or officer in default compounds a contravention within
3 years from the date on which the similar offence was committed and compounded, cannot
be compounded.
ii. This means:
a. on which the offence was previously compounded, shall be deemed to be a first offence;
b. “Regional Director” means a person appointed by the Central Government as a Regional Director
for the purposes of this Act

CAN YOU SOLVE THIS?

Whether an offence punishable under the relevant provisions of the
Companies Act, 2013 with ‘fine only’ or with ‘imprisonment or fine’,
if repeated within a period of three years results into a mandatory
imprisonment for the defaulters and whether the same can be
compounded or not?

Solution:
An offence committed by a company or its officer within a period of 3 years from the date
on which a similar offence committed by it or him was compounded under this section cannot
be compounded and the provisions of Section 451 also becomes applicable. Section 451 prescribes
that if the same offence is committed for the second or subsequent occasions within a period
of three years, then, that company and every officer thereof who is in default shall be

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 punishable with twice the amount of fine for such offence in addition to any imprisonment
provided for that offence.

CAN YOU SOLVE THIS?

Whether an offence punishable under the relevant provisions of the
Companies Act, 2013 with ‘fine only’ or with ‘imprisonment or fine’,
if repeated within a period of three years results into a mandatory
imprisonment for the defaulters and whether the same can be
compounded or not?

Solution:
Yes, all three years offence can be compounded as these offences were committed prior to
compounding order. If same offence is repeated during 2019-20 that cannot be compounded.

11. APPLICATION TO REGISTRAR OF COMPANIES

i. Application under section 441 is forwarded to the ROC. ROC after adding comments forward it
to RD or NCLT.
ii. Where any offence is compounded under this section, whether before or after the institution
of any prosecution, an intimation thereof shall be given by the company to the Registrar within
seven days from the date on which the offence is so compounded.
iii. Where any offence is compounded before the institution of any prosecution, no prosecution
shall be instituted in relation to such offence, either by the Registrar or by any shareholder of
the company against the offender in relation to whom the offence is so compounded.
iv. Where the compounding of any offence is made after the institution of any prosecution, such
compounding shall be brought by the Registrar in writing, to the notice of the court in which
the prosecution is pending and on such notice of the compounding of the offence being given,
the company or its officer in relation to whom the offence is so compounded shall be discharged.

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 Schneider Electric IT Business India Private Limited & Ors
In this case the central question revolves around whether an offense can be compounded even
when a prosecution is already underway against the involved parties.
The case establishes that if an offense is compounded after the initiation of a prosecution,
the Registrar is obligated to inform the Court where the prosecution is currently being pursued
in writing. Upon receiving notice of the composition, the Court is then mandated to release
the company or its officers against whom the prosecution is pending

Thoda Extra gyaaannnn……… Swaaad Anusaaar

Are the following offences compoundable and if yes, by
whom ?
i. Fraudulently issuing duplicate share certificates
The offence is punishable under section 46(5) of the
Companies Act, 2013 with fine only.
Compoundable by RD/NCLT.

ii. Failure to keep proper books of accounts

Compoundable by RD

iii. Tampering with minutes of meetings.

This offence is punishable under section 118(12) of the
Companies Act, 2013 with Imp & Fine
Hence, Not Compoundable.

CAN YOU SOLVE THIS?

PQR Ltd. failed to file return of allotment against the 16 lakh shares allotted by
the Board of directors at its meeting held on 20th April, 2019 and got order for
compounding of offence on 10th June, 2020. The company again failed to file
return of allotment against the 11 lakh shares allotted by the Board of directors
at its meeting held on 4th March, 2022. What options are available to the
company in respect of this default ?

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Solution:
According to section 441 of Companies Act, 2013, Similar offence cannot be compounded if
the offence is committed within 3 years from the date it was compounded. Hence, in the given
case, the company cannot go for compounding for non-filing of return of allotment.
However, there is no such restriction imposed under section 454 on adjudicating a penalty by
the adjudicating officer. AO may impose the penalty on company or direct the company or
officer in default to rectify the default.
Secondly, section 460(b) of Companies Act, 2013, provides an option for condonation of delay
by the CG if there is a delay in filing of document with ROC.
Hence, PQR doesn’t have an option for compounding but they can go for adjudication or
condonation of delay.

Procedure for Compounding (Chart)

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12. PROCEDURE FOR COMPOUNDING OF OFFENCE UNDER THE COMPANIES ACT, 2013

Check if the offence is compoundable

13. Step 1

Step 2 Hold a BM to decide the offence that has been

committed and calculate the fine that is payable
Form MGT-14
is filed with
Following would be decided in BM: ROC for Board
1. Application for Compounding Resolution
2. Authorize the Director or Officer in
Default to sign and submit the
application.
3. To appoint CA/CS/Lawyer to appear
before authority.

Step 3 Filing Application for Compounding of Offence

with ROC:
 Application is filed in Triplicate.
 Board resolution passed for the purpose of
making an application Form GNL-1
 Affidavit verifying the application/petition
 Memorandum of appearance or power of
attorney
 General profile and history of the company
 Copy of notice received from ROC
 Other documents if required.

Step 4 ROC will forward the complaint to NCLT/ RD

Step 5 RD/NCLT will send a notice a notice to the company

for personal hearing & authorized representative of the
company will make representation and admit the
contravention committed

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 Step 6 Payment of fees for compounding within the time
period specified.

Step 7 RD/NCLT will pass an order of Compounding.

Step 8 Order of RD/NCLT will be intimated to ROC.

Form INC-28

CAN YOU SOLVE THIS?

Is there any discretionary power to reject the Application of
Compounding?

Solution:
No, neither of the NCLT or the RD has been authorized with discretionary power to reject a
compounding application without due consideration.

CAN YOU SOLVE THIS?

Whether NCLT has powers to review its own decision?

Solution:
Section 420 of Companies Act, 2013 gives power to tribunal to rectify any error apparent on
record and to amend the order accordingly (“APC Credit Rating Private Limited Vs. Registrar
of Companies)

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14. OTHER PROVISIONS OF COMPOUNDING OF OFFENCES UNDER SECTION 441 OF THE
COMPANIES ACT, 2013
i. Compounding authority may ask the applicant to submit the amount before compounding to
the credit of Central Government.
ii. Offence will be compounded only after the sum has been paid and an evidence has been given
proving the payment of the compounding fee.
iii. The amount asked by the compounding authorities should not exceed the maximum amount of
fine that could have been imposed for the respective offence.
iv. The sum will be determined after duly taking into account any additional fee that the company
would have paid.
v. Prior to making the application for the compounding of offence arising from any failure or
default in relation to which a fee and additional fee is payable it is essential to ensure to put
an end to the failure or for removal of the default so that the compounding authority could
take the additional fee paid into consideration.

15. PENALTY FOR NON – COMPLIANCE OF ORDER OF COMPOUNDING AUTHORITIES

In case any officer fails to comply with the compounding order the maximum amount of fine
for the offence proposed to be compounded under section 441 shall be twice the amount
provided in the corresponding section.

16. COMPOUNDING PROVISIONS UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA
ACT, 1992 (“SEBI ACT”), SECURITIES CONTRACTS (REGULATION) ACT, 1956 (SCRA) &
DEPOSITORIES ACT, 1996
Composition Of Certain Offences
SEBI Act, provides that any offence punishable under this Act, not being an offence punishable
with imprisonment only, or with imprisonment and also with fine, may either before or after
the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court
before which such proceedings are pending.

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 Prakash Gupta v. Securities and Exchange Board of India
Issue:
In this case, the appellant was being prosecuted for an offence under Section 24(1) of the
Securities and Exchange Board of India Act, 1992 (SEBI Act). The appellant sought to
compound the offence under Section 24A. However, the Trial Court rejected the application,
upholding SEBI's objection that the offence could not be compounded without its consent.
Facts:
i. Mr. Prakash Gupta, director of Ideal Hotels & Industries Limited, was accused of price rigging
and insider trading during the Company's IPO, violating SEBI regulations. SEBI's investigation
revealed irregularities in share trading by certain entities during the IPO, suggesting their
involvement in upward price movement.
ii. A compounding application under Section 24A was filed by Mr. Gupta after an Adjudicating
Officer imposed a fine on him for the violations. However, SEBI's High Powered Advisory
Committee objected to compounding.
iii. The Trial Court rejected the application, stating that SEBI's consent was necessary for
compounding. The High Court of Delhi upheld this decision.

Key Issue:
The key issue was whether SEBI's consent was required for compounding offences under Section
24A. The Supreme Court observed that Section 24A doesn't explicitly demand SEBI's consent
and that Parliament had intentionally specified SEBI's role in other sections. The Court held
that SEBI's consent was not mandatory for compounding before the Securities Appellate
Tribunal (SAT) or the court where proceedings were pending.

Judgement:
In the present case, the nature of the allegations against the appellant are such so as to
preclude a decision to compound the offences:
i. The opinion of SEBI and its HPAC must be given due deference as the same indicates their
position on the effect that non-prosecution of the offence may have on market structures.
The Securities Appellate Tribunal or the courts should only differ from the opinion of SEBI/
the HPAC, if it has reasons to believe that the said opinion is mala fide or manifestly arbitrary.

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 ii. The principle behind the compounding proceeding should be that the aggrieved party has been
restituted and that it has consented to end the dispute. Since the aggrieved party may not
be before the court, and that the offences are usually of public nature, it becomes even more
essential to rely on SEBI’s opinion to understand if restitution has taken place.
iii. Even if restitution has taken place, but the offence is of public character and non-prosecution
of the same would affect the public at large, such offence should not be compounded.

17. SETTLEMENT PROCEEDINGS / CONSENT ORDERS UNDER SEBI LAWS-APPLICABLE FOR

COMPOSITION OF OFFENCE
i. Consent order may be passed at any stage after probable cause of violation has been found
under SEBI Laws. However, in the event of a serious and intentional violation, the process
should not be completed till the factfinding process is completed whether by way of
investigation or otherwise
ii. Consent orders provide flexibility of a wider array of enforcement actions which will achieve
the twin goals of an appropriate sanction and deterrence without resorting to long drawn
litigation before SEBI, SAT, and Courts. Passing of consent orders also reduce regulatory costs
and save time and efforts in pursuing enforcement actions
iii. It is an order settling administrative or civil proceedings between the regulator and a person
(Party) who may prima facie be found to have violated securities laws.
iv. Under the Securities and Exchange Board of India Act, 1992, Securities Contracts (Regulation)
Act, 1956 (SCRA) and the Depositories Act, 1996 (collectively also known as securities laws),
SEBI pursues two streams of enforcement actions i.e., Administrative /Civil (or) Criminal.
v. Administrative/civil actions include issuing directions such as remedial orders, cease and desist
orders, suspension or cancellation of certificate of registration and imposition of monetary
penalty under the respective statutes and action pursued or defended in a court of law/tribunal.
Criminal action involves initiating prosecution proceedings against violators by filing complaint
before a criminal court

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18. SETTLEMENT OF ADMINISTRATIVE AND CIVIL PROCEEDINGS (Same as Chap 6)
i. Any person, against whom any proceedings have been initiated or may be initiated under section
11, section 11B, section 11D, sub-section (3) of section 12 or section 15-I, may file an application
in writing to the Board proposing for settlement of the proceedings initiated or to be initiated
for the alleged defaults.
ii. The Board may, after taking into consideration the nature, gravity and impact of defaults,
agree to the proposal for settlement, on payment of such sum by the defaulter or on such
other terms as may be determined by the Board.
iii. The settlement proceedings under this section shall be conducted in accordance with the
procedure specified in the regulations made under this Act.
iv. All settlement amounts, excluding the disgorgement amount and legal costs, realised under this
Act shall be credited to the Consolidated Fund of India.
v. No appeal should lie against the order of settlement.

Kapashi Commercials Ltd.

On July 10, 2020, shareholders of Kapashi Commercials Ltd., a BSE-listed company, reached a settlement
with the Securities and Exchange Board of India (SEBI) to resolve an alleged violation of takeover norms.
The shareholders paid an amount exceeding Rs. 34 lakh as part of the settlement terms.
The case revolved around the alleged breach of SAST (Substantial Acquisition of Shares and Takeovers)
Regulations. These regulations govern the acquisition of substantial shares in a company and the
obligations that arise due to such acquisitions. It was claimed that four individuals had failed to promptly
disclose changes in their shareholding within the stipulated timeframe, both to Kapashi Commercials and
the Bombay Stock Exchange (BSE).
To address the alleged violation, the shareholders submitted an application to SEBI, proposing a settlement
for the breach of SAST Regulations related to the change in their shareholding in Kapashi Commercials.
The settlement involved the payment of a sum of more than Rs. 34 lakh as part of the resolution.
In summary, shareholders of Kapashi Commercials Ltd. settled with SEBI by paying a settlement amount
of over Rs. 34 lakh to address allegations of violating takeover norms. The allegations were linked to the
delayed disclosure of changes in their shareholding within the company and the stock exchange.

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19. SECURITIES AND EXCHANGE BOARD OF INDIA (SETTLEMENT PROCEEDINGS)
REGULATIONS, 2018
Application for Settlement
1. Application for settlement will be filed in form specified in Part A in Schedule I.
2. It will be accompanied by non-refundable fee.
3. The applicant shall make full and true disclosures in the application in respect of the alleged
default.
4. The applicant shall make one application for settlement of all the proceedings that have been
initiated or may be initiated in respect of the same cause of action.
5. The applicant whose application has been returned may, within fifteen days from the date of
communication from the Board, submit the complete and revised application that conforms to
the requirements of these regulations. No further opportunity will be given to the applicant for
default.
6. An application for settlement of defaults related to disclosures, shall as possible, be made after
making the required disclosure.

Limitation
Any application for settlement will not be accepted after expiry of 60 days from the date on
which the show cause notice is issued.

Scope of Settlement Proceedings

i. No application for settlement of any proceedings may be accepted if-
 An earlier application regarding same default has been rejected.
 Audit, investigation or inquiry is pending regarding the said offence.
 Monies due under an order issued under securities laws are liable for recovery under securities
laws.
ii. Board may not settle any matter if it is of the opinion that the default:
 has market wide impact
 caused losses to a large number of investors, or
 affected the integrity of the market

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iii. Apart from provisions laid down above, Board will take into consideration following factors for
acceptance of any application:
 whether the applicant has refunded or disgorged the monies due, to the satisfaction of the
Board;
 whether the applicant has provided an exit or purchase option to investors in compliance with
securities laws, to the satisfaction of the Board;
 whether the applicant is in compliance with securities laws or any order or direction passed
under securities laws, to the satisfaction of the Board;
 any other factor as may be deemed appropriate by the Board.

Rejection of Application
An application made to the Board can anytime be rejected on the following grounds:
i. The applicant refuses to receive or respond to the communications sent by the Board;
ii. The applicant does not submit or delays the submission of information, document, etc., as
called for by the Board
iii. The applicant who is required to appear, does not appear before the Internal Committee on
more than one occasion
iv. Where the applicant violates in any manner the undertaking and waivers
v. The applicant does not remit the settlement amount within the period specified and/or does
not abide by the undertaking and waivers.
vi. When the applicant fails to comply with the condition precedent for settlement in the time
required by Internal Committee.

Withdrawal of Application
i. An application can be withdrawn before the decision is communicated by the panel of whole
time members. However, once the application is withdrawn no application can be made for a
similar default unless a recommendation has been made by the High-Powered Advisory
Committee.
ii. Such an application may be considered subject to an increase of at least fifty percent over the
settlement amount determined.

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 Effect of pending application on specified proceedings
i. The filing of an application for settlement of any specified proceedings shall not affect the
continuance of the proceedings save that the passing of the final order shall be kept in
abeyance till the application is disposed of.
ii. Where the application is filed in case of proceedings that may be initiated against the applicant,
such proceedings shall not be initiated till the application is rejected or withdrawn.

Settlement terms
Settlement terms includes a settlement amount and non-monetary terms which includes the
following:
a) Suspension or cessation of business activities for a specified period;
b) Exit from Management;
c) Disgorgement on account of the action or inaction of the applicant;
d) Refraining from acting as a partner or officer or director of an intermediary or as an officer or
director of a company that has a class of securities regulated by the Board, for specified
periods;
e) Cancel securities and reduce holdings where the securities are issued fraudulently, including
bonus shares received on such securities, if any, and reimburse any dividends received, etc.;
f) Lock-in of securities;
g) Implementation of enhanced policies and procedures to prevent future securities laws violations
and agreeing to appoint an independent consultant to review internal policies, processes and
procedures.
h) Provide training and education to employees of intermediaries and securities market
infrastructure institutions.
Money received through application has to be credited to SEBI General Fund, Settlement
amount, excluding the cost, shall be credited to consolidated fund of India and the amount
of profits made by the applicant may be disgorged as part of the settlement terms and shall
be credited to the Investor Protection and Education Fund.

Factors to be considered to arrive at the settlement terms

i. Nature, gravity and impact of alleged default

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 ii. The extent of harm and/or loss to the investors’ and/or gains made by the applicant;
iii. The role played by the applicant in case the alleged default is committed by a group of persons
iv. Processes that have been introduced since the alleged default to minimize future defaults or
lapses;
v. Economic benefits accruing to any person from the non-compliance or delayed compliance;
vi. Whether any other proceeding against the applicant for non-compliance of securities laws is
pending or concluded
vii. Any other enforcement action that has been taken against the applicant for the same violation
viii. Any other factors necessary taking into consideration the facts and circumstances of the case.

Internal Committee
i. An officer of the Board not below the rank of Chief General Manager.
ii. Such other officers as specified by the Board.

High Powered Advisory Committee

i. The Board shall constitute a High-Powered Advisory Committee for consideration and
recommendation of the terms of settlement.
ii. Composition:

Judicial Member- 3 External Experts- Expertise Term- 3years Quorum- 3

Judge of SC/HC in securities market members

iii. High Powered Committee shall conduct its meetings in the manner specified by the Board
however, if no consensus could be reached between the members, decision of judicial member
will be considered as the final decision.

Provided that:
(i) where any member of the High-Powered Advisory Committee seeks recusal, the remaining two
or more members may submit their recommendation on the terms of settlement;
(ii) where no consensus or majority may be reached, the recommendation made by the Judicial
member shall be considered to be the recommendation of the High-Powered Advisory

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 Committee and in case of recusal of the Judicial member, the recommendations of the
remaining two or more members shall be submitted for consideration to the Panel of Whole
Time Members; and
(iii) where all or all but one of the members of the High-Powered Advisory Committee recuse
themselves in respect of an application, the Board may constitute another High-Powered
Advisory Committee.

20. PROCEDURE OF SETTLEMENT

Proceedings before the Internal Committee
i. Application is referred to Internal Committee to determine whether the proceedings may be
settled and the settlement terms as per the regulations.
ii. The Internal Committee may:
a. call for relevant information, documents, etc., pertaining to the alleged default(s) in possession
of the applicant or obtainable by the applicant.
b. call for the personal appearance of the applicant before it. Personal appearance under this
clause includes appearance through audio-video electronic means or through the medium of
electronic video linkage as may be permitted by the Internal Committee
c. permit the applicant to submit revised settlement terms within a period not exceeding 15
working days from the date of the Internal Committee meeting.
iii. The proposed settlement terms, if any, shall be placed before the High-Powered Advisory
Committee.

Proceedings before the High Powered Advisory Committee

i. Internal committee will place settlement terms before the High-powered committee and the
committee would take into consideration
a. the application,
b. settlement terms or revised settlement terms proposed by the applicant,
c. factors specified,
d. any material available on record.
ii. Committee has the power to seek revision of terms and refer application back to Internal
Committee.

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iii. The recommendations of the High-Powered Advisory Committee shall be placed before the
Panel of Whole Time Members.

21. ACTION ON THE RECOMMENDATION OF HIGH POWERED ADVISORY COMMITTEE

i. The Panel of Whole Time Members shall consider the recommendations of the High Powered
Advisory Committee and may accept or reject the same
ii. where the recommendations of the High Powered Advisory Committee to settle the specified
proceedings are rejected, the panel of Whole Time Members shall record reasons for rejection
of the recommendations and communicate the same to the applicant.
iii. Where the recommendation of the High-Powered Advisory Committee have been rejected, the
panel may return the application for re-examination of the settlement terms and thereafter
the procedure as applicable in the case of an original application shall be followed by the
Internal Committee and the High Powered Advisory Committee.
iv. Where the Panel of Whole Time Members accepts the recommendation of the High-Powered
Advisory Committee to settle the specified proceedings, the applicant shall be issued a notice
of demand within seven working days of the decision of the panel and the applicant shall-
a) remit the settlement amount forming part of the settlement terms, not later than Thirty
calendar days from the date of receipt of the notice of demand.
b) fulfil/undertake in writing to abide by, the other settlement terms, if any, within the time
provided to the applicant.

22. SUMMARY SETTLEMENT PROCEDURE

i. Before initiating any specified proceedings, Board may issue a notice of summary settlement,
calling upon the person to whom the notice is served to file an application and submit a
settlement amount or submit any undertaking in non-monetary terms for following defaults:
a) Delayed disclosures
b) Non-disclosure in relation to companies already listed on stock exchange
c) Disclosures not made in specified formats
d) Delayed compliance of any requirement laid down by the board
e) Such other defaults as may be determined by the Board.

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 Provided that, the specified proceeding(s) shall not be settled under this Chapter, if in the
opinion of the Board, the applicant has failed to make a full and true disclosure of facts or
failed to co-operate in the required manner.
ii. The noticee may, within thirty calendar days from the date of receipt of the notice of
settlement-
a) File a settlement application
b) remit the settlement amount as specified in the notice of settlement
c) comply or undertake to comply with other non-monetary terms as specified in the notice of
settlement
d) ask for rectification of the calculation of the settlement amount, as communicated in the
notice of settlement.
iii. Noticee has to remit the amount within 30 days from the date of receiving the notice. However,
if the Board deems fit, in a case of delay, it can grant an extension of not more than 15 days.
iv. After receiving the settlement amount and being sure that noticee will comply with the terms
of the settlement agreement, Board may pass an order of settlement.

23. SETTLEMENT WITH CONFIDENTIALITY

i. An applicant can seek the benefit of confidentiality subject to conditions imposed under this
chapter which includes:
a) Providing and continuing to provide true and complete disclosures of informations, documents
or evidences which are in his possession or he is capable to obtain.
b) Co-operating fully, continuously and expeditiously throughout the investigation, inspection,
inquiry or audit and related proceedings before the Board
c) Not concealing, destroying, manipulating or removing the relevant documents in any manner
that may contribute to the establishment of the alleged violation.
d) cease to participate in the violation of securities laws from the time of the disclosure of
information.
ii. To ensure confidentiality, the applicant or its authorized representative may make an application
containing all the relevant disclosures and evidence relating to the commission of any violation
of securities laws.

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iii. Upon being satisfied, the Board may assure the benefit of confidentiality and shall thereupon
mark the status of the application depending upon its priority.
iv. The Board may, at any stage, reject the application if the information, documents or evidence
is found to be incomplete or false to the knowledge of the applicant.
v. An application made shall be made prior to any order of investigation, inspection, inquiry or
audit.

24. CONFIDENTIALITY
i. The following shall be treated as confidential,
a. the identity of the applicant seeking confidentiality; and
b. the information, documents and evidence furnished by the applicant
ii. However, the identity of the applicant or such information or documents or evidence may not
be treated as confidential if-
a. the disclosure is required by law
b. the applicant has agreed to such disclosure in writing
c. there has been a public disclosure by the applicant

25. SETTLEMENT ORDERS

Settlement of proceedings before the Adjudicating Officer and the Board
The Whole Time Member, Adjudicating Officer or the competent officer of the Board before
whom the proceedings are pending, shall dispose of the respective proceedings, by an appropriate
order, on the basis of the approved settlement terms.

Settlement of the proceedings pending before the Tribunal or any Court

The proposal of settlement along with the settlement terms or rejection thereof shall be placed
before such Tribunal or court for appropriate orders.

Service and publication of settlement order

Settlement orders shall be served on the applicant and shall also be published on the website
of the Board, however settlement orders with confidentiality should not directly or indirectly
disclose the identity of the applicant.

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 Settlement Schemes
The Board may specify a settlement scheme for any class of persons involved in respect
of any similar specified defaults.

Effect of settlement order on third party rights or other proceedings

i. A settlement order under these regulations shall not be admissible as evidence in any other
proceeding relating to an alleged default not covered under the settlement order
ii. It will not affect the right of third parties arising out of the alleged default.
iii. Where any person has obtained a settlement order, which contains observations in respect of
any other person for the commission of an alleged default, such an order shall not in itself be
admissible as evidence against such other person.

Revocation of the settlement order

i. If the applicant does not comply with the settlement or der or Board has the knowledge that
information given during settlement is false, the settlement order will stand revoked and Board
will initiate or restore the proceedings.
ii. Whenever any settlement order is revoked, no amount paid under these regulations shall be
refunded.

Confidentiality of information
All information submitted and discussions held in settlement proceedings will not be disclosed
to the public.
Any documents submitted or proposals made during the settlement proceeding will not be
submitted as an evidence in the court or Tribunal.

26. INTRODUCTION OF COMPOUNDING PROVISIONS UNDER COMPETITION ACT, 2002

The Competition (Amendment) Act, 2023 provides for compounding of compoundable offences
by National Company Law Tribunal.

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27. COMPOUNDING PROVISIONS UNDER THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999
(FEMA)
PENAL PROVISIONS UNDER FEMA
Section 13 of FEMA contains the penalties for contravention of any provision of FEMA. The
penalties are quite substantial and can extend up to three times of the sum involved in such
contravention where the amount is quantifiable or up to Rs.2 lakhs, where the amount is not
directly quantifiable and where the contravention is a continuing one, further penalty which
may extend to Rs.5000 for every day after the first day during which the contravention
continues.

28. POWER TO COMPOUND CONTRAVENTION

Any contravention under section 13 may, on an application made by the person committing
such contravention, be compounded within 180 days from the date of receipt of application by
the Director of Enforcement or such other officers of the Directorate of Enforcement and
officers of the Reserve Bank as may be authorised in this behalf by the Central Government.

29. WHO ARE THE COMPOUNDING AUTHORITIES/WHO CAN COMPOUND THE OFFENCE?
Officers from RBI not below the rank of Assistant General Manager and officers from
Directorate of Enforcement not below the rank of Deputy Director or Deputy Legal Adviser are
authorized to compound the offences.

30. POWER OF RESERVE BANK TO COMPOUND CONTRAVENTION

When a person contravenes provisions of section 3 except section 3
(a) of the act, compounding can be done:
i. where the sum involved is ten lakhs rupees or below, by the Assistant General Manager of the
Reserve Bank of India;
ii. where the sum involved is more than rupees ten lakhs but less than rupees forty lakhs, by the
Deputy General Manager of Reserve Bank of India;
iii. where the sum involved is rupees forty lakhs or more but less than rupees one hundred lakhs
by the General Manager of Reserve Bank of India;

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iv. where the sum involved is rupees one hundred lakhs or more, by the Chief General Manager of
the Reserve Bank of India;

31. POWER OF ENFORCEMENT DIRECTORATE TO COMPOUND CONTRAVENTIONS

i. If a person contravenes provisions of section 3(a) of the Act then following have the authority
to compound the offences:
ii. where the sum involved is five lakhs rupees or below, by the Deputy Director of the Directorate
of Enforcement;
iii. where the sum involved is more than rupees five lakhs but less than rupees ten lakhs, by the
Additional Director of the Directorate of Enforcement
iv. where the sum involved is rupees ten lakhs or more but less than fifty lakhs rupees by the
Special Director of the Directorate of Enforcement;
v. where the sum involved is rupees fifty lakhs or more but less than one crore rupees by Special
Director with Deputy Legal Adviser of the Directorate of Enforcement;
vi. where the sum involved in such contravention is one crore rupees or more, by the Director of
Enforcement with Special Director of the Enforcement Directorate.
vii. No contravention shall be compounded unless the amount involved in such contravention is
quantifiable.

32. LIMIT FOR COMPOUNDING

Any contravention committed by a person within a period of three years from the date on
which a similar contravention was committed, cannot be compounded.
If any appeal is made, the offence cannot be compounded.

33. PROCEDURE FOR COMPOUNDING

i. Every application for compounding any contravention under this rule shall be made in Form to
the along with a fee of Rs, 5.000 by Demand Draft in favour of compounding authority.
ii. The Compounding Authority may call for any information, record or any other documents
relevant to the compounding proceedings and pass an order after providing opportunity of being
heard to both the parties within 180 days from the date of receiving the application.

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iii. Where contravention is compounded before adjudication no inquiry can be made against such
person.
iv. Where contravention is compounded after making a complaint such compounding shall be
brought in the notice of adjudicating authority and on such notice the person will be discharged.
v. If the Enforcement Directorate is of the view that the proceeding initiated before it relates to
a serious contravention suspected of money laundering, terror financing or affecting sovereignty
and integrity of the nation, the compounding authority will not proceed with compounding and
transfer the matter for adjudication.

34. FACTORS CONSIDERED WHILE CONSIDERING COMPOUNDING APPLICATION

i. The amount of gain of unfair advantage.
ii. The amount of loss caused to any authority/ agency/ exchequer.
iii. Economic benefits accruing to the contravener from delayed compliance or compliance avoided.
iv. The repetitive nature of the contravention, the track record and/or history of non-compliance
of the contravene.
v. Contravener’s conduct in undertaking the transaction, in disclosure of full facts in the
application and submissions made during the personal hearing.

35. PAYMENT OF AMOUNT COMPOUNDED AND CERTIFICATE OF COMPOUNDING

The sum for which the contravention is compounded as specified in the order of compounding
shall be paid by demand draft in favour of the Compounding Authority within fifteen days
from the date of the order of compounding of such contravention. In case a person fails to
pay the sum compounded within the time specified he shall be deemed to have never made an
application for compounding.

36. CONTENTS OF THE ORDER OF THE COMPOUNDING AUTHORITY

i. Should specify the provisions of act, rules s, directions, requisitions or orders made in respect
of the contravention that has taken place along with the details of alleged contravention.
ii. Should be dated and signed by the Compounding Authority.
iii. Copy of order will be given to the applicant and AO.

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 M/s Candor View India Private Limited
The applicant, M/s Candor View India Private Limited(applicant), was incorporated on December
01, 2015, under the Companies Act, 2013, as per the Certificate of Incorporation issued by the
Registrar of Companies, Karnataka. The company is engaged in the business of aluminium metal
& metal alloys as cash and carry wholesale trading
Applicant made an application for compounding for delay in allotment of shares to the foreign
investors, persons resident outside India, beyond 180 days of receipt of the inward remittances
The application was considered and the contraventions were compounded.

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 Mrs. Joyce Lynn Peters v. Reserve Bank of India
i. SCN was issued to the applicant for non compliance with capital account transactions.
ii. Applicant applied for compounding before RBI and ED.
iii. Application was rejected on the grounds that compounding was not permissible when adjudicatory
proceedings for contravention were being initiated.
iv. Applicant submitted that pendency of adjudicatory proceedings cannot be a ground for declining
the request for compounding.
v. since no decision was taken by the Respondents thereon, the Petitioner filed a writ petition before
the co-ordinate bench of the Karnataka High Court, which ordered to file another application for
compounding within 2 weeks and direct the respondent to consider the same.
vi. Accordingly, after some period of delay, the Petitioner filed another application before the
Respondents (“Application”). The Application was also rejected by the Respondents stating that
since the Petitioner had filed appeal against the adjudicatory order, Rule 11 of the Compounding
Rules would come in the way of the Application being treated favourably
Further issues:
a. Whether petitioner had made the application for compounding beyond the period prescribed by the
Coordinate Bench of this Court?
b. Whether the pendency of appeal preferred by the contravener bars the compounding of contravention,
c. Whether the Respondent Nos. 1 & 2 could have banked upon Rule 11 of the Compounding Rules for
rejecting petitioner’s application for compounding...?
Judgement:
The writ petition succeeded and a writ of certiorari was issued quashing the Impugned Reply to
Application. The matter was remitted back to the Respondents for consideration afresh, in accordance
with law and within a period of eight weeks.

37. MEDIATION & CONCILIATION

Alternative dispute resolution (ADR) mechanisms like arbitration, conciliation and mediation
plays a significant role in reducing the number of cases that enter the formal justice delivery
system by providing redress outside it.

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 Mediation

i. Mediation is a voluntary, party-centered and structured negotiation process where a neutral

third party assists the parties in amicably resolving their dispute by using specialized
communication and negotiation techniques.
ii. In mediation, the parties retain the right to decide for themselves whether to settle a dispute
and the terms of any settlement.

“A method of non- binding dispute resolution involving a neutral third party who tries to help
the disputing parties to reach a mutually agreeable solution”

Conciliation

It is a process in which independent person or persons are appointed by the parties with mutual
consent by agreement to bring about a settlement of their dispute through consensus or by
using of the similar techniques which is persuasive.

““The process of adjusting or settling disputes in a friendly manner through extra judicial
mean”

38. DIFFERENCE BETWEEN MEDIATION AND CONCILIATION

Points of Mediation Conciliation
Difference
Meaning The Mediator assists the disputants to reach Conciliator brings the
a negotiable settlement. disputants to the agreement
through negotiation
Third Party Has less involvement More participation

Terms of The mediator does not suggest the manner Conciliator suggests terms
Settlement of settlement to the parties. for settlement to the parties
Decision Is called settlement Is called Award

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39. ADVANTAGES OF MEDIATION AND CONCILIATION
i. Informal: The process is informal as there are no proper rules and regulations to be followed.
ii. Confidential: Mediators and Conciliators do not disclose any information revealed during
mediation. It is a closed door discussion.
iii. Quick and Inexpensive: It takes less time to complete the process.
iv. Mediator: Unlike formal adjudicatory processes, the mediation need not be confined to the
issues raised in the case, but can go beyond to other matters the parties want resolved. The
mediator helps the parties to address each others issues.

40. MEDIATION & CONCILIATION UNDER THE COMPANIES ACT, 2013

Panel of Mediators and Conciliators
i. Regional Director shall prepare a panel of experts willing and eligible to be appointed as
mediators or conciliators in the respective regions and such panel shall be placed on the website
of the Ministry of Corporate Affairs or on any other website as may be notified by the Central
Government.
ii. RD may invite applications of persons possessing relevant qualifications and who is willing to
get empaneled as mediator or conciliator.
iii. RD may scrutinize the application and if the application is rejected, provide reasons for the
same.
iv. Interested person will make an application in form MDC-1.
v. The Regional Director shall invite applications from persons interested in getting empanelled as
mediator or conciliator every year during the month of February and update the Panel which
shall be effective from 1st of April of every year.

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 Qualifications Disqualification

i. has been a Judge of the Supreme Court of

India; or
ii. has been a Judge of a High Court; or
iii. has been a District and Sessions Judge; or i. is an undischarged insolvent or has

iv. has been a Member or Registrar of a Tribunal applied to be adjudicated as an

constituted at the National level under any insolvent and his application is

law for the time being in force; or pending or

v. has been an officer in the Indian Corporate ii. has been convicted for an offence

Law Service or Indian Legal Service with which, in the opinion of the Central

fifteen years’ experience; or Government, involves moral

vi. is a qualified legal practitioner for not less turpitude or

than ten years; or iii. has been removed or dismissed from

vii. is or has been a professional for at least the service of the Government or

fifteen years of continuous practice as the Corporation owned or controlled

Chartered Accountant or Cost Accountant or by the Government or

Company Secretary; or iv. has been punished in any

viii. has been a Member or President of any disciplinary proceeding, by the

State Consumer Forum; or appropriate disciplinary authority.

ix. is an expert in mediation or conciliation who

has successfully undergone training in
mediation or conciliation.

Conditions for application for appointment of Mediator or Conciliator

1. Parties may agree to appoint a sole mediator or sole conciliator.
2. Where parties are unable to agree upon a sole mediator or sole conciliator, Central Government
may ask each party to nominate a mediator or conciliator or the Central Government or Tribunal
may themselves appoint the mediator or conciliator.
3. The application to the Central Government or the Tribunal or the Appellate Tribunal, for
referring the matter pertaining to any proceeding pending before it for mediation or conciliation
shall be in Form MDC-2 and shall be accompanied with a fee of one thousand rupees.

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 4. On receipt of application, Tribunal or Central Government may appoint a mediator or conciliator
from the panel of experts.
5. Central Government or Tribunal may suo moto refer a matter before the panel, in public
interest.

Deletion from the Panel

 The Regional Director may by recording reasons in writing and after giving him an opportunity
of being heard, remove any person from the Panel.

Withdrawing Name from Panel

Any person who intends to withdraw his name from the Mediation and Conciliation Panel may
make an application to the Regional Director indicating the reasons for such withdrawal and
the Regional Director shall take a decision on such application within fifteen days of receipt
of such application and update the Panel accordingly.
Duty of mediator or conciliator to disclose certain facts
i. It shall be the duty of a mediator or conciliator to disclose to the Central Government or the
Tribunal or the Appellate Tribunal, as the case may be, about any circumstances which may
give rise to a reasonable doubt as to his independence or impartiality in carrying out his
functions.
ii. Every mediator or conciliator shall from the time of his appointment and throughout
continuance of the mediation or conciliation proceedings, without any delay, disclose to the
parties about existence of any circumstance referred in clause 1.

Withdrawal of appointment
Where the Central Government or the Tribunal receive any information about impartiality of
the mediator or conciliator, it may withdraw the appointment and appoint any other mediator
or conciliator in that proceeding. The mediator or conciliator may, offer to withdraw himself
from such proceeding and request the Central Government or the Tribunal or the Appellate
Tribunal as the case may be to appoint any other mediator or conciliator.

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 Procedure for disposal of matters
i. He will fix, the dates and the time of each mediation or conciliation session, where all parties
have to be present, in consultation with the parties.
ii. He shall hold the mediation or conciliation at the place decided by the Central Government or
the Tribunal or the Appellate Tribunal, as the case may be, or such other place where the
parties and the mediator or conciliator jointly agree;
iii. He may conduct joint or separate meetings with the parties;
iv. Each party shall, ten days before a session, provide to the mediator or conciliator a brief
memorandum providing issues which needs to be resolved;
v. Each party shall provide all the information as may be required by the mediator or conciliator.

Representation of parties
i. The parties shall be present personally or through an authorised attorney at the sessions or
meetings.
ii. The parties may be represented by an authorised person or counsel with the permission of the
mediator or conciliator in such sessions or meetings and the mediator or conciliator or the
Central Government or the Tribunal or the Appellate Tribunal as the case may be, shall be
entitled to direct or ensure the presence of any party to appear in person.
iii. The party not residing in India may, with the permission of the mediator or conciliator, be
represented by his or her authorised representative at the sessions or meetings

Consequences of non-attendance of parties at sessions or meetings on due dates

If a party fails to attend a session or a meeting fixed by the mediator or conciliator deliberately
or wilfully for two consecutive times, the mediation or conciliation shall be deemed to have
failed and mediator or conciliator shall report the matter to the Central Government or the
Tribunal or the Appellate Tribunal, as the case may be.

Administrative assistance
In order to facilitate the conduct of mediation or conciliation proceedings, the mediator or
conciliator with the consent of the parties, may arrange for administrative assistance by a
suitable institution or person.

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 Role of Mediator or Conciliator
The mediator or conciliator shall attempt to voluntary resolve dispute between the parties,
communicate the view of each party to the other, assist them in identifying issues, reducing
misunderstandings, clarifying priorities, exploring areas of compromise. He shall not impose any
terms of compromise on the parties. Parties will consent amongst themselves and
mediator/conciliator may then impose such terms on which the consent is reached.

Parties alone responsible for taking decision

i. The mediator or conciliator facilitates in arriving a decision to resolve the dispute. They cannot
impose any settlement nor the mediator or conciliator give any assurance that the mediation
or conciliation shall result in a settlement.
ii. The mediator or conciliator shall not impose any decision on the parties

Time limit for completion of mediation or conciliation

i. The process for any mediation or conciliation shall be completed within a period of three
months from the date of appointment of expert or experts from the Panel.
ii. However, if same cannot be completed within the said period, an application may be made to
Tribunal or Central Government by the mediator or conciliator and if the Government or Tribunal
deems fit, they can grant an extension of not more than three months.

Confidentiality, disclosure and inadmissibility of information

i. When a mediator or conciliator receives any information, regarding the dispute between the
parties, they may disclose the same to the other parties, in order to provide them an opportunity
of explanation. However, when a party gives an information to the mediator or conciliator
subject to a specific condition that the information may be kept confidential, the mediator or
conciliator shall not disclose that information to the other party.
ii. The receipt or preparation of records, reports or other documents by the mediator or conciliator,
should also be confidential and the mediator or conciliator shall not be compelled to provide
information regarding the same.
iii. There shall be no audio or video recording of the mediation or conciliation proceedings and no
statement of parties or witnesses should be recorded by the mediator or conciliator.

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iv. The parties shall maintain confidentiality in respect of events that occurred during the
mediation and conciliation and shall not rely on or introduce the said information in other
proceedings as to:
a. views expressed by a party in the course of the mediation or conciliation proceedings
b. documents obtained during the mediation or conciliation which were expressly required to be
treated as confidential or other notes, drafts or information given by the parties or the mediator
or conciliator.
c. proposals made or views expressed by the mediator or conciliator
d. admission made by a party in the course of mediation or conciliation proceedings

No statement of parties or the witnesses shall be recorded by the mediator or conciliator.

Communication between mediator or conciliator and the Central Government or the

Tribunal or the Appellate Tribunal
In order to ensure neutrality, there is no communication between Central Government or
Tribunal and Mediator or Conciliator. If at all any communication is required same shall be
done in writing and copies of it will be distributed amongst the parties and their representatives.
Communication between the mediator or conciliator and the Central Government or the Tribunal
or the Appellate Tribunal, shall be limited to communication by the mediator or conciliator:
i. About the failure of the party to attend the sessions;
ii. About the consent of the parties;
iii. About his assessment that the case is not suited for settlement through the mediation or
conciliation;
iv. About settlement of dispute between the parties.

Settlement agreement
i. Where an agreement is reached between the parties, the same shall be reduced in a written
format and shall be submitted to the mediator or conciliator, who then forwards it to the
Central Government or the Tribunal.
ii. Where no agreement is reached between the parties or no settlement is possible, mediator or
conciliator will inform the same to the Central Government or the Tribunal.

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iii. The Central Government, Tribunal or Appellate Tribunal, shall fix a date of hearing normally
within 14 days from the date of receipt of report of mediator or conciliator and on the said
date if the Government or Tribunal is satisfied that the parties have settled their dispute, it
shall pass a necessary order.
iv. If the settlement has dealt with only few issues then Tribunal may proceed with the rest.

Fixing date for recording settlement and passing order

The Central Government or the Tribunal or the Appellate Tribunal shall fix a date of hearing
normally within fourteen days from the date of receipt of the report of the mediator or
conciliator and on such date of hearing if the authority comes to the conclusion that the
parties have settled their dispute, it shall pass an order in accordance with terms thereof.
If the settlement disposes of only certain issues arising in the proceeding, the Central
Government or the Tribunal or the Appellate Tribunal, as the case may be, shall proceed further
to decide the remaining issues.

Expenses of the mediation and conciliation

i. At the time of referring the matter to the mediation or conciliation, the Central Government
or the Tribunal or the Appellate Tribunal may fix the fee of the mediator or conciliator and as
far as possible, a consolidated sum may be fixed rather than for each session or meeting.
ii. Expenses of Mediation and Conciliation including the fee of the mediator or conciliator, costs
of administrative assistance and other ancillary expenses are borne equally by the parties.
iii. Each party shall bear the costs for production of witnesses on his side.
iv. The mediator or conciliator may, before the commencement of the mediation or conciliation,
direct the parties to deposit equal share of the probable costs of the mediation or conciliation
including the fees to be paid to the mediator or conciliator.
v. If any party or parties do not pay the amount as specified above, the Central Government or
the Tribunal or the Appellate Tribunal, shall on the application of the mediator or conciliator,
issue appropriate directions to the concerned parties.
vi. The mediation or conciliation shall commence only on the deposit of amount and in case
amount is not paid before such commencement, the mediation or conciliation shall be deemed
to have terminated.

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 Ethics to be followed by Mediator or Conciliator
i. Follow and observe the rules strictly and with due diligence.
ii. Not carry on any activity or conduct which shall reasonably be considered as unacceptable
conduct of a mediator or conciliator.
iii. Uphold the integrity and fairness of the mediation or conciliation process.
iv. Ensure that the parties involved in the mediation or conciliation are fairly informed and have
an adequate understanding of the procedural aspects of the process.
v. Satisfy himself or herself that he or she is qualified to undertake and complete the assignment
in a professional manner.
vi. Disclose any interest or relationship likely to affect impartiality.
vii. Be faithful to the relationship of trust and confidentiality imposed in the office of mediator
or conciliator.
viii. Conduct all proceedings related to the resolutions of a dispute, in accordance with the relevant
applicable law.

Resort to arbitral or judicial proceedings

The parties shall not initiate, during the mediation or conciliation under these rules, any arbitral
or judicial proceedings in respect of a matter that is the subject-matter of the mediation or
conciliation, except that a party may initiate arbitral or Judicial proceedings, where, in his,
opinion, such proceedings are necessary for protecting his rights.

Matters not to be referred to the mediation or conciliation

i. Cases involving serious and specific allegations of fraud, fabrication of documents forgery,
impersonation, coercion etc.
ii. Cases involving prosecution for criminal and non-compoundable offences.
iii. Cases which involve public interest or interest of numerous persons.
iv. The matters relating to proceedings in respect of inspection or investigation or the matters
which for which applications for compounding have been made.

QUESTIONS FOR PRACTICE?

i. Whether the order of the panel will be binding upon the parties?

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ii. Can crimes of fraud be referred to mediation or conciliation?
iii. A Practicing Company Secretary wants to establish his practice in the field of Mediation and
Conciliation. He wants to know whether he would not be eligible to be appointed as a Mediator
or Conciliator as per Rule 5 of Companies (Mediation and Conciliation) Rules, 2016. Advise
him.
iv. What is a Settlement agreement as per Companies Act, 2013 and the Companies (Mediation
and Conciliation) Rules?

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PART-B
 INDEX

Concepts of various audit 8.1-8.61

8
9 Audit Engagement 9.1-9.31

10 Audit Principles & Techniques 10.1-10.38

11 Audit Process & Documentation 11.1-11.25

12 Forming an Opinion & Reporting 12.1-12.29

13 Secretarial Audit 13.1-13.51

14 Internal Audit & Performance Audit 14.1-14.37

15 Peer Review & Quality Review 15.1-15.39

16 Due Diligence 16.1-16.45

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 8- CONCEPTS OF VARIOUS AUDITS

1. INTRODUCTION
i. Audit is an independent and systematic examination of statutory records, books of accounts,
documents and vouchers of an organization to ascertain how far the financial statements as well
as non-financial disclosures present a true and fair view of the concern as to.
ii. Audit provides and significant assurance to the management and other stakeholders on the affairs
of the company.

The term audit is derived from the Latin word “audire” which means to hear.

iii. Sections 139 to 147 under chapter X of the Companies Act, 2013 along with the Companies (Audit
and Auditors) Rules, 2014 contain provisions regarding audit and auditors covering the appointment,
removal, resignation of auditors, eligibility, qualifications and disqualifications of auditors,
remuneration of auditors, powers and duties of auditors etc. for the statutory auditors of the
company.
iv. The Companies Act, 2013 contains the provisions relating to the following Audits:

Secretarial Audit (Section 204)

Statutory Audit (Section 139 to 147)

Cost Audit (Section 148)

Internal Audit (Section 138)

v. Audit can be of two types i.e. the Financial Audit and the Compliance Audit.
vi. The Financial Audit cover the Statutory Audit, Cost Audit and Internal Audit whereas the
Compliance Audit cover the Secretarial Audit, CSR Audit, and Corporate Governance Audit, Takeover
Audit, Insider trading Audit, Labour law Audit, Cyber Audit, Systems Audit, Social Audit and
Forensic Audit etc.

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 2. CORPORATE GOVERNANCE AUDIT
i. Corporate Governance deals with conducting the affairs of a company in such a way that there
is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders.
It is about transparency, integrity and accountability.
ii. Recent scandals in Indian Corporates have raised questions not only about the practices adopted
by companies to solicit business but also about the standards of accountability in public
administration including within the government machinery and institutions.
iii. Corporate Governance provisions under the former listing agreement popularly known as the Clause
49 requirements have been overhauled by the Companies Act 2013, recent adoptions of SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).
Schedule II of the said regulations have elaborated on the Corporate Governance measures and
are applicable to the entities which are listed with recognized stock exchange(s). These have
aligned India’s corporate governance regime with the developed countries.
iv. Audit of corporate governance processes provides assurance to the various stakeholders that all
the required governance activities have been accomplished.
v. Corporate Governance Audit mechanism works primarily through Audit Committee and the Auditor.

Need for Corporate Governance Audit (CGA)

 To ensure commitment of the Board in managing the company in a transparent manner.
 Improving corporate governance will also increase capital flows to companies; from domestic and
global capital, equity and debt, and from public securities markets and private capital sources even
the increased customer base.

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 Scope of Audit of Corporate Governance Activities

• Financial and non-financial information's and disclosures

1

• Rights of stakeholders
2

• Boards of directors (composition,mix,independence)

3

• Control Environment (accounting, controls, internal and external audit)

4

• Risk Management
5

• Transparency and disclosures of financial information and executive compensation

6

• Strategic plans, programs and guidance on social responsibilities

7

Role of Audit Committee

Audit Committee plays a vital role in the corporate governance of an entity.
According to Section 177 of Companies Act, 2013, the Board of Directors of the following class of
companies shall constitute an Audit Committee:
i. every listed public company; or
ii. the Public Companies having paid up share capital of ten crore rupees or more; or
iii. the Public Companies having turnover of one hundred crore rupees or more; or
iv. the Public Companies which have, in aggregate, outstanding loans, debentures and deposits,
exceeding fifty crore rupees.

The Audit Committee shall consist of a minimum of three directors with independent directors
forming a majority.
Provided that majority of members of Audit Committee including its Chairperson shall be persons
with ability to read and understand, the financial statement.

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 Regulation 18 of SEBI (LODR) Regulations. 2015 provides that every listed entity shall constitute
a qualified and independent audit committee in accordance with the terms of reference, subject
to the following:
i. Minimum No. of Directors: The audit committee shall have minimum three directors as members.
ii. Requirement of IDs: Two-thirds of the members of audit committee shall be independent directors
and in case of a listed entity having outstanding SR equity shares, the audit committee shall only
comprise of independent directors.
iii. Financial Literacy: All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise.
iv. Presence of Chairperson in AGM: The chairperson shall be an independent director and he/she
shall be present at the annual general meeting to answer shareholder queries.
v. CS as Secretary of Audit Committee: company secretary shall act as the secretary of the
committee
vi. Invitation to Executives: The audit committee at its discretion shall invite the finance director
or head of the finance function, head of internal audit and a representative of the statutory
auditor and any other such executives to be present at the meetings of the committee

Under LODR regulation role of Audit Committee is as following:

1. Oversight of the listed entity’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible;
2. Recommendation for appointment, remuneration and terms of appointment of auditors of the
listed entity;
3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors;
4. Reviewing, with the management, the annual financial statements and auditor’s report thereon
before submission to the board for approval, with particular reference to:
a. matters required to be included in the director’s responsibility statement to be included in the
board’s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act,
2013;
b. changes, if any, in accounting policies and practices and reasons for the same;
c. major accounting entries involving estimates based on the exercise of judgment by management;
d. significant adjustments made in the financial statements arising out of audit findings;

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e. compliance with listing and other legal requirements relating to financial statements;
f. disclosure of any related party transactions;
g. modified opinion(s) in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission to the
board for approval;
6. Reviewing, with the management, the statement of uses / application of funds raised through an
issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for
purposes other than those stated in the offer document / prospectus / notice and the report
submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights
issue, and making appropriate recommendations to the board to take up steps in this matter;
7. Reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit
process;
8. Approval or any subsequent modification of transactions of the listed entity with related parties;
9. Scrutiny of inter-corporate loans and investments;
10. Valuation of undertakings or assets of the listed entity, wherever it is necessary;
11. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the
internal control systems;
12. Reviewing the adequacy of internal audit function, if any, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting structure
coverage and frequency of internal audit;
13. Discussion with internal auditors of any significant findings and follow up there on;
14. Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board;
15. Discussion with statutory auditors before the audit commences, about the nature and scope of
audit as well as post-audit discussion to ascertain any area of concern;
16. To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non-payment of declared dividends) and creditors;
17. To review the functioning of the whistle blower mechanism;
18. Approval of appointment of chief financial officer after assessing the qualifications, experience
and background, etc. of the candidate;

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 19. Carrying out any other function as is mentioned in the terms of reference of the audit committee;
20. Reviewing the utilization of loans and/ or advances from/investment by the holding company in
the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is
lower including existing loans / advances / investments existing;
21. Consider and comment on rationale, cost-benefits and impact of schemes involving merger,
demerger, amalgamation etc., on the listed entity and its shareholders.

Illustrative Checklist for Auditing Corporate Governance System in a Company

Accountability
i. Check there is separation of ownership and control.
ii. Check whether executive management is accountable to Board.
iii. Check whether board is accountable to shareholders.
iv. Check whether there is a board / audit committee charter/ policies.
v. Check whether the independent directors have powers to play their role effectively.
vi. Check whether sufficient number of meetings held, and are the meetings of sufficient length and
depth to cover the agenda and provide healthy discussion of issues.
vii. Check whether the auditors of the company have full access to information and authority to
present their view points at board meetings.
viii. Check whether the company has policies on ethical marketing practices, bribery and dishonesty,
employee and customer privacy, fair employment practices, gifts, entertainment, related party
transactions and conflict of interests.

Fairness
i. Check whether all shareholders, including minorities are treated equitably.
ii. Check whether there are defined procedure for effective resolutions of violations.
iii. Check whether the company has pricing policy and fair market practice code.

Transparency
i. Investors should be able to obtain information about the rights attached to all series and classes
of shares before they purchase. Any changes in voting rights should be subject to approval by
those classes of shares which are negatively affected.

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 ii. Check whether there is a timely, accurate disclosure on all material matters, including financial
and non-financial information, performance, ownership, frauds, going concern crisis and governance.
iii. Check whether the company has a policy for making political contributions.
iv. Check whether the company has comprehensive insider trading disclosure and compliance practices.
v. Check whether shareholders should be able to make their views known on the remuneration policy
for board members and key executives. The equity component of compensation schemes for board
members and employees should be subject to shareholder approval.
vi. Institutional investors acting in a fiduciary capacity should disclose how they manage material
conflicts of interest that may affect the exercise of key ownership rights regarding their
investments.

Responsibility
i. Check whether the company has policy on stakeholder’s rights, social responsibility and business
sustainability requirements.
ii. Check whether the board’s responsibility includes review and guiding of corporate strategy, major
plans of action, risk policy, annual budgets and business plans; setting performance objectives;
monitoring implementation and corporate performance; and overseeing major capital expenditures,
acquisitions and divestitures.

Shareholder Interests
i. Check whether shareholders should have the right to participate in, and to be sufficiently informed
on, decisions concerning fundamental corporate changes such as:
a. amendments to the statutes, or articles of incorporation or similar governing documents of the
company;
b. the authorisation of additional shares; and
c. extra-ordinary transactions, including the transfer of all or substantially all assets that in effect
result in the sale of the company.
ii. Check whether capital structures and arrangements that enable certain shareholders to obtain a
degree of control disproportionate to their equity ownership should be disclosed.
iii. There exists rules and procedures governing the acquisition of corporate control in the capital
markets, and extraordinary transactions such as mergers, and sales of substantial portions of

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 corporate assets, should be clearly articulated and disclosed so that investors understand their
rights and recourse. Transactions should occur at transparent prices and under fair conditions that
protect the rights of all shareholders according to their class.
iv. The exercise of ownership rights by all shareholders, including institutional investors, should be
facilitated.
v. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and should have effective means of redress.
vi. Members of the board and key executives should be required to disclose to the board whether
they, directly, indirectly or on behalf of third parties, have a material interest in any transaction
or matter directly affecting the corporation.

In the Corporate Governance Audit, the auditor issue the compliance certificate and summarizes
his opinion and descriptive narration of areas of improvement.
The Compliance certificate shall be given either the practicing company secretaries or auditors
regarding compliance of conditions of corporate governance which shall be annexed with the
directors’ report.

CORPORATE GOVERNANCE DUE DILIGENCE – COVERAGE

BOARD INDEPENDENCE & GOVERNANCE
i. Board Composition
a. Is the chairperson an executive chairperson?
b. If chairperson is executive, does 50% or more of the board consist of independent directors?
c. If the non-executive chairperson is a promoter of the company or is related to any promoter or
person occupying management positions at the board level or at one level below the board, does
50% or more of the board consist of independent directors?
d. If the non-executive chairperson is not a promoter of the company or is not related to any
promoter or person occupying management positions at the board level or at one level below the
board, does 1/3rd or more of the board consist of independent directors?
(ii) The proportion of independent directors to total number of directors.
(iii) The company has at least one woman director.

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(iv) In case of top 1000 listed entities, the Board of directors has at least one independent woman
director.
(v) In case of top 2000 listed entities, the board of directors has not less than six directors.
(vi) Senior/lead independent director if any, if the offices of chairperson and chief executive officer
are not held by different persons.
(vii) Written policy/ procedure if any for induction of independent directors.
(viii) Disclosure if any, in the annual report the basis on which independent directors are nominated
on the board
(ix) Letter of appointment of non-executive directors.
(x) Maximum tenure of independent directors if any specified.
(xi) Details of separate meetings of independent directors.
(xii) Details of orientation programme /training of directors.
(xiii) Details of D&O insurance if any provided.
(xiv) Gap between resignation and appointment of independent directors.
(xv) Details of affirmative statement from each of the independent directors that they meet the
criteria of independence (annual and at the time of appointment).

BOARD SYSTEMS AND PROCEDURES

i. Details of circulation of agenda.
ii. Details of board meetings.
iii. Attendance in board meeting.
iv. Details of meeting through video conferencing.
v. List of applicable laws if any maintained by the company.
vi. Information /certificate to the board on statutory compliances.
vii. Communication of board decisions to various departments.
viii. Details of written code of conduct for directors, senior management and other employees.
ix. Policy on succession planning at senior management level (just one level below the board),
x. Policy on action taken report
xi. Policy on reviewing the effectiveness of board and its members.
xii. Share dealings by directors and his relatives.

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 BOARD COMMITTEES
i. Names of board committees, its terms of reference, composition and meetings.
ii. Details of chairperson of board committees.
iii. Proportion of independent directors in audit committee.
iv. Risk assessment process by audit committee.
v. Process of reviewing the related party transactions by the audit committee.
vi. Details of financial experts in the audit committee.
vii. Communication mechanism between internal auditor, audit committee and CFO.
viii. Details of rotation of auditors/audit partners.
ix. Details of pending investor grievances.

TRANSPARENCY AND DISCLOSURE COMPLIANCES

i. Details of disclosures in the Annual Report.
ii. Disclosure on the details of remuneration paid to Board members.
iii. Disclosure on related party transaction.
iv. Disclosure on material cases pending against the company.
v. Details of directors appointed or proposed to be appointed.
vi. Means of communication.
vii. Details of filings with Corp filing portal.
viii. Disclosures on insider trading.
ix. Disclosure of CEO/CFO on compliance under LODR Regulations.
x. Compliance of Secretarial Standards issued by ICSI.
xi. Compliance of Accounting Standard/Cost Accounting Standard (if applicable).
xii. Details of Secretarial Audit if any.
xiii. Adverse remarks in Audit Report, Cost Audit Report, Secretarial Audit Report.
xiv. Disclosure of director’s relationship inter-se.
xv. Details of corporate disclosure policy.

CONSISTENT SHAREHOLDER VALUE ENHANCEMENT

i. Growth in net-worth.
ii. Details of dividend paid.

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 iii. Dividend policy, if any.
iv. EPS
v. Details of public shareholdings.
vi. Details of investor satisfaction survey, if any.

OTHER STAKEHOLDERS VALUE ENHANCEMENT

i. Details of Vendor/Supplier/Customer Satisfaction surveys.
ii. Personnel policy.
iii. Policy on employee participation in management.
iv. Policy on ESOPs
v. Policy on prevention of sexual harassment.
vi. Vendor Development policy.

CORPORATE SOCIAL RESPONSIBILITY

i. Policy on CSR, if any.
ii. CSR/Sustainability Report, if any.
iii. Energy conservation initiatives.
iv. Water/ waste management initiatives.
v. Budget for CSR activities etc.

4. SECRETARIAL AUDIT
i. Every Company, while pursuing its business activities, has to comply with the rules and regulations
relating to the Companies Act, Securities laws, FEMA, Industry Specific laws and General laws
like Labour laws, Competition law and Environmental and Pollution related laws and should also
pursue the good governance practices.
ii. Secretarial Audit covers non-financial aspects of the business vis-à-vis their impact on the
performance of the company and verifies compliances of applicable laws, regulations and guidelines.
iii. Secretarial Audit is an independent and objective assurance intended to add value and improve
operations of a company. It helps to accomplish the organisation’s objectives by bringing a
systematic, disciplined approach to evaluate and improve effectiveness of risk management, control,
and governance processes.

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 Applicability of Secretarial Audit
Section 204(1) of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment
and Remuneration of Managerial Personnel) Rules, 2014 provides that-
1. Every listed company and a company belonging to other class of companies as may be prescribed1
shall annex with its Board’s report made in terms of section 134(3), a secretarial audit report,
given by a company secretary in practice, in such form [Link]-3.
2. It shall be the duty of the company to give all assistance and facilities to the company secretary
in practice, for auditing the secretarial and related records of the company.
3. The Board of Directors, in their report made in terms of section 134(3), shall explain in full any
qualification or observation or other remarks made by the company secretary in practice in his
report under sub-section (1).
4. If a company or any officer of the company or the company secretary in practice, contravenes
the provisions of this section, the company, every officer of the company or the company secretary
in practice, who is in default, shall be liable to a penalty of Rs. 2,00,000.

In terms of Rule 9(1) of the Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014, for the purposes of sub-section (1) of section 204, the other class of companies
shall be as under-
a. Every Public Company having a paid-up share capital of 50 crore rupees or more; or
b. Every Public Company having a turnover of 250 crore rupees or more; or
c. Every Company having outstanding loans or borrowings from banks or public financial institutions
of 100 crore rupees or more.

Secretarial Audit and Secretarial Compliance Report under the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015
In view of the criticality of secretarial functions for ensuring efficient functioning of the Board,
the Kotak Committee on Corporate Governance, in its report dated October 05, 2017, recommended
that-
a. Secretarial Audit to be made compulsory for all listed entities under the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 (“Regulations”) in line with the provisions of the
Companies Act, 2013.

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 b. Secretarial Audit to be extended to all material unlisted Indian subsidiaries in line with the
recommendations of the Committee on strengthening group oversight and improving compliance
at a group level for listed entities.

Accordingly, SEBI vide circular no. CIR/CFD/CMD1/27/2019 dated February 08, 2019 notified the
following provisions to be included in the SEBI (LODR) Regulations, 2015:

Regulation 24A: Secretarial Audit: Every listed entity and its material unlisted subsidiaries
incorporated in India shall undertake secretarial audit and shall annex with its annual report, a
secretarial audit report, given by a company secretary in practice, in such form as may be
prescribed with effect from the year ended March 31, 2019.

The above provision has been substituted by the SEBI vide amendment dated 05.05.2021 which
reads as under:
Regulation 24A: Every listed entity and its material unlisted subsidiaries incorporated in India
shall undertake secretarial audit and shall annex a secretarial audit report given by a company
secretary in practice, in such form as specified, with the annual report of the listed entity.

i. Every listed entity shall submit a secretarial compliance report in such form as specified, to stock
exchanges, within 60 days from end of each financial year.
ii. In order to avoid duplication, the listed entity and its unlisted material subsidiaries shall continue
to use the same Form No. MR-3 as required under Companies Act, 2013 and the rules made
thereunder for the purpose of compliance with Regulation 24A of SEBI (LODR) Regulations, 2015
as well.
iii. While the Annual Secretarial Audit shall cover a broad check on compliance with all laws applicable
to the entity, listed entities shall additionally, on an annual basis, require a check by the Company
Secretary in Practice on compliance of all applicable SEBI Regulations and circulars / guidelines
issued thereunder, consequent to which, the Company Secretary in Practice shall submit a report
to the listed entity.

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 Purpose of Secretarial Audit
i. Secretarial Audit provides an effective mechanism to ensure that compliance of various legislations
and regulations including the Companies Act, SEBI Law, Secretarial Standards and other corporate
and economic laws applicable to the company has been diligently done.
ii. Secretarial Audit facilitates monitoring compliances with the requirements of law through a formal
compliance management programme which can produce following positive results to the
stakeholders of a company:
 Companies that go the extra mile with their compliance programs lay the foundation for good
governance.
 Companies with an effective compliance management programme have lesser chance of being
penalised, both monetarily and by way of imprisonment.
 Companies that imbibe business and personal ethics and an effective compliance management
programme within their work culture often enjoy employee and customer loyalty and public respect
for their brand, which can translate into better market capitalization and shareholder returns.
 Recognition for the company as a good corporate citizen.

5. INTERNAL AUDIT
i. Internal audit is a process of evaluating and assessing an organization’s internal controls, risk
management procedures, and governance practices.
ii. The goal of internal audit is to help organizations achieve their objectives by providing independent,
objective assurance and consulting services.
iii. Performed by professionals with an in-depth understanding of the business culture, systems, and
processes, the internal audit activity provides assurance that internal controls in place are adequate
to mitigate the risks, governance processes are effective and efficient, and organizational goals
and objectives are met.
iv. Performed by professionals with an in-depth understanding of the business culture, systems, and
processes, the internal audit activity provides assurance that internal controls in place are adequate
to mitigate the risks, governance processes are effective and efficient, and organizational goals
and objectives are met.
v. The internal audit may contribute in the following areas:

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 a. Independent review and appraisal of control systems across the organization (both financial control
systems and operational areas where the organization may reap benefits).
b. Ascertainment of the extent of compliance of policies, procedures, regulations and legislations.
Checking compliance management systems of an organization.
c. Facilitate good practices in management of risk. This requires systems for ascertaining, measuring,
managing and where possible mitigation or dispersion of the risk.
d. Achieve savings by identifying waste, inefficiency and duplication of effort across the organization.
e. Structuring programs and activities such that company assets are safeguarded and there are
internal check systems which minimize the possibility for reducing fraud / early warning signals
for identifying fraud.

vi. Section 138 of the Companies Act, 2013 provides that such class or classes of companies as may
be prescribed shall be required to appoint an internal auditor, who shall either be a chartered
accountant or a cost accountant, or such other professional as may be decided by the Board to
conduct internal audit of the functions and activities of the company.

Limit of Internal Audit

Listed company Unlisted Public Company Every Pvt Co.

Internal Audit is PSC-50 cr Rupees T/O- 200 Cr

mandatory for all listed T/O- 200 cr Rupees O/S Loans &
O/S Loans & Borrowings- 100 cr Borrowings- 100 cr
companies
O/S Deposits- 25 cr

6. CORPORATE SOCIAL RESPONSIBILITY (CSR) AUDIT

i. Corporate Social responsibility includes the way a company treats and proactively contributes to
its community, promotes fair working conditions and a non-discriminatory environment, conveys
transparent and honest accounting reports, and generally earns a reputation of trust and integrity
in the society where it serves.

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ii. CSR has become a mandatory part of many Companies vide introduction in Companies Act, 2013
and has changed the dynamics of CSR. An increased emphasis on governance, stricter monitoring
and reporting obligations requires companies to be more accountable, disciplined and strategic in
their CSR approach

Applicability of CSR Spending/Committee

Net worth of rupees five Turnover of rupees Net profit of rupees five crore
hundred crore; or one thousand crore or more; or or more

During the immediately preceding financial year

Section 135 of the Companies Act, 2013 provides that every company on whom CSR is applicable
shall:
 constitute a Corporate Social Responsibility Committee of the Board consisting of three or more
directors, out of which at least one director shall be an independent director;
− In case, where a company is not required to appoint an independent director under sub-section
(4) of section 149 of Companies Act, 2013, the company shall have in its Corporate Social
Responsibility Committee two or more directors.
 adopt a CSR Policy in order to develop a sustainable CSR road map to help determine both
compliance and social relevance with the Act.
 spend, in every financial year, at least 2% of its average net profits made during the three
immediately preceding financial years, in pursuance of its CSR policy.

Objective of CSR Audit

Corporate Social Responsibility (CSR) audit help in measuring the actual social performance against
the social objectives set by the Company. The audit helps meeting the expectations of stakeholder
groups relating to social and environmental responsibilities of the company.

Purpose of CSR Audit

 To ensure compliance with the provisions of Companies Act, 2013 with respect to constitution of
the Committee, adoption of policy and appropriate spending towards CSR activities.

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 To facilitate transparent monitoring mechanism and a mentor for the company’s CSR activities
and implementation of CSR policy.
 To evaluate internal control and governance framework.
 To assess the project life cycle.
 To conduct financial review of projects to confirm the utilization of budgets for achieving desired
outcomes.

Methodology for CSR Audit

1. Review of CSR policy, CSR committee, governance structure, strategy, projects, partner
identification and selection process, monitoring, evaluation and reporting.
2. Interact with beneficiaries, project team, management and other stake holders.
3. Review of beneficiary identification and selection process, budget allocation, outcomes monitoring
and reporting.
4. Review of CSR expenditure, project’s direct expenditure, overheads and administrative expenses,
traceability and genuiness of expenditure, per beneficiary cost, reasons for inability to spend 2%
of profits.

Conducting CSR Audit

The CSR audit may be conducted internally by the company or engage external agencies having
expertise in CSR projects. However the companies publish periodical report on their social initiatives
and through the Website. According to provisions of Companies Act, 2013, Companies are required
to annex report on the corporate social responsibilities with the board report of the company.

Coverage of CSR Audit

Schedule VII of the Companies Act, 2013 provides the list of activities which could be taken by
the company as their CSR Activities. These activities cover the following:
1. Eradicating hunger, poverty and malnutrition, promoting health care including preventive health
care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central
Government for the promotion of sanitation and making available safe drinking water.

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2. promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly and the differently abled and livelihood enhancement
projects.
3. promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens
and measures for reducing inequalities faced by socially and economically backward groups.
4. ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal
welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and
water including contribution to the Clean Ganga Fund set-up by the Central Government for
rejuvenation of river Ganga.
5. protection of national heritage, art and culture including restoration of buildings and sites of
historical importance and works of art; setting up public libraries; promotion and development of
traditional art and handicrafts.
6. measures for the benefit of armed forces veterans, war widows and their dependents, Central
Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their
dependents including widows.
7. training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports.
8. contribution to the prime minister’s national relief fund or Prime Minister’s Citizen Assistance
and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the
central govt. for socio economic development and relief and welfare of the schedule caste, tribes,
other backward classes, minorities and women;
9. Contribution to incubators or research and development projects in the field of science, technology,
engineering and medicine, funded by the Central Government or State Government or Public Sector
Undertaking or any agency of the Central Government or State Government; and
10. Contributions to public funded Universities; Indian Institute of Technology (IITs); National
Laboratories and autonomous bodies established under Department of Atomic Energy (DAE);
Department of Biotechnology (DBT); Department of Science and Technology (DST); Department
of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy
(AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense
Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR);
Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research

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 (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed
at promoting Sustainable Development Goals (SDGs).
11. rural development projects.
12. slum area development different. Explanation- For the purposes of this item, the term ‘slum area’
shall mean any area declared as such by the Central Government or any State Government or any
other competent authority under any law for the time being in force.
13. disaster management, including relief, rehabilitation and reconstruction activities. Explanation- For
the purpose of this item, the team ‘Slum area’ shall mean any area declared as such by the
Central Government or any State Government any other competent out authority under any Law
for the time being in force.

Illustrative Checklist for Corporate Social Responsibility provisions under the Companies Act,
2013
1. Check if the constitution of CSR Committee is applicable to company.
2. If yes, whether the company has constituted CSR committee of the board consisting of three or
more directors, out of which at least one director is an independent director. In case where a
company is not required to appoint an independent director under sub-section (4) of 149, it shall
have in its CSR Committee two or more directors.
3. Whether the company has CSR policy approved by the CSR Committee.
4. Whether the CSR committee has recommended list of CSR projects or programme within the
purview of schedule VII.
5. Whether the monitoring process of such projects or programme has been established by the
company.
6. The composition of CSR committee is disclosed in the board’s report.
7. Check whether the CSR activities were under taken as per CSR policy and projects, programs or
activities excludes activities undertaken in pursuance of its normal course of business
8. Corporate social responsibility committee has recommended the amount of expenditure to be
incurred on the activities referred in the Corporate Social Responsibility policy.
9. The company has instituted a transparent monitoring mechanism for implementation of the CSR
projects or programs or activities undertaken by the company.
10. The company has disclosed the contents of the policy in board’s report and at its website, if any.

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11. The board’s report includes an annual report on CSR containing prescribed particulars.
12. In case the company does not spend the specified amount (i.e. at least two percent of the average
net profits made during the three immediately preceding financial years), Board’s report specifies
the reason for not spending the amount.
13. Check if the net profits of the company are in accordance with the provisions section 198 of the
Companies Act, 2013 or not.
14. In case the company has built CSR capacities of their own personnel, check whether the
expenditure including expenditure on administrative overheads shall not exceed five percent of
total CSR expenditure of the company in one financial year.
15. The company has complied with all other requirement of the CSR Rules.

The different measures of the CSR Audit Includes:

1. How the Company has identified the major socio-economic changes in the key communities caused
by its presence/ operations/ major expansion programs.
2. How the company has conducted social surveys before undertaking a particular CSR activity.
3. How the company has identified the possible impact of its CSR activities on the life style of
communities.
4. How the company undertakes the Impact assessment of the CSR activities.

7. TAKEOVER AUDIT
The Takeover audit includes the compliances relating disclosure requirements (event based
/continuous disclosures), Pricing, Open offer and verification of the compliance of various stage of
takeover process etc., under the provision of the Companies Act, 2013 and the SEBI (Substantial
Acquisition of Shares and Take- overs) Regulations, 2011. However, the takeover audit primarily
includes:

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The takeover audit primarily includes:

• Identify and categorises of acquirer i.e. promoter,

Identification and promoter group, person in control, persons acting in
categorisation concert, associates, immediate relatives etc.

• Ensuring that the timely disclosures have been made by

promoters, members of promoter group and PAC’s
Timely Disclosures
relating to acquisition, transfer and encumbrance.

• Effective monitoring of the holdings of promoters,

Monitoring of promoters members of promoter group and PACs and take
holding necessary action as required.

• Ensuring that timely intimation is sent to stock

exchanges in respects of transfers exempt under SEBI
Timely Intimation
(SAST) Regulations, 2011.

• Ensuring that timely reports are filed in respect of

transfers exempt under SEBI (SAST) Regulations with
Timely reports under SAST
stock exchanges and SEBI, if applicable.

Checking timely Compliances • Thoroughly examine the takeover regulations through

checklist and timeline for compliances.

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 Takeover audit for a business deal may be done as:
 pre-acquisition;
 post-acquisition.

CONSEQUENCES OF VIOLATION OF OBLIGATIONS SEBI (SAST) REGULATIONS, 2011

SEBI (SAST) Regulations, 2011 have laid down the general obligations of acquirer, target company
and the manager to the open offer.
Penalties for non-compliance with SEBI (SAST) Regulation, 2011 includes:
i. directing the divestment of shares acquired;
ii. directing the transfer of the shares / proceeds of a directed sale of shares to the investor
protection and education fund;
iii. directing the target company / any depository not to give effect to any transfer of shares;
iv. directing the acquirer not to exercise any voting or other rights attached to shares acquired;
v. debarring person(s) from accessing the capital market or dealing in securities
vi. directing the acquirer to make an open offer at an offer price determined by SEBI in accordance
with the Regulations;
vii. directing the acquirer not to cause, and the target company not to effect, any disposal of assets
of the target company or any of its subsidiaries unless mentioned in the letter of offer;
viii. directing the acquirer to make an offer and pay interest on the offer price for having failed to
make an offer or has delayed an open offer;
ix. directing the acquirer not to make an open offer or enter into a transaction that would trigger an
open offer, if the acquirer has failed to make payment of the open offer consideration;
x. directing the acquirer to pay interest of for delayed payment of the open offer consideration;
xi. directing any person to cease and desist from exercising control acquired over any target company;
xii. directing divestiture of such number of shares as would result in the shareholding of an acquirer
and persons acting in concert with him being limited to the maximum permissible non-public
shareholding limit or below.

8. INSIDER TRADING AUDIT

The insider trading audit includes the compliances requirements (event based /continuous
disclosures) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 which includes:

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 i. Initial disclosures of trades which is to be made by only the promoters, key managerial personnel,
directors internally;
ii. Continual disclosures which is to be made by every promoter, employee or director in case value
of trade exceed monetary threshold of ten lakh rupees over a calendar quarter;
iii. company to accordingly notify stock exchanges within 2 trading days;
iv. Submission of trading plans; Appointment of compliance officer;
v. Pre-clearance for trading; Codes of fair disclosure and conduct;
vi. Role of the designate person; Manner of dealing with UPSI (unpublished price sensitive
information).

Illustrative checkpoints for verification of Compliance under the SEBI (Prohibition of Insider
Trading) Regulations, 2015 includes whether:
i. The company has appointed a compliance officer.
ii. The company has maintained structured digital database containing the nature of unpublished
price sensitive information and the names of such persons who have shared the information and
also the names of such persons with whom information is shared under this regulation along with
the Permanent Account Number or any other identifier authorized by law where Permanent
Account Number is not available.
iii. The structured digital database is preserved for a period of not less than eight years after
completion of the relevant transactions and in the event of receipt of any information from the
Board regarding any investigation or enforcement proceedings, the relevant information in the
structured digital database shall be preserved till the completion of such proceedings.
iv. The company has designated an officer to administer the code of conduct and other requirements
under Insider trading regulations. (Regulation 9)
v. The Board of Directors of has formulated a code of practices and procedures for fair disclosure of
unpublished price sensitive information as per Schedule A of Insider trading regulations.
vi. The Code has been hosted on the website of the company and a copy of the same must be sent
to the stock exchange.
vii. The code of conduct has stipulated the sanctions and disciplinary actions, including wage freeze,
suspension, recovery, clawback etc. and any amount collected has been remitted to the SEBI for

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 credit to the Investor Protection and Education Fund administered by the SEBI under the SEBI
Act, 1992.
viii. The Company has designated a Chief Investor Relation Officer, who is also a senior officer of the
company to deal with dissemination of information and disclosure of unpublished price sensitive
information, as per the principles set out in Schedule A of Insider trading regulations.
ix. The Company has formulated code of conduct to regulate, monitor and report trading by insiders
as per Schedule B of these regulations.
x. The Company has formulated an internal code of conduct for governing dealing in securities as
per the minimum standards set out in Schedule B of Insider trading regulations.
xi. Every such code of practices and procedure relating to unpublished price sensitive information and
every document thereto has been promptly intimated to the stock exchange where the securities
are listed.
xii. The trading plan has been formulated in compliance with Regulation 5. If yes, whether necessary
compliances have been made.
xiii. The disclosures were taken from the KMPs of the Company and from those relating to trading
by such person’s immediate relatives, and by any other person for whom such person takes trading
decisions.
xiv. The connected person or class of connected persons have made disclosures of holdings and trading
in securities of the company in such form and at such frequency as may be determined by the
company in order to monitor compliance with these regulations.
xv. Every code of practices and procedures for fair disclosure of unpublished price sensitive information
and every amendment thereto has been promptly intimated to the stock exchanges where the
securities are listed. (Regulation 8)
xvi. Any action has been sanctioned by the Board for the violation/ contravention of the provisions
these regulations. (Regulation 10)
xvii. The Compliance officer has reviewed and monitored the trading plans if any, submitted by any
insider and approved the trading plan that it has not violated these regulations.
xviii. The Compliance officer has received undertaking or declaration from insider with respect to the
trading plan, as the case may be.
xix. The Compliance officer has notified the trading plan to the stock exchange(s), if any.

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 xx. The Company maintains the record of the said disclosures as required for a minimum period of
five years.
xxi. The Company has received the initial disclosure from every promoter, Key Managerial Personnel
(KMP) and Directors with respect to the securities held by them in Company.
xxii. The Company receives disclosure by every person on appointment as KMP or Director or upon
becoming a promoter within seven working days of such appointment or becoming promoter.
xxiii. The Company is regular in receiving continual disclosure from the promoter, member of the
promoter group, designated person and directors with respect to the number of securities acquired
or disposed of within two trading days of such transaction, if such transactions exceed Rs.10,00,000
or such other value as may be specified in a calendar quarter.
xxiv. The Company has notified the particulars of such trading to the stock exchange(s) within two
trading days of receipt of the disclosure or from becoming aware of such information.
xxv. The Company is regular in receiving disclosures of holding & trading of securities of the company
by any other connected person or class of connected persons, held or traded by them. The
Company has in its discretion require this information & set out the frequency for seeking such
information.
xxvi. The Compliance officer has provided reports of trading to the Chairman of Audit Committee, if
any or to the Chairman of the Board of Directors as per the frequency stipulated by the Board
of Directors.
xxvii. The Company follows Chinese wall procedures & processes as per the norms contained in the code
of conduct, wherever applicable.
xxviii. The Compliance officer determines the timing of closure of the trading window and re-opening of
the trading window.
xxix. The Compliance officer has put in place appropriate procedure for pre-clearance of trades for
designated persons.
xxx. The Designated Person have not entered into any contra trade as per the specified period as
mentioned in the code of conduct which shall be not less than six months from the date of trade
in securities of the Company.
xxxi. The profit arises from the Contra trade, if executed inadvertently or otherwise, has been liable to
be disgorged for remittance to SEBI for credit to the Investor Protection and Education Fund
administered by the SEBI under the Act.

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xxxii. Any action has been initiated by SEBI against the company or any of its promoter, director, Key
Managerial Personnel, officer or employee under the PIT regulations in the past or present.
xxxiii. The company or any of its promoters, director, Key Managerial Personnel, officer or employee has
been convicted by SEBI with respect to Insider Trading in the past or present.
xxxiv. Any action taken against persons responsible for non- adherence with respect to formulation of
code of conduct.
xxxv. Any other prevention mode with respect to insider trading as adopted by the Company.

9. INDUSTRIAL AND LABOUR LAW AUDIT

i. Industrial and Labour law Audit is an effective tool for compliance management of labour,
employment and Industrial laws.
ii. Audit helps to detect non-compliances of labour and employment laws applicable to a business
and take corrective measures to avoid any unwarranted legal actions by the regulators against the
business and its management.
iii. Labour Law audit is useful in promoting cordial relations between employees and employers and
also lead to better governance and value creation for the business

Scope of Industrial and Labour Audit

Labour laws audit differs from other compliance/audits in the country because where most audits
focus on the financial impact on a company, labor laws audits consider human values and the
rights of workers.
The scope of secretarial audit also includes examining and reporting on whether the adequate
systems and processes are in place to monitor and ensure compliance required under the various
industrial and labour laws.

Though the Industrial and Labour audit include the various State and Local Laws along with the
central laws, However the illustrative list of the compliance requirement under the various central
law has been provided below:

Factories Act, 1948

1. The Factories Act, 1948 is applicable to the company.

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 2. The occupier has at least fifteen days before occupying or using any premises as a factory, sent
to the Chief Inspector a written notice as contained in section 7.
3. The provisions regarding registration / licence as prescribed in section 6 have been complied with.
4. The employer has appointed the manager/ occupier of the factory under the Factories Act, 1948
and sent notice to the competent authority.
5. The company has complied with provisions of:
 “Health” measures as provided in chapter III;
 “Safety” measures as provided in chapter IV; Applicable provisions of chapter IV-A – Hazardous
Processes;
 “Welfare” measures as provided in chapter V;
 “Working Hours” of adults as provided in chapter VI;
 “Employment of Young Persons” as provided in chapter VII; and
 “Annual Leave with Wages” as provided in chapter VIII.
6. Under the Factories Act, 1948 Registers, Return & Abstracts:
 Register of Compensatory Holidays
 Register of Adult Workers
 Register of Leave with Wage
 Register Muster Roll Register of Accident & Dangerous Occurrences
 Inspection Book
 Half yearly returns (Before 15th of July & 15th of January) of every year in duplicate)
 Accident & Dangerous Occurrences (Every Month)
 Combined Annual Returns (Before January every year)
 Notice of Adult workers
 Abstract of Factories Act, 1948.

Industrial Disputes Act, 1947

1. The Industrial Disputes Act, 1947 is applicable to the company.
2. There is an industrial dispute, as defined under Section 2A of the Act.
3. The company has maintained a muster roll as required under section 25-D of the Act.
4. The Company is an industrial establishment, having one hundred or more workmen. If yes, the
company has constituted Works Committee as required under Section 3 of the Act.

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5. Any change in the conditions of service applicable to any workman in respect of any matter
specified in the fourth schedule of the Act, has been made after giving 21 days’ notice to the
workmen, of such intention in Form E, as required under Section 9A of the Act, read with Rule
34.
6. The company has twenty or more workmen. If yes, the company has constituted Grievance
Redressal Committee as required under Section 9-C of the Act.
7. The Company is a Public Utility Service. If yes, the lockout if any has been carried out after
giving sufficient notice in Form N, as required under Section 22(3) of the Act read with rule 73.
8. The Company has complied with the conditions precedent to the retrenchment of workmen, as
required under Section 25F and Section 25N, as applicable.
9. The Company maintains a muster roll for its workmen as required under Section 25-D.
10. The Company has compensated for being laid off, the workmen, whose name is in the muster
rolls and has completed not less than one year of continuous service. (Section 25C)
11. The company has compensated the workmen in case of closing down of undertakings, as prescribed
in section 25FFF.

The Payment of Wages Act, 1936

1. The Payment of Wages Act, 1936 is applicable to the company.
2. The payment of wages is made before:
(a) before the expiry of the 7th day of the following month, when less than 1000 persons are
employed.
(b) before the expiry of the 10th day of the following month, when more than 1000 workers are
employed.
3. The deductions made from the wages of the employee are in accordance with section 7 of the
Act.
4. If any deduction has been made on account of damage or loss, show cause notice has been given
to the employee.
5. In case any deduction has been made for unauthorized absence, opportunity of being heard is
given.

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6. The registers and records giving particulars of persons employed, the work performed by them,
the wages paid to them, the deductions made from their wages and the receipts given by them
are maintained and preserved for a period of 3 years or more.
7. The employer has displayed the abstract of the Act and Rules made thereunder in the manner
prescribed under section 25.

The Minimum Wages Act, 1948

1. The Minimum Wages Act, 1948 is applicable to the Company.
2. The company has been paying the minimum wages as notified from time to time by the appropriate
Government under the Act.
3. The company has paid wages in cash. If not, the wages in kind has been paid after following the
procedure prescribed under section 11 of the Act.
4. The company follows the conditions prescribed with regard to working hours, working day under
section 13 of the Act.
5. The company has paid overtime rate as prescribed under section 14 of the Act read with rule 25.
6. The company has maintained all registers and records that are required to be maintained under
section 18 of the Act and rule 26.
7. The company has followed the procedure prescribed with respect to payment of undisbursed
amounts due to employees, for reasons such as death, whereabouts not known etc.
8. The company has followed the procedure prescribed in rule 21 of the Minimum Wages (Central)
Rules, 1950 with respect to deductions made from the wages.
9. The company has followed time and conditions of payments of wages prescribed in rule 21 of the
Minimum Wages (Central) Rules, 1950.
10. Notices in prescribed Form, containing the minimum rate of wages has been displayed at the
main entrance to the establishment, as specified in rule 22.

Employees’ State Insurance Act, 1948

1. The Employees’ State Insurance Act, 1948 is applicable to the company.
2. The factory or establishment to which the Act applies has been registered.
3. The rate of contribution of the employer and employee is in accordance with the Act. [Rule 51 of
ESI (Central) Rules, 1950.]

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4. The manner and time Limit for making payment of contribution is in accordance with the Act.
5. The employer has maintained the register of employees in ç.
6. Submission of returns/reports:
a. Annual return;
b. Return of contributions;
c. Report of accident;
d. Report of death of insured persons.
7. The benefits provided in Chapter V of the Act were made available to the applicable employee.

The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952

1. The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 is applicable to the
company.
2. The contributions made by the employer and the employee and payment thereof are in accordance
with para 29 and 30 of the Employees’ Provident Funds Scheme, 1952.
3. The employer has obtained declarations from the persons taking up the employment. (Para 34 of
the scheme)
4. The employer has prepared the contribution card in Form No. 3 or 3-A as appropriate in respect
of every employee in his employment.
5. The employer has sent to the Commissioner:
a. Consolidated return in the form specified by the commissioner.
b. Monthly return in prescribed Form together with declaration.
c. In such form as the commissioner may specify of employees leaving service of the employer during
the preceding month.
d. Inspection note book in such form as the commissioner may specify, is maintained.
e. Accounts relating to amount contributed to the fund by the employer and by the employee have
been maintained. (Para 36 of scheme)
6. The employer has furnished particulars of ownership to the Regional Commissioner. (Para 36 A
of scheme)
7. The employer has forwarded the monthly abstract to the commissioner. [Para 38 (2) of scheme]
8. Consolidated annual contribution statement was sent to the commissioner. [Para 38(3) of
scheme]

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9. Submission of contribution card to the commissioner with a statement.
10. Any proceedings under the Act have been initiated against the Directors for recovery of dues.
11. If the Employer has created its own trust, whether the terms of trust are more beneficial than
those provided under the trust.
12. The conditions imposed by PF Commissioner for the creation of Trust are satisfied.
13. The provisions relating to Employees’ Pension Scheme, 1995 have been complied with.
14. The provisions relating to Employees’ Deposit Linked Insurance Scheme, 1976 have been complied
with.

The Payment of Bonus Act, 1965

1. The Payment of Bonus Act, 1965 is applicable to the company.
2. Computation of available surplus, allocable surplus and bonus are correctly arrived at.
3. Any amount has been deducted from bonus and if so, whether they are in accordance with the
provisions of section 18.
4. Bonus is paid to the eligible employees.
5. The minimum or maximum amount of bonus paid is in accordance with section 10 or section 11,
as the case may be.
6. The company has paid bonus to the employee:
a. Where there is a dispute regarding payment of bonus pending before any authority under section
22-within a month from the date on which the award becomes enforceable or the settlement
comes into operation, in respect of such dispute;
b. In any other case-within a period of eight months from the close of the accounting year.
7. The company has maintained the registers as provided in rule 4.
8. The company has submitted the annual return of payment of bonus to the Inspector in Form No.
D within thirty days after the expiry of the time limit prescribed in section 19.

The Payment of Gratuity Act, 1972

1. The Payment of Gratuity Act, 1972 is applicable to the company.
2. There are employees who have worked for a continuous period of 5 years or more.
3. Any gratuity has been paid to any employee. If yes, whether it has been paid within 30 days.

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 4. The employer has displayed a notice as provided in rule 4, specifying the name of the officer with
designation who is authorised to receive notice under the Act or the rules made thereunder.
5. The employer has complied with the provisions related to nominations as specified in rule 6.
6. Gratuity of any employee has been forfeited. If yes, whether an opportunity of being heard is
given?
7. The gratuity has been forfeited for the reasons as specified in the Act.
8. The employer has displayed the abstract of the Act and rules made thereunder at or near the
main entrance of the establishment, as specified in rule 20.
9. The employer has obtained insurance for liability of payment of gratuity as specified in section
4A of the Act.

The Contract Labour (Regulation and Abolition) Act, 1970

1. The Contract Labour (Regulation and Abolition) Act, 1970 is applicable to the company.
2. The principal employer has obtained the certificate of registration for the establishment.
3. The appropriate Government has by a notification prohibited the employment of contract labour
under section 10.
4. The contractors have obtained license from the Licensing Authority for contract labour undertaken
or executed by them.
5. The contractors have got their license renewed in time.
6. The contractors are employing workmen as per license and registration certificate.
7. The number of workmen actually employed by the contractor’s tallies with the number of workmen
shown in the license.
8. The contractors are sending half-yearly returns in time.
9. Where the wage period is one week or more, the contractors are issuing wages slips one day prior
to the disbursement of wages.
10. The principal employer maintains register of contractors.
11. The principal employer has sent annual return in to the Registering Officer.
12. The principal employer has within fifteen days of commencement or completion of each contract,
submitted return to the Inspector.
13. Minimum rate of wages are being paid to the contractor labour in the presence of authorized
representative of the principal employer.

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14. The authorized representative of the principal employer gives a certificate to this effect at the
end of the entries in the register of wage- cum- Muster Roll, as the case may be.
15. The contractors are properly depositing ESI, EPF contributions in respect of their workmen and
submitting copies of the challan to the HR Department of the company.
16. The contract labour is provided the facility of rest room, canteen, wash room, first aid and other
facilities.
17. The contract labour is granted leave with wages.
18. The contract labour is being paid over time at double rate.
19. The workmen engaged by the contractor are ensured benefits from ESI Scheme including issue of
cards, temporary slips and are provided medical facilities.
20. The contract labour is being given contribution slips of EPF issued by the Regional Provident
Commissioner.
21. The payment of wages to contract labour is being made in accordance with rule 65.
22. The leave applications and gate passes of the contract labour are being signed by the contractor
and his agent.
23. The gate passes to the contract Labour are issued and signed by the company’s employees.
24. The contractors are maintaining records as provided in rule 78.
25. Under the Contract Labour (Regulation & Abolition) Act, 1970.
 Registration Certificate (Before appointing contractor)
 Register of Contractor
 Register of Employees employed by Contractor
 Muster Roll, Wage Register, Over Time Register, Fine Register
 Deduction Register, Advance Register (contractor)
 Notice regarding rates of wages
 Display of the Act & Rules
 Half yearly return by contractor
 Annual Return by Principle Employer (before 15th Feb)

The Maternity Benefit Act, 1961

1. The Maternity Benefit Act, 1961 is applicable to the company.

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2. The employer has knowingly employed a woman in any establishment during the six weeks
immediately following the day of her delivery, miscarriage or medical termination of her pregnancy.
3. Any pregnant woman has made any request not to give her any work which is of an arduous
nature or which involves long hours of standing, etc. during the period of one month immediately
preceding the period of six weeks, before the date of her expected delivery.
4. Any woman employee is entitled for maternity benefit, medical bonus and nursing break and if
yes, whether payment has been made and nursing break was allowed in accordance with the Act.
5. The employer exhibited the abstract of the provisions of the Act and the rules made thereunder
in accordance with section 19 of the Act.
6. Whether the employer has maintained muster rolls, registers and records as prescribed, if any, by
the appropriate Government.
7. Whether the employer has submitted annual return in the form prescribed, if any, by the
appropriate Government.

The Child and Adolescent Labour (Prohibition and Regulation) Act, 1986
1. The Child and Adolescent Labour (Prohibition and Regulation) Act, 1986 is applicable to the
company.
2. The occupier has sent notice to Inspector as per section 9 when a child is employed or permitted
to work.
3. The employer has employed any child labour in occupations set forth in Part-A or Process set
forth in Part-B of the Schedule to the Act.
4. The employer has maintained the register in Form No. A in respect of children employed or
permitted to work as specified in section 11.
5. The occupier has displayed notice containing abstract of sections 3 and 14 as specified in section
The Industrial Employment (Standing Orders) Act, 1946
1. The Industrial Employment (Standing Orders) Act, 1946 is applicable to the company.
2. One hundred or more workmen are employed, or were employed on any day of the preceding twelve
months.
3. The industrial establishment has submitted to the Certifying Officer, five copies of the draft
Standing Orders proposed by it for adoption in the establishment.

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4. The text of the Standing Orders as finally certified has been prominently posted by the company
in English and in the language understood by the majority of workmen on special boards to be
maintained for the purpose.
5. The industrial establishment has modified the Standing Orders on agreement between the employer
and the workmen or a trade union or other representative body of the workmen.
6. Any workman was suspended by the industrial establishment pending investigation or inquiry into
complaints or charges of misconduct.
7. The industrial establishment has paid any subsistence allowance to any suspended employee.

The Employees’ Compensation Act, 1923

1. The Employees’ Compensation Act, 1923 is applicable to the company.
2. Any personal injury is caused to an employee by an accident arising out of or in the course of
employment. If yes, the company has paid compensation as prescribed under Section 4 of the
Act.
3. The company has maintained notice book in its premises, for reporting notice of accidents as
prescribed in Section 10(3) of the Act.
4. The company has reported of fatal accident or serious bodily injuries in prescribed Form to the
Commissioner, as prescribed in section 10-B read with Rule 11 of the rules.
5. The company has deposited compensation with the Commissioner in respect of the workman
whose injury has resulted in death and has furnished statement in Form No. A, OR In other cases
company shall furnish statement in Form ‘AA’, as prescribed in section 8(1) read with rule 6(1).
(As Applicable)
6. The company has furnished a statement in Form ‘D’, while depositing compensation, as required
under section 8(2) read with rule 9.
7. The company has sent a return as to compensation paid during the previous year. (As specified
by the State Government in respective state law)
8. On settlement of compensation amount in between company and workman, company executed a
memorandum of agreement with the workman in Form No. K, L or M, as the case, may be and
submitted such agreement along with an application to register it to the Commissioner, as
prescribed in rule 48.

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 9. The provisions for reservation of apprentice training places for SC/ST/OBC have been made in
designated trades.
10. The contract of apprenticeship was sent by the employer to the apprenticeship advisor/entered on
the port-site within 7 days for verification & registration.

Equal Remuneration Act, 1976

1. Equal Remuneration Act, 1976 is applicable to the Company.
2. Payment of equal remuneration has been made to all for same work or work of similar nature and
there is no discrimination between men and women while recruiting or subsequent to recruitment,
promotion etc. (As per Section 4 read with section 5)
3. The company has maintained register in relation to workers in Form No. D as required under rule
6.

The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959

1. The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959 is applicable to the
company.
2. The company has notified the vacancies to employment exchanges, as prescribed in section 4 of
the Act read with rule 5.
3. The company has furnished quarterly returns, biennial return to local employment exchange as
prescribed in rule 6.

10. CYBER AUDIT

i. Cyber security is an attempt to minimising any risk of financial loss, disruption or damage to the
reputation of an organisation that may arises from the failure of its information technology
systems.
ii. The objective of the cyber audit is to provide an assessment of the operating effectiveness of
cyber security policies and procedures, identify, protect, detect, respond and recover processes and
activities to the board.
iii. The security and control issues which deals under cyber security audits includes:
a. Protection of sensitive data and intellectual property
b. Protection of networks to which multiple information resource are connected

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c. Responsibility and accountability for the device and information contained in it.

Scope of a cyber-security audit includes

• Data security policies relating to the network, database and applications in

1 place

• Data loss prevention measures deployed

2

• Effective network access controls implemented

3

• Detection/prevention systems deployed

4

• Security controls established (physical and logical)

5

• Incident response program implemented.

6

Dimension of the Cyber Security Audit Process

Management
Management of the Company ultimately owns the risk decisions made for the organization.
Therefore, it has a vested interest in ensuring that cyber security controls exist and are operating
effectively.

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 Risk Management
Risk assessments are typically made based on guidance by the Cyber security officer at an
organization and enterprise management make decisions, employing risk management processes.
The objective in any risk assessment is twofold.
a. First, is clear communication. It is critical to clearly communicate the state of risk for easy
understanding.
b. Second, Identify ways to address the risk.
This provides both problem and solution, and mitigates the negative impact of that risk to an
enterprise.
The risk landscape is always changing. To deal with this, it's crucial to have clear processes, a
skilled cybersecurity team, and a governance framework. This ensures that leaders can take
appropriate actions effectively, addressing both current and emerging threats.

Internal Audit
a. Internal auditors and risk management professionals have key roles to play as they report to the
audit committee to ensure an independent view is being communicated at the board level of the
enterprise.
b. Audits help companies deal with cyber threats. They assess controls, suggest improvements, and
assist senior management and the board in understanding and responding to cyber risks.

Illustrative checkpoint on the Cyber Security Audit

 Personnel Security
1. Whether the staff wears ID badges?
2. Whether it is a current picture part of the ID badge?
3. Are authorized access levels and type (employee, contractor, visitor) identified on the Badge?
4. Whether the credentials of external contractors are checked?
5. Whether the company has policies addressing background checks for employees and contractors?
6. Whether the Company has a process for effectively cutting off access to facilities and information
systems when an employee/contractor terminates employment?

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 Physical Security
1. Whether the Company has policies and procedures that address allowing authorized and limiting
unauthorized physical access to electronic information systems and the facilities in which they
are housed?
2. Whether the Company’s policies and procedures specify the methods used to control physical
access to your secure areas, such as door locks, access control systems, security officers, or video
monitoring?
3. Whether the access to the computing area is controlled (single point, reception or security desk,
signin/ sign-out log, temporary/visitor badges)?

 Account and Password Management

1. Whether the Company has policies and standards covering electronic authentication, authorization,
and access control of personnel and resources to your information systems, applications and data?
2. Whether the Company ensures that only authorized personnel have access to the computers?
3. Whether the Company requires and enforces appropriate passwords? 4. Are your passwords secure
(not easy to guess, regularly changed, no use of temporary or default passwords)?

 Confidentiality of Data
1. Whether the Company is exercising responsibilities to protect sensitive data under their control?
2. Whether the most valuable or sensitive data encrypted?
3. Whether the Company has a policy for identifying the retention of information (both hard and
soft copies)?

 Compliance and Audit

1. Whether the Company reviews and revises the security documents, such as: policies, standards,
procedures, and guidelines, on a regular basis?
2. Whether the Company audits the processes and procedures for compliance with established policies
and standards?
3. Whether the Company test the disaster plans on a regular basis?
4. Does management regularly review lists of individuals with physical access to sensitive facilities
or electronic access to information systems.

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 11. ENVIRONMENTAL AUDIT
i. According to Section 2(a) of the Environmental Protection Act, 1986, ‘Environment’ includes
Water, air and land.
ii. Environmental audit in general term reflect various types of evaluations intended to verify the
environmental compliance and management system implementation gaps, along with related
corrective actions.
iii. Objectives of environmental audit are to evaluate the efficacy of the utilization of resources of
man, machine, materials, and to identify the areas of environmental risks and liabilities and
weaknesses of management system and problems in compliance of the directives of the regulatory
agencies and control the generation of pollutants and / or waste.
iv. During an audit of financial statements related to environmental matters, the following issues will
merit special attention:
a. Initiatives to prevent, abate, or remedy damage to environment;
b. Conservation of renewable and non-renewable resources;
c. (Mentioned in Director’s Report) Consequences of violating environment laws, rules and
regulations;
d. Consequences of vicarious liability imposed by the government, courts etc.

v. There are generally two different types of environmental audits:

Compliance Audit Management System

Audit

Compliance audits and Management systems audits..

a. Environmental Compliance audits

Environment Compliance Audit provides assurance that government and private companies
activities are conducted according to laws/rules/regulations/notifications/standards.
Following laws are covered under the environmental compliance audit:

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 Air Pollution
i. The Indian Boilers Act, 1923.
ii. The Motor Vehicles Act, 1988.
iii. The Mines and Minerals (Development and Regulation) Act, 1957.
iv. The Factories Act, 1948.
v. The Industries (Development and Regulation) Act, 1951.
vi. The Air (Prevention and Control of Pollution) Act, 1981.

Water Pollution
i. The River Boards Act, 1956.
ii. The Merchant Shipping (Amendment) Act, 1970.
iii. The Water (Prevention and Control of Pollution) Act, 1974.

Radiation
The Atomic Energy Act, 1962.

Pesticides
i. The Poison Act, 1919.
ii. The Factories Act, 1948.
iii. The Insecticides Act, 1968.

Miscellaneous
i. The Indian Forest Act, 1927.
ii. The Ancient Monuments and Archaeological Sites and Remains Act, 1958.
iii. The Wildlife (Protection) Act, 1972.
iv. The Urban Land (Ceiling and Regulation) Repeal Act, 1999.
v. The Forest (Conservation) Act, 1980.
vi. The Environment (Protection) Act, 1986.
vii. The Public Liability Insurance Act, 1991.

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 2. Environmental Management Systems Audit
ISO 14001
ISO 14001 is an environment management system standard published by International Organisation
for standardization in the year 1996 and later updated in the year 2005. It provides highly
effective, globally accepted framework for establishing and continually improving the effectiveness
of environmental management.
Implementation of ISO 14001 may bring with it both reductions in environmental risk and
environmental costs.
The International Organization of Standardization (ISO) defines an environmental management
system as “part of the management system used to manage environmental aspects, fulfil
compliance obligations, and address risks and opportunities.”
An Enterprise Management System meeting the requirements of ISO 14001:2015 is a management
tool enabling an organization to:
i. Identify and control the environmental impact of its activities, products or services;
ii. Improve its environmental performance continually, and
iii. Implement a systematic approach to setting environmental objectives and targets, to achieving
these and to demonstrating that they have been achieved.

Process of Environment Audit

1. Understanding the industrial activity and Pre-audit or planning stage
Collection of background information about the entity, definition of objectives and scope of audit,
formation of audit team and development of audit plan and protocols.
2. On-site or Field Audit
Schedule necessary meetings and interviews, identify areas of concern, site / facility inspection,
evidence / records / document review, staff interviews, initial review of findings.
3. Assessing the impact and post-audit
Final evaluation of findings, submit preliminary report with type and magnitude of impact on the
environment, get approval of management, introduce the findings to the auditees, submit final
environment audit report along with short/ long term acceptability.
4. Follow up or review
Verify the action taken on audit findings and recommendations.

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 Checklist on Environment Audit
A. Environment Policy
1. Whether the company have defined and documented its environmental policy.
2. Whether such policy is based on significant environmental aspects and corporate policy.
3. Whether such policy is appropriate to the organization’s activities and their potential environmental
impacts and regulatory requirements.
4. Does the policy include commitments to:
 Continual improvement;
 Prevention of pollution;
 Comply with environmental legislation and other requirements.
5. Does the policy provide a framework for setting environmental objectives and targets.
6. Is the policy documented, implemented, maintained and communicated to all persons working for
or on behalf of the organization.
7. Is the policy available is freely available to public.

B. Environment Aspects
1. Whether a procedure been established, implemented and maintained to identify the environmental
aspects of its current and relevant past activities.
2. Whether aspects related to potential significant environmental aspects been considered in
establishing and implementing the EMS.
3. Whether aspects having legal and/or regulatory reporting, monitoring or operational requirements
been identified as “significant” aspects.
4. Are the following environmental aspects considered in sufficient detail:
Air emission
 Wastewater effluent
 Waste management
 Soil pollution
 Raw material and natural resource usage
 Hazardous and toxic material
 Impact on well-being (e.g. noise, smell, heat, landscape, protection)
 Utility, energy and resource.

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5. Other environmental specific issues on site such as housekeeping, storage, areas, piping.
6. Are the following operational aspects considered: Normal operating conditions Abnormal operating
conditions (e.g. start up and shut down conditions, maintenance, incidents) Development of new
or modified processes, products or services.
7. Actual and potential emergency conditions and accidents.
8. Have significant aspects been identified.

C. Legal and Other Requirements

1. Has a procedure been developed and implemented to identify applicable regulatory, legal and other
requirements.
2. Are current copies of all applicable regulatory and other requirements accessible to personnel as
necessary.
3. Have all further agreements the organization needs to fulfil been integrated in the procedure:
 Business related agreements
 Agreements with public authorities.
4. Guideline other than legal requirements (e.g. company policy, industry codes and practices, etc.)
5. Are the following licenses, permits and approvals available to demonstrate full legal compliance:
 Licenses of waste collectors
 Air emission permits
 Wastewater discharge permits
 Permits and licenses related to dangerous goods
 Environmental fees, e.g. wastewater discharge fee
 Registration at authorities (e.g. wastewater discharge, air emission inspection).

12. INFORMATION SYSTEMS AUDIT

Information systems auditing or systems audit is an ongoing process of evaluating controls,
collecting and evaluating evidence to determine whether a computer system safeguards assets,
maintains data integrity, allows organizational goals to be achieved effectively, and uses resources
efficiently.
An information systems audit performed in an organisation is a comprehensive examination of a
given targeted system.

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 The audit consists of an evaluation of the components which comprise that system, with
examination and testing in the following areas:
 High-level systems architecture review
 Business process mapping (e.g. determining information systems dependency with respect to user
business processes)
 End user identity management (e.g. authentication mechanisms, password standards, roles limiting
or granting systems functionality)
 Operating systems configurations (e.g. services hardening)
 Application security controls
 Database access controls (e.g. database configuration, account access to the database, roles
defined in the database)
 Anti-virus/Anti-malware controls
 Network controls (e.g. running configurations on switches and routers, use of Access control lists,
and firewall rules)
 Logging and auditing systems and processes
 IT privileged access control (e.g. System Administrator or root access)
 IT processes in support of the system (e.g. user account reviews, change management)
 Backup/Restore procedures.

During the System audit, the auditors are required to understand and evaluate the overall control
environment. The control environment reflects the overall attitude of, awareness of, and actions
by the board of directors, management, and others concerning the importance of internal controls
in the enterprise.

CHECKLIST ON SYSTEMS AUDIT

A. Management Controls
1. Security Policy and Standards
a. Whether the organization has a Security Policy?
b. If a security policy exists, it needs to be examined for adequacy in proportion to the risk.

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2. Constitution of Steering Committee
The formulation and implementation of a sound security policy should be a team effort, brought
into effect by a committee in which there is at least one member of the Board of Directors apart
from the Chief Information Officer (CIO)and user HoDs.

3. Business Continuity Planning

The Auditor should examine all such possibilities by which the availability of Computer Systems
is threatened with temporary or permanent breakdown. In sensitive areas, even proofing against
mob violence/terrorist strikes should be kept in view.

4. Systems Development Methodology

The documentation should be properly cross-indexed. The effect of a change made in the system
should be well understood and thorough testing should be done and documented. The System
Auditor should get necessary evidence and comment on the lack of proper adherence to procedure.

B. Operational Controls
1. Monitoring physical assets
a. Whether monitoring of physical assets are done in regular intervals?
b. Any discrepancy in the data collected and the current data of physical assets are addressed
immediately or not?

2. Ensure adequate environmental controls:

a. Whether proper facilities of Air-conditioning (dust, temperature & humidity controls), Power
Conditioning (Online UPS functioning all the time with backups, proper earthing) are timely
reviewed?
b. Whether the cable connections/electronic points are functioning properly or not is reviewed on
regular intervals?

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 C. Organizational Controls
a. Whether the roles, responsibilities and duties of User Departments and IT Department are defined?
b. The CIO should have three reportees– one for taking care of the development team, one for
ensuring Information System / IT Centre security and another for managing the facilities (i.e.,
operations and maintenance of hardware), OS, database administration, vendor management,
service providers etc.

D. Application Controls
Whether each of the Computer Systems and subsystems must have its own set of controls for
Inputs, processing & outputs. Processing controls should also ensure checks for legal compliance.

BOX PAGE 326 Mandatory Audits

13. FORENSIC AUDIT

i. Forensic is the application of science to crime concerns. Forensic science is science applied to
legal matters especially criminal matters.
ii. Forensic Audit is a tool in combating corruption, financial crimes and frauds through investigations
and resolving allegations of fraud and embezzlement.
iii. Forensic audits are highly specialized, and the work requires detailed knowledge of fraud
investigation techniques and the legal framework. Forensic accountants are trained to look beyond
the numbers and has necessary skills and experience to accept the work.
iv. A forensic audit, also known as forensic accounting, refers to the application of accounting methods
for detection and gathering evidence of frauds, embezzlement, or any other such white-collar
crime.
v. Forensic audit is done in two-phases:
1. Investigation Services – At first the auditor begins with an investigation, looking into the
accounts and statement, and identifying defects in it. Post this, it moves on to find ways to deal
with such defects.

2. Litigation Services – It is entirely possible the frauds detected be resolved within the company
itself. However, there are times when they need to be resolved through legal channels. During

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 such situations, forensic auditors give litigation support to the advocates. Their advice and
consultation about the legalities of commercial disputes are very essential.. They are also called
up by the Court as an expert witness for further investigation.

Areas of Forensic Audit

Fraud
Criminal Professional Settlement
investigation Arbitration Dispute
investigati negligence of insurance
cases settlement
and risk /
ons cases claims
control
reviews

PURPOSE OF FORENSIC AUDIT

I. Corruption
In Forensic audit, while investigating fraud, auditor would look out for:
a. Conflicts of interest – When fraudster used his/her influence for personal gains detrimental to
company. For example, if a manager allows and approves inaccurate expenses of employee with
whom he has personal relations. Even though the manager is not benefitted from this approval
but he is likely to receive personal benefits after making such inappropriate approvals.
b. Bribery –Offering money to get things done or influence a situation one’s favour would be bribery.
c. Extortion –if someone demands money so as to award Tender to other party then it would amount
to extortion.

II. Asset Misappropriation

Misappropriation of cash, raising fake invoices, payments made to non-existing suppliers or
employees, misuse of assets or theft of Inventory are few examples of such asset misappropriation.

III. Financial statement fraud

Companies commit fraud to make their performance look better than it really is. They may do
this to boost liquidity, ensure top management gets bonuses, or meet market performance
expectations.

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 Some examples of such frauds are – Intentional forgery of accounting records; omitting
transactions – either revenue or expense transactions, non-disclosures of relevant details from the
financial statements; or not applying the requisite financial reporting standards.

Procedure of Forensic Auditing Investigation

 Step 1 – Accepting the Investigation
i. A forensic audit is always assigned to an independent firm/group of investigators in order to
conduct an unbiased and truthful audit and investigation.
ii. When a firm receives an invitation to conduct an audit, their first step is to understand the
business, Identify possible frauds and determine whether or not they have the necessary tools,
skills and expertise to go forward with such an investigation.
iii. If, they are satisfied with such considerations, can they go ahead and accept the investigation.

 Step 2 – Planning the Investigation

The auditors need to clearly understand the goal of the audit and carefully plan the procedures
to achieve it. They should identify potential fraud signs before planning the investigation.
Planning also includes the identification of the best way/mode to gather evidence. Thus, it is
necessary that ample research should be done regarding certain investigative, analytical, and
technology-based techniques, and also related legal process, with regard to the outcome of such
investigation

Symptoms of Fraud
 Delayed submission of returns information etc.;
 Delayed remittances into Bank;
 Delay or non-preparation of Bank reconciliation statements;
 Lifestyle of promoters/directors and key employees ;
 Continued internal control lapses and not following norms of corporate governance.

Internal Indicators
 Delay in finalisation of accounts;
 Frequent changes in Accounting Policies;

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 Continuing Losses;
 Over drawl of loans or advances;
 Higher cost per unit of production;
 High amount of losses or wastage shown in books v/s Norms;
 High investment in group companies;
 Profit not supported by increased cash availability.

They should also be clear on the final categories of the report, which are as follows,
 Identifying the type of fraud that has been operating, how long it has been operating for, and
how the fraud has been concealed;
 Identifying the fraudster(s) involved;
 Quantifying the financial loss suffered by the client;
 Gathering evidence to be used in court proceedings;
 Providing advice to prevent the recurrence of the fraud.

Illustrative Checklist on Forensic Audit

 Whether the fraud detected is at the management level or employee level?
 What was the reason or motive behind the fraud?
 How is the internal check on cash transactions, raising of invoices etc.?
 Who is responsible for the checking if all the things are in order in regular intervals?
 What is the nature of fraud – corruption, assets misappropriation or financial misstatement?
 Whether the entries passed are properly reflected in the balance sheet without any omission?
 Whether IT returns are filed every year properly?
 Whether bank entries are reconciled on regular basis?
 Whether bank statements do not have any discrepancy.

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 Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short Note)
Fraud Triangle and Fraud Risk
A fraud triangle is a tool used in forensic auditing that explains three interrelated elements
that assist the commission of fraud- Pressure (motive), opportunity (ability to carry out the fraud)
and rationalization (justification of dishonest intentions). Fraud risk is the vulnerability a
company/organisation has to those who are capable of overcoming the three elements in the
fraud triangle. Fraud risk assessment is the identification of fraud risks that exist in
the company/organisation. The planning involves the formulation of techniques and procedures
that align with the fraud risk and fraud risk management.

 Step 3 – Gathering Evidence

i. In forensic auditing specific procedures are carried out in order to produce evidence.
ii. In order to continue, it is pertinent that the planning stage has been thoroughly understood by
the investigating team, who are skilled in collecting the necessary evidence. It is also important
to keep clear sequence of custody until the evidence is presented in court. A logical flow of
evidence helps in understanding the fraud and evidence presented in a better manner. If the same
is not done then the evidence can be challenged in court, or the court would not admit it.
iii. The investigators can use the following techniques to gather evidence or data about symptoms,
testing controls to gather evidence which identifies the weaknesses, which allowed the fraud to
be perpetrated.
a. Analytical Procedure: Using analytical procedures to compare trends over time or to provide
comparatives between different segments of the business applying computer-assisted audit
techniques, for example, to identify the timing and location of relevant details being altered in
the computer system.
b. Discussions and Interviews: Discussions and interviews with employees.
c. Substantive Techniques: Substantive techniques such as reconciliations, cash counts and reviews
of documentation.
d. Forensic Data Analysis (FDA): FDA is the technology used to conduct fraud investigations; the
process by which evidence is gathered, summarized and compared with existing different sets of

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 data. The aim here is to detect any anomalies in the data and identify the pattern of such
anomalies to indicate fraudulent activity.

 Step 4 – Reporting
The reporting stage is the most obvious element in a forensic audit. After investigating and
gathering evidence, the investigating team is expected to give a report of the findings of the
investigation, and also the summary of the evidence and conclusion about the loss suffered due
to the fraud. It should also include the plan of the fraud itself, and how it unfolded, basically the
whole trail of events, and suggestions to prevent such fraud in the future.

 Step 5 – Court Proceedings

The last stage expands over those audits that lead to legal proceedings. Here the auditors will
give litigation support to the Company/Regulators. The auditors are called to Court, and also
included in the advocacy process. The understanding here is that they are called in because of
their skill and expertise in commercial issues and their legal process. It is important that they lay
down the facts and findings in an understandable and objective manner for everyone to
comprehend so that the desired action can be taken up. They need to simplify the complex
accounting processes and issues for others to understand the evidence and its implications.

FORENSIC AUDIT REPORT

Illustrative table of contents of a Forensic Audit Report include the following points:
1. Executive Summary
2. Origin of the audit
3. Audit Objective
4. Proposed Audit Outputs
5. Audit Implementation approach
6. Risk Analysis
7. Internal Environment Risk: Customers, product and Competitors; Financial Management; Human
Resource Management; Information Technology; Business processes
8. External Environment Risk: Economy and market situation; political and legal scenario; Technology
in the sector

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 9. Audit Process
10. Preliminary understanding of scope and incident coverage
11. Collect evidence
12. Conduct Interviews
13. Analyse findings
14. Validate inferences and conclusions
15. Evidence of risk events
16. Conflicts of interest; Bribery; Extortion; Theft; Fraudulent transactions; inventory frauds; misuse
of assets; financial statement frauds
17. Audit recommendations
18. Logical framework approach
19. Preconditions and risks
20. Governance on recommendation implementation
21. Stakeholders
22. Budget considerations

14. SOCIAL AUDIT

i. A social audit is a way of measuring, understanding, reporting and ultimately improving an
organization’s social and ethical performance. A social audit helps to narrow gaps between
vision/goal and reality, between efficiency and effectiveness and creates an impact upon
governance.
ii. Social auditing is taken up for the purpose of enhancing local governance, particularly for
strengthening accountability and transparency in local bodies. Social audit is a process of reviewing
official records and determining whether state reported expenditures reflect the actual money
spent on the ground.
iii. A social audit is a formal review of a company’s endeavors in social responsibility.
iv. The key difference between development and social audit is that a social audit focuses on the
neglected issue of social impacts, while a development audit has a broader focus including
environment and economic issues, such as the efficiency of a project or programme.

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 Implications of Social Audit
Social auditing creates an Social auditing is taken up for Social Audit makes it sure that
impact upon governance. It the purpose of enhancing local in democracy, the powers of
values the voice of governance, particularly for decision makers should be used
stakeholders, including strengthening accountability as far as possible with the
marginalized/poor groups and transparency in local consent and understanding of all
whose voices are rarely heard. bodies. concerned.

Objectives of Social audit

• Assessing the physical and financial gaps between needs and resources available for
1 local development.

• Creating awareness among beneficiaries and providers of local social and productive
2 services.

• Increasing efficacy and effectiveness of local development programmes.

3

• Scrutiny of various policy decisions, keeping in view stakeholder interests and

4 priorities, particularly of rural poor.

• Estimation of the opportunity cost for stakeholders of not getting timely access to
5 public services.

• Provision of information needed to improve the effectiveness of programs designed

6 to enhance community development.

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 Rights of Social Auditor to be effective

• seek clarifications from the implementing agency about any decision-making,

1 activity,

• consider and scrutinize existing schemes and local activities of the agency; and
2

• access registers and documents relating to all development activities undertaken

3 by the implementing agency or by any other government department.

SOCIAL AUDIT- COVERAGE

A social audit examines issues regarding internal practices or policies and how they affect the
identified society. The activities included tend to pertain to the concepts of social responsibility.
This can include activities affecting the financial stability of a region, any environmental impact
resulting from standard operations and issues of transparency in reporting.

Use of Social Audit

i. Findings as a social audit is completely voluntary, the results of the audit are not required to be
released to the general public or any regulatory agency.
ii. Positive results may be voluntarily disclosed, negative results may be kept internal and used to
identify potential improvements that can make the results of the next social audit more favorable.

Implementation of Social Audit

1. Empowerment of people:
Social audit is most effective when the actual beneficiaries of an activity are involved in it.
However, people can only get involved in the process when they are given appropriate authority
and rights. To this end, the 73rd amendment of the constitution has empowered the Gram Sabha
to conduct social audit. This is relevant only in the villages. In the cities, the Right to Information
Act empowers the people to inspect public records.

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2. Proper Documentation:
Everything right from the requirement gathering to planning to implementation must be properly
documented. Some of the documents that should be made mandatory are: Applications, tenders,
and proposals. Financial statements, income - expense statements. Registers of workers. Inspection
reports.

3. Accessibility of Documents:
Merely generating documents is useless if they are not easily accessible. In this information age,
all the documents must be put on line.

4. Punitive Action:
The final and most important provision, about which nothing is being done yet is to have punitive
actions for non-conformance of the process of social audit. Unless there is legal punishment, there
will be no incentive for the people in authority to implement the processes in a fair manner.

Steps for Social Audit

 Clarity of purpose and goal of the local elected body.
 Identify stakeholders with a focus on their specific roles and duties.
 Definition of performance indicators which must be understood and accepted by all
 Regular meetings to review and discuss data/information on performance indicators.
 Follow-up of social audit meeting with the panchayat body reviewing stakeholders’ actions,
activities and viewpoints, making commitments on changes and agreeing on future action as
recommended by the stakeholders.
 Establishment of a group of trusted local people including elderly people, teachers and others who
are committed and independent, to be involved in the verification and to judge if the decisions
based upon social audit have been implemented.
 The findings of the social audit should be shared with all local stakeholders. This encourages
transparency and accountability.
Checklist on Social Audit
 Whether the company has well defined policies for development of the society especially the poor
and rural people?

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  Whether on regular basis the scrutiny of fulfilment of the policy is done?
 Whether the physical and financial gaps between needs and resources available for local
development are assessed on regular intervals?
 Whether the voice of the minority shareholders are considered?
 Are necessary actions taken over them?

15. ICSI SOCIAL AUDIT STANDARDS

The Institute of Company Secretaries of India has approved the ICSI Social Audit Standards
covering all the sixteen areas of activities listed by the Regulatory Authorities, where a Social
Enterprise can operate to be eligible to register on the Social Stock Exchanges.

Objectives
i. The main object of Social Audit is to ascertain the impact made by the Social Enterprise through
its activities, intervention, programs or projects implemented during the reporting period. It will
also analyse whether the implemented activities, intervention, programs or projects has addressed
the challenges set at the implementation stage or those mentioned in the fund-raising documents.
ii. The impact report aims to highlight the positive impact made to the target area, unintended
negative impact and gap between desired object and actual impact made by the Social Enterprise
during the reporting period.
iii. The main objects of Social Audit are as follows:
 Assessing the impact made by the Social Enterprise through implementation of activities,
intervention, programs or projects;
 Verifying the authenticity and validity of implementation of projects;
 To identify and report the gap between desired object and actual impact made by the Social
Enterprise;
 Assessing the nature, intensity and duration of impact of the project;
 Evaluating the cost and efficiency of the projects/ interventions being carried out by the Social
Enterprise;
 Evaluating the unintended effects and how to use the experience from the running projects to
improve the design of future projects;
 Verifying whether all the statutory requirements are fulfilled or not.

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 Scope
Different projects may have a very different list of social issues. The Social Auditor is to exercise
his own technical judgement to determine which issues should be subject to inquiry. The minimum
issues which must be addressed by the Social Auditor are enumerated as under:
 Will the project significantly impact the economic, environment and social condition of the local
community?
 Will there be a significant change in the general access that the communities have to natural
resources, such as drinking water and energy?
 Does the local community have effective governance mechanisms to deal with the long-term
effects of the project?
 Are there groups (indigenous groups, women, ethnic minorities, LGBTQIA+ and so on) who will
be differentially impacted by the project?
 Will the project increase or decrease the demand for services, such as education or health?
 Will the project produce any population or demographic movement, such as the change in size of
the communities affected by the project?

Above questions can help the auditor and the Enterprise to determine the extent of the impact,
as well as any unmanageable social obstacles ahead of the project. This allows for the anticipation
of any adverse significant social effects of the infrastructure and for avoiding, minimizing, or
offsetting them.

Mandatory nature of framework and Standards

These Social Audit Standards are applicable to all Social Auditors empanelled with the ICSI
Institute of Social Auditors who undertake the Social Audit assignment as per the relevant
provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018 and other relevant provisions
notified from time to time. The Standards are formulated for the effective assessment of impact
made by the Social Enterprises through the projects identified and the eligibility criteria as notified
by SEBI vide Regulation 292E (2) (a) of SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018.

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 Eligibility Criteria
As per Regulation 292E (2) (a) of SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018, in order to establish the primacy of its social intent, such Social Enterprise
shall meet the following eligibility criteria: -
i. Eradicating hunger, poverty, malnutrition and inequality;
ii. Promoting health care including mental healthcare, sanitation and making available safe drinking
water;
iii. Promoting education, employability and livelihoods;
iv. Promoting gender equality, empowerment of women and LGBTQIA+ communities;
v. Ensuring environmental sustainability, addressing climate change including mitigation and
adaptation, forest and wildlife conservation;
vi. Protection of national heritage, art and culture;
vii. Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic
sports;
viii. Supporting incubators of Social Enterprises;
ix. Supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity
building;
x. Promoting livelihoods for rural and urban poor including enhancing income of small and marginal
farmers and workers in the non-farm sector;
xi. Slum area development, affordable housing and other interventions to build sustainable and
resilient cities;
xii. Disaster management, including relief, rehabilitation and reconstruction activities;
xiii. Promotion of financial inclusion;
xiv. Facilitating access to land and property assets for disadvantaged communities;
xv. Bridging the digital divide in internet and mobile phone access, addressing issues of misinformation
and data protection;
xvi. Promoting welfare of migrants and displaced persons.

Social Audit Standards for other items, if any, identified by the SEBI or Government of India
from time to time, will be notified as and when the items are notified by the SEBI or Government
of India. The Social Auditors empanelled under IISA shall maintain and preserve the records and

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 evidences collected in the course of Social Audit for a minimum period of eight (8) years from
the date of the respective Social Impact Assessment Report.

Benefits and Advantages of Social Audit

 Financial data on social activities/ programs/ interventions: Social Audit assesses the source of
funding, its utilisation and appropriate reporting to the Governing Body of the Social Enterprise.
 Encourage for social performance: Social Audit assesses the impact of the activities undertaken
and brings the social point of view to the attention of the management, and thus encourages the
Social Enterprise to perform better.
 Improve relationships with Stakeholders: By Implementing the auditors’ recommended
improvements, it helps the Social Enterprise to meet stakeholder expectations, enabling it to build
a good relationship with them in the long term.
 Comparison of different activities: The Social Audit provides data for comparing effectiveness
of different types of social welfare programmes undertaken and this further enables to assess
which activity has better social impact.
 Enhances Social Reputation: Social Audit helps the organization to build up the image and
reputation of the organization in the minds of the public.
 Sense of Social Responsibility among Shareholders and Community as a whole: Social Audit
helps shareholders as well as other stakeholders realize the importance of socially beneficial
programmes and extend their cooperation to the Social Enterprise’s programmes of social welfare
and development.

EXTRA
There are 16 social auditing standards issued by ICSI but all 16 are the eligibility criteria
given above. (ICSI SAS 01- ICSI SAS 16)

16. ICSI AUDITING STANDARDS – AN OVERVIEW

i. The Companies Act, 2013 has introduced the concept of Secretarial Audit (Audit) for Bigger
Companies in order to have third party professional assurance in the areas of governance,
compliances and disclosures by the companies.

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 ii. A Practicing Company Secretary (PCS) who is holding Certificate of Practice (CoP) have been
casted an exclusive responsibility to undertake such audit of companies.
iii. The ICSI has setup an Auditing Standards Board for laying down the foundations of Company
Secretaries Auditing Standards (CSAS) in India and for inculcation of best auditing practices
among its members, and issued CSAS-1 to CSAS-4 effective from it 1st April, 2021.
iv. Observance of ICSI auditing for standards by PCS, will lead to good governance, compliance and
transparency among the companies. It will also help the PCS to comply with its important function
of detection and reporting of frauds.
v. The Council of the Institute of Company Secretaries of India (ICSI) has approved the issuance of
four ICSI Auditing Standards. The Standards are required to be observed by the Company
Secretaries undertaking Audits. The Standards seek to promote best auditing practices, uniformity
and consistency while conducting audits.

The four Standards namely

CSAS-1: Auditing Standard on Audit Engagement which lays down the Auditor’s role and
responsibilities with respect to an Audit Engagement and the process of entering into an
understanding/agreement with the Appointing Authority for the purpose of audit.

CSAS-2: Auditing Standard on Audit Process and Documentation which lays down the
responsibilities and duties of the Auditor with respect to Audit Process in conducting audit and
maintaining proper audit records.

CSAS-3: Auditing Standard on Forming of Opinion covers the basis and manner for forming
Auditor’s opinion on subject matter of the audit.

CSAS-4: Auditing Standard on Secretarial Audit covers the basis and manner for carrying out the
Secretarial Audit. However, the developments arising due to the spread of Covid-19 pandemic, the
mandatory applicability of ICSI Auditing Standards CSAS-1 to CSAS-4 is extended for Audit
Engagements accepted by the Auditor on or after 1st April, 2021

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 9 – AUDIT ENGAGEMENT

1. MEANING OF AUDIT ENGAGEMENT

The audit engagement is a contractual arrangement by way of the Audit Engagement letter
between the auditee and the auditor.
ICSI issued CSAS-1 – Auditing Standard on Audit Engagement effective from 1st April, 2021,
which defines: “Audit Engagement” means detailed terms of reference of appointment including
scope of audit, remuneration and limiting conditions.

Offer and acceptance of the Audit Engagement

The offer for the audit engagement may be initiated either by the Auditee or by the auditor.
However it is necessary that the engagement are accepted by the auditors and the auditor
fulfils the various criteria for acting as an auditor prescribed in the various applicable laws.
For example in case of the statutory audit the auditor shall fulfil the eligibility criteria as
prescribed under section 141 of the Companies Act, 2013. An auditor may be appointed either
as a result of one to one communication between the auditor and the Management or through
a tendering process followed by the Management.

In case the auditor is to be appointed by the management on one to one basis, following
steps should be taken care by the auditor:
1. Selection or screening of prospective auditee based on following risk / assessment
a. Client acceptance and engagement risk
b. Performance Risk – capacity, resources et
c. Engagement Contract Risk
d. Reputation Risk
e. Commercials
2. Communicating his willingness to take up the audit assignment
3. Conducting a pre- engagement meeting with the management
4. Signing the engagement letter with the Management and issuance of certificate by auditor
before accepting an audit.

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 In case the auditor is to be appointed by tendering process, following steps should be
taken care by the auditor
1. Pre-bid meeting with the management to discuss upon various aspects of the tender, scope of
work terms of engagement, prior year audit results, appropriateness of reporting framework,
understanding business and environment
2. Submission of technical bid as per the requirements of the tender document of the management
3. Signing the engagement letter with the management
4. Certificate by auditor before accepting an audit

The Auditor shall furnish a certificate to the Appointing Authority that:

i. The number of audits are within the ceiling prescribed by the ICSI as specified in para 2 of
CSAS 1.
ii. No substantial conflict of interest as defined in para 3 of CSAS-1 exists with the Auditee.
iii. There is no restriction to render the professional services under ICSI Guidelines.
iv. He is not debarred to undertake such audit under any law or under the disciplinary mechanism
of the ICSI

Preconditions of accepting/continuing any professional engagement

Prior to acceptance of any Audit engagement, the auditor, in order to establish whether the
preconditions for accepting professional assignment are present, the auditor should check that:
a. Whether the reporting framework as required in the preparation, performance of audit, review
of the secretarial/ non-financial statements is acceptable; and
b. Whether the management is in agreement to acknowledge and understands its responsibility
relating to:
i. Preparation of the secretarial/ non-financial statements in accordance with the applicable
reporting framework, including their fair presentation;
ii. Development of internal control/systems/procedure to enable the preparation of secretarial/
non-financial statements which are free from material misstatement, whether due to fraud or
error; and

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iii. Providing:
a. Access to all information of which management is aware that is relevant to the preparation/
audit/ review etc. of the secretarial/ non-financial statements such as records, documentation
and other matters;
b. Additional information that the auditor may request from management for the relevant purpose;
and
c. Unrestricted access to persons within the company from whom the auditor determines it
necessary to obtain audit evidence.

Limitation on scope prior to Engagement Acceptance

If management or appointing authority impose a limitation on the scope of the auditor’s work
in the terms of a proposed audit engagement such that the auditor believes the limitation will
result in the auditor disclaiming an opinion on the Secretarial records/non-financial statements,
the auditor shall not accept such a limited engagement as an audit engagement, unless required
by law or regulation to do so.

Other factors affecting Engagement Acceptance

If the preconditions for an audit/professional assignment are not present, the auditor should
discuss the matter with management. Unless required by law or regulation to do so, the auditor
should not accept the proposed audit engagement:
a. If the auditor assesses that the reporting framework to be applied in the preparation of the
secretarial records/ non-financial statements is unacceptable, or
b. If the agreement has not been concluded.
c. Reference to the expected form and content of any reports and a statement that there may
be circumstances in which a report may differ from its expected form and content.

Criteria for declining and withdrawing from an Engagement

Based on the evaluation of client information and the following factors, the auditor should
determine and document the conditions beyond which it would be prudent to decline, or
withdraw from an engagement:
a. Client’s status/information that is likely to impact adversely on the independence of the firm.

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 b. Ability of the firm to provide appropriate service to the client, considering needs for technical
skills, knowledge of the industry and personnel.
c. Consider circumstances which would cause the firm to regard the engagement as one requiring
special attention or presenting unusual risks.

2. APPOINTING AUTHORITY
The appointing authority means the person who is appointing the Auditors of the company.
The Auditee under the Statute could be a company or any other form of entity. Appointing
Authority will depend upon the type of the Auditee. In case the Auditee is a company, the
Appointing Authority would be the Board of company or members of the company, and in other
cases, it would be the persons who have been entrusted with the responsibility of governance
and compliances of the Auditee. Further, the Appointing Authority may also include Court,
Tribunal or Regulator or any officer thereof.

ICSI auditing standard CSAS-1 (Auditing Standard on Audit Engagement) defines “Appointing
Authority” as any person having authority to appoint the Auditor. “Auditee” means a person
subject to audit.
i. Under the provision of the Section 139 of the Companies Act, 2013, it has been specifically
provided that the first statutory auditor shall be appointed by the Board of Directors of the
company within 30 days of the incorporation of the company, however, subsequent auditors
shall be appointed upon the recommendation of the board or the audit committee of the
company, if any, by the members at the general meeting of the company.

ii. For example, to conduct audit of the function and activities of the company in case of
Secretarial Audit under Section 204 of Companies Act, 2013 or Clause 24A of the SEBI (LODR)
Regulations, 2015 and Internal Audit under Section 138 of Companies Act, 2013, the Appointing
Authority would be the Board of the Company.
iii. In case where the tribunal/ official liquidator by exercising his power, appointed the auditor,
the tribunal/ official liquidator is considered as the appointing authority.
iv. In case where the law specifically provides for the appointing authority and the appointing
authority may authorize such person to sign the engagement letter, however instances where

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 the law has not provided, the person who signs the engagement letter in official capacity can
be considered as the appointing authority.
v. In case, the Auditee is under Corporate Insolvency Resolution Process, the Appointing Authority
shall be the Resolution Professional.
vi. In case of Audit of Depository Participants, the Appointing Authority may depend upon the
type of Auditee, e.g. if the Depositary Participant is a company then the Appointing Authority
will be the Board or in case of an LLP it could be the designated partner or any other partner
as may be authorised to appoint the Auditor.
vii. In case of Internal Audit of Stock Brokers, Internal Audit of Investment Advisors, Internal
Audit of Portfolio Managers, Internal Audit of Credit Rating Agencies and Internal Audit of
Research Analysts, the Appointing Authority would depend upon the type of Auditee.

Types of appointing authorities

First statutory auditor of the Company Board of Directors or members in EGM
Statutory Auditor Members in AGM
Secretarial Auditor Board of Directors
Internal Auditors Board of Directors
Auditee is under Corporate Insolvency Resolution Resolution Professional
Process
Tribunal/ official liquidator by exercising his power Tribunal/Official Liquidator
Audit of Depository Participants Director /Designated etc. partner depends on
nature of Organisation
Internal Audit of Stock Brokers Depends upon the type of auditee

CASE STUDY
i. Sun Moon Limited is a listed company and operates in the manufacturing sector. In January
2023, the company received a notice from the Securities and Exchange Board of India (SEBI)
stating that Sun Moon Limited had failed to comply with several provisions of the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015.
ii. The SEBI notice also required the company to appoint a practicing company secretary to
conduct a secretarial audit of its records and submit a report to SEBI.

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iii. The board of directors of Sun Moon Limited have decided to appoint a M/S RR & Associates
(Practicing Company Secretaries Firm) to conduct the secretarial audit and passed the Board
resolution in their meeting.
iv. However, Mr. Abhinav (shareholder) of the company challenged the appointment of the
secretarial auditor in court, stating that the board did not have the authority to appoint the
auditor and that the appointment should have been made by SEBI.
v. The matter was referred to court. The court examined the provisions of the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015, and found that the regulations did
not specify who had the authority to appoint a secretarial auditor.
vi. However, the court noted that the regulations required the secretarial auditor to be appointed
by the company to conduct the audit. Based on these findings, the court ruled that the board
of directors of Sun Moon Limited had the authority to appoint the secretarial auditor, and that
the appointment was valid.
The secretarial audit was conducted, and the report was submitted to SEBI. Sun Moon Limited
took corrective measures to rectify the non-compliances identified during the audit

Terms and Conditions of Audit engagement

This is essential that the auditor as well as the auditee should agree upon the terms of audit
engagement and documented the same in the audit engagement letter or other suitable form
of written agreement which can be referred on any conflict arising during the course of audit.
While drafting the terms and conditions of audit these 4 corners requires the specific attention
of the auditors and auditee:
 The objective and purpose of the audit;
 The responsibilities of the auditor;
 The responsibilities of management/ Auditee;
 The audit risk;
 The audit limitation;
 The audit plan

3. AUDIT FEE & EXPENSES

Audit fee which is to be charge by the auditor depends on several factors, which includes:

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  Size of the organization;
 Nature of business;
 Internal Controls systems & Technology adopted;
 Scope of audit;
 Frequency of audit etc.

i. Audit fees should be a fair reflection of the value of the work performed for the auditee, taking
into account the above-mentioned factors. However, the Audit services should not be offered
or rendered under an arrangement whereby no fee will be charged unless specified findings or
results are obtained, or where the fee is otherwise contingent upon the findings or results of
such services, and fees should not be regarded as being contingent if fixed by a court or other
public authority.
ii. The charge or accept a fee for professional work on a percentage basis is not advisable except
where that course is authorized by statute or has been approved by a member body as generally
accepted practice for certain work.
iii. Auditors should not accept a very low level of fee as a result of competing for business.
However, charging a lower fee than has previously been charged by another auditor for similar
work is not restricted in any law.
iv. In case of Statutory Auditors, Section 142 of the Companies Act, 2013 provides that the
remuneration to the Auditors shall be fixed in the general meeting of the company, also the
auditor can claim the expenses incurred by him in connection with the audit of the company.
v. In case of the Secretarial Audit and the Internal Audit, the Audit fee shall be decided by the
Audit committee or by the board of the company.

CASE STUDY
In Re R. Swarup Reddy Vs. M.N Pratap Reddy, NCLAT New Delhi,
In this matter CLB appointed Independent auditors for auditing books of account the company.
Auditors completed their work and claimed fees of Rs. 36.16 lakh. The director company stated
that fees claimed by auditors was on higher side and at best they were entitled for a fees of
Rs. 8 lakh. The Court observed that said auditors had not only done audit but also did
investigation, particularly with reference to related party transactions entered at instance of

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appellant with its two sister companies for period from 1-4-2007 to 31-3-2014. Further, amount
claimed by said auditors was supported by number of days spent and composition of people
working on assignment. It was also observed that appellant had paid nearly Rs. 62 lakh for
auditing of sister concerns for same period. Therefore, fees claimed by auditors were reasonable.
Court was justified in directing the company to remit to said auditors entire claimed amount

ICSI Guidance Note on Audit Engagement

The Auditing Standard on Audit Engagement (CSAS-1) is applicable to the Practicing Company
Secretaries (PCS).
CSAS-1 is not applicable for Audits entrusted on a voluntary basis by the Auditee to the
Auditor. However, adherence to the Standard is recommended in respect of Audits entrusted
on voluntary basis also.

Following is an illustrative list of Audits which may be undertaken by a Company Secretary

under various Statutes:

Type of Audit Act/Regulation Section/ Regulation Auditee

Secretarial Audit Companies Act, 2013 204 Company

Secretarial Audit SEBI (LODR) 24A Listed Entities

Regulations, 2015

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Type of Audit Act/Regulation Section/ Auditee
Regulation
Internal Audit Companies Act, 2013 138 Company
Audit of SEBI (Depositories and 76 Sole Proprietorship,
Depository Participants) Regulations Partnership Firm, LLP, Company
Participants 2018 read with SEBI
circular no. SEBI/HO/
MRD/ DOP2-DSA2/
CIR/P/2019/22 dated
January 23, 2019
Internal Audit of SEBI (Stock and sub- SEBI circular no. Sole Proprietorship, HUF,
Stock Brokers broker) Regulations, 1993 MIRSD/ DPSIII/ Partnership Firm, LLP, Company
Cir-26/ 08
Internal Audit SEBI (Investment 19(3) Sole Proprietorship,
of Advisors) Regulations, Partnership Firm, LLP, Company
Investment Advisors 2013
Internal Audit of SEBI (Portfolio SEBI circular no. Body Corporate
Portfolio Managers Managers)Regulations, IMD/
1993 PMS/CIR/1/21727/

03
dated November
18,
2003
Internal Audit of SEBI (Credit Rating SEBI circular Public Financial Institution,
Credit Rating Agencies) Regulations [Link]/ Scheduled Commercial Bank,
Agencies 1999 CRA/CIR- Foreign Bank operating in
01/2010 India with RBI approval, Foreign
dated January Credit Rating Agency recognised
06, by or under any law, Company,
2010 Body Corporate
Internal Audit of SEBI (Research Analysts) 25(3) Sole, Proprietorship,
Research Analysts Regulation, 2014 Partnership Firm, LLP, Company

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 New Audit Engagement – Covers an audit being conducted first time and therefore the
appointment of the Auditor is an initial appointment. It will also cover the situations where
the audit for the previous period was conducted by another Auditor.

Recurring Audit Engagement – Covers the situation where the Auditor had conducted the
audit for the previous period and is requested to conduct the audit for the subsequent period
as well. In such a case, the Auditor should obtain fresh Audit Engagement Letter if the period
of engagement has expired.

Changes in terms of Audit Engagement – Whenever there is a change in the terms of Audit
Engagement in the middle of an ongoing audit, the Auditor shall adhere to the Standard and
initiate a revised Engagement Letter in terms of this Standard.

Definitions:
 “Auditor” means a member of the ICSI who holds a valid Certificate of Practice under Section
2(2) of the Company Secretaries Act, 1980. It includes a firm or Limited Liability Partnership
(LLP) registered with ICSI and whose partners are members of the ICSI.
 The term “Management” includes Board of Directors and persons who have been entrusted
with the responsibility of governance and compliances of the Auditee like In case of Companies.
 The term “persons who have been entrusted with the responsibility of governance and
compliances of the Auditee” include the Key Managerial Personnel as defined under Section
2(51) of the Companies Act, 2013 and senior As per Section 2(51) of Companies Act, 2013:
 “Key Managerial Personnel”, in relation to a company, means –
(i) the Chief Executive Officer or the Managing Director or the Manager;
(ii) the Company Secretary;
(iii) the whole-time Director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is in whole-time
employment, designated as Key Managerial Personnel by the Board; and
(vi) such other officer as may be prescribed.

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  As per Regulation 16(1)(d) of SEBI (LODR) Regulations, 2015 : “Senior Management” shall
mean officers/ personnel of the listed entity who are members of its core management team
excluding board of directors and normally this shall comprise all members of Management one
level below the Chief Executive Officer/Managing Director/ whole time Director/ Manager
(including Chief Executive Officer/Manager, in case they are not part of the board) and shall
specifically include Company Secretary and Chief Financial Officer:

4. AUDITING STANDARD ON AUDIT ENGAGEMENT (CSAS-1)

Pre-Engagement
i. Pre engagement meeting is a , meeting Before accepting the Audit Engagement.
ii. The meeting may include discussion about the terms of engagement, prior year audit findings
and conclusions, appropriateness of reporting framework, understanding Auditee’s business
operations and environment including internal control system, commercial terms of the audit
and the timelines and milestones, if any, for conducting the Audit and submission of the Audit
Report.
iii. The Auditor shall be under Confidentiality obligation with respect to the information obtained
during the pre-engagement meeting.

Appointment
Before accepting an audit, the Auditor shall furnish a certificate to the Appointing Authority
that:
a. The number of audits are within the ceiling prescribed by the ICSI as specified in para 2 of
CSAS 1.
b. No substantial conflict of interest as defined in para 3 of CSAS-1 exists with the Auditee.
c. There is no restriction to render the professional services under ICSI Guidelines.
d. He is not debarred to undertake such audit under any law or under the disciplinary mechanism
of the ICSI.
Example
Section 179(3)(k) of Companies Act, 2013 read with Rule 8(4) of Companies (Meeting of
Board and its Powers) Rules, 2014 requires that the Internal Auditor and Secretarial Auditor of
the company shall be appointed by passing a resolution at a duly convened meeting of the

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 Board. Therefore, the appointment of Internal Auditor/Secretarial Auditor cannot be made by
passing a resolution by circulation. Further, the said appointment cannot be made by Key
Managerial Personnel or Senior Management, even if authorised by the Board in this regard

The Auditor shall obtain an Audit Engagement Letter along with a copy of the resolution and
shall provide acceptance to the Appointing Authority. The Auditor may give his acceptance to
undertake the audit either on the copy of the Audit Engagement letter or through a separate
letter.

Audit engagement letter

i. The engagement letter contain terms and conditions with respect to the scope of the Audit
Engagement and roles & responsibilities between the Auditor and the Auditee.
ii. It is in interest of both the management and the auditor that the auditor should get an audit
engagement letter before the commencement of the audit to help avoid misunderstandings
with respect to the terms of engagement.
iii. It should be reviewed every year to ensure that it is up to date but does not need to be
reissued every year unless there are changes to the terms of the engagement.
iv. The auditor shall obtain a new engagement letter if the scope or context of the assignment
changes after initial appointment.
v. It documents the terms of Audit Engagement agreed between the Auditor and the Appointing
Authority with reference to scope of audit, responsibilities of Auditor and Auditee, remuneration
and limiting conditions.

The Audit Engagement

Letter shall include:
a. The objective and scope of the audit;
b. The responsibilities of the Auditor and the Auditee;
c. Written representations provided and/or to be provided by the Management to the Auditor,
including particulars of the Predecessor or Previous Auditor;
d. The period within which the audit report shall be submitted by the Auditor, along with
milestones, if any;

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e. The commercial terms regarding audit fees and reimbursement of out of pocket expenses in
connection with the audit; and
f. Limitations of audit, if any.

The Responsibilities of Auditor inter alia include the following:

 To take up the audit as per the terms of the engagement.
 To depute personnel who have the knowledge of the laws under which the audit is being carried
out, subject to his overall supervision.
 To observe and ensure observance of highest standards of ethics and maintain utmost
professionalism at all times by the employees, staff and other team members involved in the
Audit and persons engaged by him to provide advice or assistance for the conduct of audit.
 To maintain and ensure confidentiality by the employees, staff and other team members
involved in the audit and persons engaged by him to provide advice or assistance for the
conduct of audit.
 To not trade in securities relating to which unpublished price sensitive information has come
to his/ her knowledge during the course of audit, which responsibility shall extend to the
employees, staff and other team members involved in the audit and persons engaged by him
to provide advice or assistance for the conduct of audit also.

Responsibilities of Auditee inter alia include:

 To provide access to premises of the Auditee and timely access to Records, documents, legal
opinions, show cause notices, inspection reports and other information, explanations and reports
as may be necessary in connection with the audit.
 To identify and depute a responsible official to timely provide relevant documents, information
and explanations required by the Auditor.
 To provide written Management representations, if any, to the Auditor during the course of
audit, which shall provide the Auditor a substantive evidence of important assertions and the
Management’s primary responsibility for the assertions and its accuracy.
 To provide details of the Predecessor or Previous Auditor, so as to enable proposed Auditor to
communicate with the Predecessor or Previous Auditor.

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 Audit remuneration and expenses may depend on several factors including:
 Size of the organisation;
 Location of business and its branches;
 Type of company (Listed/Unlisted);
 Sector to which company belongs;
 Nature of business;
 Internal control mechanism;
 Scope of Audit Engagement;
 Frequency of audit, whether monthly, quarterly, yearly;
 Type of audit, whether sole, joint or concurrent audit;
 The experience of the Auditor in conducting audits;
 Estimated man-hours required to complete the assignment;
 Guidance/Advisory issued by the ICSI, if any;
 Any other term or a combination of any of the above.

i. Auditor should include a statement in the Audit Engagement Letter that because of inherent
limitations of an audit, inherent limitations of internal control, an unavoidable risk exists that
some material non-compliance may not be detected, even though the audit is properly planned
and performed in accordance with the applicable Auditing Standards.
ii. Audit Engagement Letter should specify the involvement of third party and experts in some
aspects of the Audit.
iii. If the Appointing Authority has imposed a limitation on the scope of the Auditor’s work in the
terms of engagement and the Auditor believes that such limitation will not give assurance than
what is required under law, the Auditor shall not accept such an engagement, unless required
by law or regulation to do so.
Communication to Previous Auditor
As a measure of the professional etiquettes, while taking up the any audit engagement, the
auditors shall give intimation to the previous auditor, intimating his engagement as auditors of
the company.
The term predecessor or previous auditor can be defined as an auditor who has conducted the
most recent audit assignment of the Auditee of the same nature and submitted report thereon

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 prior to the incumbent auditor or was engaged but did not complete the audit assignment due
to his resignation, termination or otherwise.

Example:
Mr. P was appointed as the Secretarial Auditor of ABC Ltd. for the F.Y. 2019-20. However,
during the course of audit, he intimated the Appointing Authority his inability to complete the
audit of ABC Ltd. and therefore cannot give audit report thereon. ABC Ltd. accepted the
request of Mr. P and approached Mr. Q to become the secretarial Auditor for F.Y. 2019-20. In
such case, Mr. Q has to first communicate to the Predecessor Auditor i.e. Mr. P of his intention
to accept the secretarial audit assignment of ABC Ltd. and wait for 7 days from the date of
intimation to Mr. P, before accepting the secretarial audit of ABC Ltd. for F.Y. 2019-20.

There should be an effective communication with the Predecessor or Previous Auditor, if any.
Auditor should communicate with the Predecessor or Previous Auditor in such manner as to
retain positive evidence of the delivery of the communication. Communication with predecessor
can be by a letter sent by Registered Acknowledgement Due or by courier or by hand against
the written Acknowledgement or through an email to provide an evidence of the delivery of
communication.
The Auditor shall wait for a period of 7 days from the date of communication before accepting
the audit. In case any information is provided by the Predecessor Auditor, the Successor Auditor
shall take cognizance of the same. The information obtained from the Predecessor may be
useful in undertaking the audit. Such information shall remain confidential.

CASE STUDY
1. XYZ Limited is a listed company and recently hired a new secretarial auditor firm (M/s AA &
Associates) to replace the previous auditor firm (M/s BB & Associates), who had been serving
the company for two years. The M/s AA & Associates was made responsible for ensuring
compliance with various regulations and guidelines and preparing audit report.
2. The primary challenge faced by XYZ Limited was to smoothly execute the transition of
responsibilities between new and old auditors to communicate effectively with the M/s BB &

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 Associates. This was crucial, as the new auditor would need access to all previous records,
reports, and other information related to the company’s secretarial audit
3. To address this challenge, the company’s management decided to set up a meeting between
the M/s AA & Associates and the M/s BB & Associates. During the meeting, the new auditor
would have the opportunity to ask any questions, clarify any doubts, and obtain access to all
relevant records and reports.
4. The communication between the previous secretarial auditor and the new auditor was successful
as a written communication in form of email has been made by M/s AA & Associates to
previous auditor, and the M/s AA & Associates was able to obtain all necessary information to
perform their duties effectively. The information provided by the previous auditor was extremely
useful, as it helped the new auditor to identify any areas of concern and address them promptly.

The Council of the Institute of Company Secretaries of India has resolved that it shall be
mandatory for every Company Secretary in Practice, before accepting any of the following
assignments, to communicate to the previous incumbent, in terms of terms of clause (8) of
part I of the First Schedule to the Company Secretaries Act, 1980:
i. Signing of Annual Return in Form MGT-7 under Section 92(1) of the Companies Act, 2013 and
rule 11(1) of the Companies (Management and Administration) Rules, 2014.
ii. Certification of Annual Return in Form MGT-8 under Section 92(2) of the Companies Act,
2013 and rule 11(2) of the Companies (Management and Administration) Rules, 2014.
iii. Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013.
iv. Issue of Secretarial Audit Report to material unlisted subsidiaries of Listed entities (whose
equity shares are listed) under Regulation 24A of SEBI (LODR) Regulations, 2015.
v. Issue of Annual Secretarial Compliance Report to Listed entities (whose equity shares are
listed) under Regulations 24A of SEBI (LODR) Regulations, 2015.
vi. Certification under SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015
that none of the directors on the board of the company have been debarred or disqualified
from being appointed or continuing as directors of companies by the Board/ Ministry of
Corporate Affairs or any such statutory authority under Schedule V, Part C, Clause (10)(i).

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vii. Certification under Regulation 40(9) of SEBI (LODR) Regulations, 2015 certifying that all
certificates have been issued within thirty days of the date of lodgement for transfer, sub-
division, consolidation, renewal, exchange or endorsement of calls/ allotment monies.
viii. Conduct of Internal Audit of Operations of the Depository Participants registered with NSDL
& CDSL under the provisions of the Depositories Act, 1996 read with SEBI (Depositories and
Participants) Regulations,1996.
ix. Certificate of Reconciliation of Share Capital Audit.
x. Issuance of Audit Report as provided under Regulation 76 the SEBI (Depositories and
Participants) Regulations, 2018, by the unlisted public companies, to be submitted on a half-
yearly basis to the ROC, under whose jurisdiction the registered office of the company is
situated, under the provisions of the Rule 9A(8) of the Companies (Prospectus & Allotment
of Securities) Rules, 2014.
xi. Diligence Reporting for Banks in case of multiple banking/consortium lending arrangements in
terms of the circular issued by RBI.
xii. Conduct of Internal Audit of Depositary Participants.
xiii. Conduct of Internal Audit of stock brokers/sub brokers under SCRA, 1956 and Rules and
Regulations made thereunder.

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Further, Council of ICSI has prescribed the following format to be issued by Company
Secretaries under Clause 8 of the First Schedule of the Company Secretaries Act, 1980:

CS...........

Address ..........

Dear Sir / Madam,

Sub.: Intimation in terms of Clause 8 of the First Schedule to the Company Secretaries Act,
1980.

I, CS ………… /We, M/s. ........... , Company Secretary in Practice / Firm of Company Secretaries have
been
approached by the Management of M/s................ Limited to.. (list of professional services) for the
FY
......... vide their letter No. ........... dated ..... We understand that earlier the abovementioned
professional
services were being rendered by your goodself/ firm to M/s. ........... Limited during the Financial
Year .............

I / We request you to kindly take this communication as an intimation to be given to the

previous incumbent in terms of Clause 8 of the First Schedule to the Company Secretaries Act,
1980.

Regards, CS .......

Membership [Link] ............ / FCS ................

CoP No..................

For & Co./ & Associates, Company

Secretaries Firm Unique Code ......................

Date: ........................

Place: ......................

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Limits on Audit Engagements
Auditor should conduct as many audit as per the limit prescribed by ICSI. Violation of the
limits by the auditor may attract disciplinary actions against the auditor. To uphold the quality
of services rendered by members of the Institute, the Institute has issued the following
guidelines:

Guidelines Guidelines Issued at

Limits for the issue of Secretarial Audit Reports: 235th meeting of the Council held on 11th

 10 Secretarial Audits per partner/ PCS, February, 2016

and

 an additional limit of 5 Secretarial

Audits per partner/PCS in case the unit
is peer reviewed.

The limits will be applicable for the Secretarial

Audit Reports issued for the FY2016-17 onwards)
Number of Annual Secretarial Compliance 260th meeting of the Council held on 4-5 May,
Reports to be issued by PCS are 5 (five) reports 2019
individually / per partner in each financial year
w.e.f. 1st April, 2020 and an additional limit of
5 (five) ASCR individually/ per partner in case
the unit has been Peer Reviewed.
In case of the following, Secretarial Audit/ 259th meeting of the Council held on 16th
Secretarial Compliance Report to be done by March, 2019
Peer Reviewed Units only:

 Top 100 companies as per market

capitalization w.e.f April 1, 2020

 Top 500 companies as per market

capitalization w.e.f April 1, 2021

 All listed companies w.e.f April 1, 2022

 All companies w.e.f April 1, 2023

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 5. CONFLICT OF INTEREST
i. CSAS-1 (Auditing Standard on Audit Engagement) effective from 1st April, 2021, defines:
“Conflict of Interest” as: The Auditor shall not have any substantial conflict of interest with
the Auditee. Any conflict of interest, other than substantial conflict of interest, must be
disclosed by the Auditor before accepting the Audit Engagement or as soon as the Auditor
becomes aware of the same, as the case may be.
ii. The conflict of interest with the Auditee explained below shall not be construed as a substantial
conflict of interest:
 Auditor holding not more than 2% paid up share capital or shares of nominal value of Rs.
50,000, which ever is lower or more than 2% voting power.
 Auditor indebted to the Auditee for an amount not exceeding Rs. 5,00,000.
Illustration 1 Mr. A, Mr. B and Mr. C are partners in ABC, LLP, a firm of Practicing Company Secretaries. Mr. B
holds 1% paid-up share capital in a company XYZ Ltd. Wife and daughter of Mr. A, who are financially dependent
on him hold 1% paid-up share capital in XYZ Ltd. each. Mr. A has been offered the Secretarial Audit of XYZ Ltd.
In this case, Mr. A is not directly holding any interest in XYZ Ltd. However according to para 3.1 of CSAS-1, Mr.
A is having a substantial conflict of interest in XYZ. Ltd. as the aggregate value of paid-up share capital held by
his wife, daughter and partner in XYZ Ltd. is 3%. Hence, he is not eligible to become Secretarial Auditor of XYZ
Ltd.
Illustration 2 Mr. A, Mr. B and Mr. C are partners in ABC, LLP, a firm of Practicing Company Secretaries . Mr. A
holds 1% paid-up share capital in a company XYZ Ltd. and Mr. B holds shares of nominal value of Rs. 60,000 in
XYZ Ltd. Mr. A has been offered the Secretarial Audit of XYZ Ltd.
In this case, though Mr. A holds only 1% of the paid up share capital in XYZ Ltd. But according to para 3.1 of
CSAS-1, he is having a substantial conflict of interest in XYZ. Ltd. as his partner Mr. B is having a share capital
of nominal value of more than Rs.50,000 in XYZ Ltd. and therefore Mr. A is not eligible to become Secretarial
Auditor of XYZ Ltd.
Illustration 3 Mr. A, Mr. B and Mr. C are partners in ABC, LLP, a firm of Practicing Company Secretaries. Mr. A
& Mr. B each holds 0.5% paid-up share capital in a company XYZ Ltd. Nominal value of such shares held by each
of them is Rs. 20,000. Mr. A has been offered the Secretarial Audit of XYZ Ltd.
In this case, though Mr. A is having a conflict of interest in XYZ Ltd. The same will not be considered as a
substantial conflict of interest. Therefore, Mr. A can accept the Secretarial Audit of XYZ Ltd. In this case he shall
disclose to the Appointing Authority the fact that he has a conflict of interest with the company, but the same
is not substantial conflict of interest in accordance with CSAS-1.
Illustration 4 Mr. A, Mr. B and Mr. C are partners in ABC, LLP, a firm of Practicing Company Secretaries. Mr. A
holds 1% of the paid- up share capital in company XYZ Ltd. Nominal value of such shares is Rs. 60,000. The
market value of the shares held by Mr. A is Rs. 40,000. Mr. A has been offered the Secretarial Audit of XYZ Ltd.
In this case, there will be a substantial conflict of interest between Mr. A and the company XYZ Ltd. as the
nominal value of shares held by Mr. A is more than Rs. 50,000, therefore he cannot accept the Secretarial Audit
of XYZ Ltd. The market value of the shares is irrelevant while deciding the conflict of interest based on ownership
in accordance with CSAS-1.

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 Illustration 5 Mr. A, Mr. B and Mr. C are partners in ABC, LLP, a firm of Practicing Company Secretaries.
Mr. A holds 1% of the paid- up share capital in company XYZ Ltd. Nominal value of such shares is Rs.
60,000. XYZ Ltd. wants to give its Internal Audit assignment to ABC, LLP.
In this case, there exists a substantial conflict of interest of ABC, LLP with the company XYZ Ltd. due to
the fact that one of the partners of the LLP is holding shares of a nominal value of more than Rs. 50,000
in XYZ Ltd. Therefore, it will not be eligible to undertake the internal audit assignment of XYZ Ltd. as per
CSAS-1.

Indebtedness of the Auditor for an amount exceeding rupees five lakh other than that
arising out of ordinary course of business of the Auditee:
Provided that any indebtedness that may seriously impair his independence shall also be
considered as substantial conflict of interest. Before accepting the audit the Auditor shall
disclose that there is no conflict of financial interest as specified in this standard or prescribed
law under which the audit is carried on.
The limit of rupees five lakh as specified shall be applicable to the combined indebtedness of
the audit firm including indebtedness by the partners in their individual capacity.

Illustration 1 Mr. A is a Practicing Company Secretary. He has taken a personal loan of Rs. 5,00,000 from a XYZ
LLP wherein Mr. B, who is the designated partner is friend of Mr. A. The payment of such loan is still outstanding
in full. Mr. A has been offered to undertake the Internal Audit of XYZ, LLP.
In the given case, Mr. A has a conflict of interest in XYZ LLP, but it doesn’t debar Mr. A from undertaking the
Internal Audit of XYZ LLP. Mr. A shall disclose the fact to the Appointing Authority before accepting such Audit.
Illustration 2 Mr. A is a Practicing Company Secretary. He had taken a personal loan of Rs. 5,00,000 from XYZ
Ltd. wherein his uncle is Managing Director. Mr. A has been offered to undertake the Secretarial Audit of XYZ
Ltd.
the given case, Mr. A has conflict of interest with the Auditee, as the amount of indebtedness is Rs. 5,00,000,
but the same is not considered as substantial conflict of interest. In this case, he is required to make disclosure
of the fact to Appointing Authority.
Illustration 3 Mr. P is a Practicing Company Secretary and is offered to conduct the Secretarial Audit of ABC
Ltd. Mr. P is indebted to the Director of the company for an amount Rs. 6,00,000. Whether he can accept the
Secretarial Audit Engagement of ABC Ltd.
In the given case, Mr. P has a substantial conflict of interest in ABC Ltd. And therefore he can’t accept the
secretarial audit assignment.
Illustration 4 Mr. A is a Practicing Company Secretary. He had taken a personal loan of Rs. 25,00,000 from XYZ
Ltd.. He has used such loan towards purchase of his house which has been mortgaged with XYZ Ltd. Due to some
financial crisis, Mr. A has not been able to repay any amount towards the loan since past 2 years. Mr. A has
been offered to undertake the Secretarial Audit of XYZ Ltd.
The circumstances of the case suggest that indebtedness of Mr. A towards XYZ Ltd. is such that , if he accepts
the Audit of XYZ Ltd., it may substantially impair the independence of Mr. A while forming an opinion on the
basis of his audit findings and therefore considered as substantial conflict of interest . Therefore in this case, Mr.
A shall be debarred from accepting the Secretarial Audit assignment of XYZ Ltd.

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 Where an Auditor was in employment of the Auditee, its holding or subsidiary company
and 2 (two) years have not lapsed from the date of cessation of employment, the same
shall be considered as substantial conflict of interest.
A PCS or member/partner of a PCS firm cannot undertake the audit of that undertaking where
the member was in employment prior to holding the Certificate of Practice, unless two years
have lapsed from the date of cessation of employment.

Illustration 1 Mr. A was the Company Secretary of PQR Ltd. from 1st October, 2015 till 31st May, 2018. He
left the job w.e.f. 31st May, 2018 and joined in ABC and Associates (CS Firm) as a partner. On 1st January
2020, ABC and Associates has been offered to conduct Secretarial Audit of ST Ltd. for the F.Y. 2020-21. ST
Ltd. is the wholly owned subsidiary of PQR Ltd.
According to para 3 of CSAS-1, Mr. A or ABC and Associates, in which he is a partner cannot undertake any
audit assignment in PQR Ltd. and/or its holding or subsidiary companies till 31st may, 2020, i.e. two years from
the date of cessation of his employment in PQR Ltd. Therefore, ABC and associates cannot undertake the
Secretarial Audit assignment of ST Ltd. for the F.Y. 2020-21.

Illustration 2 Mr. A was the Company Secretary of PQR Ltd. from 1st October, 2015 till 31st May, 2018. He
left the job w.e.f. 31st May, 2018 and joined ABC and Associates (CS Firm) as an employee. On 1st January
2020, ABC and Associates has been offered to conduct Secretarial Audit of ST Ltd. for the F.Y. 2020 -21. ST
Ltd. is the wholly owned subsidiary of PQR Ltd.
Since Mr. A has joined ABC and Associates in the capacity of an employee, ABC and associates can undertake
the Secretarial Audit assignment of ST. Ltd. for the F.Y. 2020-21.

Effect of Substantial Interest

i. The Company Secretaries Act, 1980 makes it an act of misconduct for a Company Secretary
to express an opinion on any report or statement of a business or enterprise in which he or
his firm or a partner of his firm has a substantial interest, unless he discloses the interest
also in his report.
ii. The Companies Act, 2013 does not define the phrase “substantial interest”. This should be
left to the judgment and discretion of the professional to determine the extent of interest
which would affect his independence.
iii. The professional must take care to see that he does not get into situations where there could
be a conflict of interest and duty.

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iv. A conflict of interest creates a threat to objectivity and may create threats to the other
fundamental principles. Such threats may be created when:
 The professional provides a professional service related to a particular matter for two or more
clients whose interests with respect to that matter are in conflict; or
 The interests of the professional with respect to a particular matter and the interests of the
client for whom the professional provides a professional service related to that matter are in
conflict.

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An auditor shall not allow a conflict of interest to compromise professional judgment. Examples
of situations in which conflicts of interest may arise include:

Providing a transaction advisory service to a client seeking to acquire an

audit client of the firm, where the firm has obtained confidential
Transaction
information during the course of the audit that may be relevant to the
transaction.

Auditing two clients at the same time who are competing to acquire the
Auditing same company where the audit report might be relevant to the parties’
competitive positions.

Taking audit assignment of two clients regarding the same matter, who
are in a legal dispute with each other.
legal dispute

when at the same time advising the licensee of the correctness

of the amounts payable.
Licensee

When addressing conflicts of interest, including making disclosures or sharing information within
the firm or network and seeking guidance of third parties, the auditor shall remain alert to the
fundamental principle of confidentiality.
If the threat created by a conflict of interest is not at an acceptable level, the auditor shall
apply safeguards to eliminate the threat or reduce it to an acceptable level. If safeguards
cannot reduce the threat to an acceptable level, the auditor shall decline to perform the audit;
or shall terminate relevant relationships or dispose of relevant interests to eliminate the threat
or reduce it to an acceptable level.

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 Before accepting a new client relationship, engagement, or business relationship, an auditor
shall take reasonable steps to identify circumstances that might create a conflict of interest,
including identification of:
5. The nature of the relevant interests and relationships between the parties involved; and
6. The nature of the service and its implication for relevant parties.

6. CONFIDENTIALITY
The Auditors of a company while performing the audit assignment access the various
confidential information of the company and it is most required for the auditors to maintain
the confidentiality of the auditee information.

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 Disclosing information acquired as a result of professional relationships
without proper and specific authority or unless there is a legal or
professional right or duty to disclose; and

Using information acquired as a result of professional relationships to

their personal advantage or the advantage of third parties.
for personal
advantage

An auditor should maintain confidentiality even in a social environment.

The auditor should be alert to the possibility of inadvertent disclosure,
particularly in circumstances involving long association with a business
associate or a relative.

An auditor should also maintain confidentiality of information

Information disclosed by a prospective client or employer.
disclosed by a

An auditor should also consider the need to maintain confidentiality of

information within the firm or employing organization.

An auditor should take all reasonable steps to ensure that staff under
the auditor’s control and persons from whom advice and assistance is
obtained respect the auditor’s duty of confidentiality.

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 i. Clause (1) of Part I of the Second Schedule to the Company Secretaries Act, 1980 provides
that a Company Secretary in practice shall be deemed to be guilty of professional misconduct,
if the member – “discloses information acquired in the course of professional engagement to
any person other than the Auditee so engaging him, without the consent of the Auditee, or
otherwise than as required by any law for the time being in force.”
ii. During the course of audit, Auditor receives, verifies and inspects various audit documents,
evidence, representation etc. to form an opinion or to give a report. These may be confidential
and privileged information that remain in possession of the Auditor and shall not be disclosed
without the express authority of the Auditee.
iii. It is the inherent duty of the Auditor to maintain the confidentiality of any information about
the Auditee or his business that came to his knowledge as a result of performing the audit
work.
iv. If permitted by the Auditee, Auditor may disclose or share such information with any other
person as may be specifically allowed by Auditee.
v. An Auditor shall maintain confidentiality even in a social environment. The Auditor shall be
alert to the possibility of inadvertent disclosure, particularly in circumstances involving long
association with a business associate or a relative or friends etc.
vi. If the Auditor gives any reference of the audit evidence or documents while forming the opinion
in the audit report, it will be deemed to be the disclosure of information under the legal
obligation or in the performance of the duty.
vii. If during the course of audit and forming opinion, the Auditor uses the decisions of the judicial
authority, it will not be treated as use or sharing of confidential information.
viii. The Auditor shall educate his employees, staff and other team members about the importance
of the confidentiality of the information available to them during the course of audit.
ix. The Auditor shall ensure that reasonable procedures have been followed to maintain the
confidentiality of the information. The Auditor shall also take a duly signed Non Disclosure
Agreement (NDA) from such personnel who may have access to such confidential information.
x. The Auditor shall also ensure that reasonable procedures and safeguards are being followed to
prevent unauthorised access to such confidential information.

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 7. CHANGES IN TERMS OF ENGAGEMENT
i. The Auditor shall not agree to a change in the terms of the Audit Engagement where there is
no reasonable justification for doing so.
ii. If the terms of the Audit Engagement are changed, the Auditor and the Appointing Authority
shall agree on the new terms of the engagement by way of a supplementary/revised engagement
letter or any other suitable form in writing.
iii. A request from the Appointing Authority to change the terms of Audit Engagement may result
from a change in circumstances affecting the need for the service or a restriction on the scope
of Audit Engagement, whether imposed by Management or caused by other circumstances. The
Auditor shall consider the justification given for the request, particularly the implication of a
restriction on the scope of the Audit Engagement.
iv. With mutual consent the terms of the Audit Engagement may be changed. When such changes
are there, the Auditor shall obtain the supplementary/revised engagement letter with a
justification for the change and it shall be duly signed by the Appointing Authority. The impact
of such change on the level of assurance shall be ascertained before accepting the same.
v. However, the Auditor should take the following precautions while accepting the change:
(1) The Auditor should not agree to a change in the terms of the Audit Engagement which restricts
the scope of audit provided under any statutes.
(2) If the term of the Audit Engagement is changed when it is expected that Auditor may have
to issue a modified report, such type of changes should be resisted.
(3) Any request to change to avoid or circumvent unfavorable Auditor’s report is also unjustified
and should not be accepted.
(4) If the terms of the Audit Engagement are changed before the completion of the audit, the
Auditor should not disregard the evidences obtained prior to the change in scope of audit.

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 Annexure A

Specimen Certificate of Eligibility as Secretarial Auditor

Date:

To

The Board of Directors, Dear Sir,

Sub: Proposed Appointment as Secretarial Auditor

I/We thank you for your communication dated .......... 2019 seeking my/our consent to act as the
Secretarial Auditor of your company for the financial year ...... I/We give my/ our consent for being
appointed as Secretarial Auditor of the company.

I/we hereby confirm that:

1. I am/we are eligible for appointment and not disqualified for appointment as per the
Companies Secretaries Act, 1980 and rules and regulations made thereunder and ICSI
Auditing Standards;

2. The proposed appointment is within the limits, if any laid down by ICSI;

3. I/We do not have any substantial conflict of interest in terms of ICSI Auditing
Standard on Audit Engagement (CSAS 1);

4. I/We do not have any conflict of interest in terms of ICSI Auditing Standard on Audit
Engagement (CSAS 1) Or

I/We do have conflict of interest other than substantial conflict of interest which are as below:

Thanking you, Yours

sincerely,

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 Annexure B

Specimen Audit Engagement Letter

To,

ABC & Associates (name of Audit firm)

Company Secretaries (Address)

Dear Sir,

This engagement letter is provided in connection with (type of audit) of XYZ Ltd.

1. Scope of work

The scope of the Audit shall include .......................... (For example, in case of Secretarial Audit,

the scope of audit shall be as specified in Section 204 of the Companies Act, 2013)

2. Responsibilities of Auditor

The Auditor shall carry out the audit with utmost integrity in terms of this Audit Engagement

Letter adhering to the highest level of ethics and standards. The Audit shall be conducted in

accordance of the requirements of the ......................... Act.

3. Duties of Auditee

Auditee acknowledges its responsibility for maintenance of Records and compliances under

the applicable laws, acts, rules and regulations. Auditee acknowledges its responsibility to

provide the Auditor access to Records and documents of the Auditee, reports of third party

and information as may be sought by the Auditor. The Auditee shall be responsible for the

correctness and appropriateness of the Records, documents and information of the Auditee.

4. Timeline

The Auditor shall submit the Audit Report for the F.Y. 20XX-XX within ............ days of the

end of the financial year. Auditor may also submit a quarterly/half-yearly review report in

which the audit observations of the Auditor made during the quarter for timely redressal.
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 5. Commercial Terms

Audit fees for the F.Y. 20XX-XX is fixed at Rs. XXXXXXX plus applicable taxes. Fees will

be billed as the work progresses. Out–of-pocket expenses by the Auditor shall be reimbursed

on actual basis.

6. Confidentiality

The Auditor shall not disclose the information obtained during the course of Audit without

proper and specific authority or unless there is a legal obligation or duty to disclose.

7. Indemnity

During and after the term of this Engagement, both Parties agree to protect, indemnify,

defend and hold harmless other Party, and to extent required from time to time non

defaulting party, its officers, agents, and employees, from and against any and all expenses,

damages, claims , suits, losses, actions, judgments, liabilities, and costs whatsoever

(including legal fees on a full indemnity basis) arising out of, connected with, or resulting

from, defaulting Party’s negligence, misrepresentation or the breach of any obligations to

be performed by the other party and/or its representatives under this Engagement. In no

event will either party’s liability towards other party arising from the terms of this

Engagement exceed the total sum of fees paid under this Engagement.

8. Any other term as may be agreed between the Auditor and the Auditee, if any

For XYZ Limited

Date

Place Director Director

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 10- AUDIT PRINCIPLES & TECHNIQUES

1. FUNDAMENTAL PRINCIPLES GOVERNING AN AUDIT

A. Integrity, Independence, and Objectivity:
The inspector must be truthful and straightforward during the inspection process, should stay
free from every kind of biasness and should not have any interest in the association he is
inspecting, which permits him to be autonomous and fair-minded consistently.

Integrity – being trustworthy, straightforward, honest, complying with the spirit as well as
the letter of applicable ethical principles, laws and regulations and respecting confidentiality
except where disclosure is in the public interest or is required to adhere to legal and professional
responsibilities.
Objectivity – acting and making decisions and judgements impartially, fairly and on merit
without discrimination, bias, or compromise because of commercial or personal self-interest,
and have given due consideration to the best available evidence.
Independence – freedom from conditions and relationships which, in the context of an
engagement, would compromise the integrity or objectivity of the firm or covered persons.

B. Confidentiality:
The auditor comes across a great deal of sensitive monetary data of the association. He can’t
uncover any delicate data to any outsider except if it is a necessity by law.

C. Skill and Competence:

The examiner should be capable, prepared & qualified for conducting any audit. He should be
aware and upgrade on the latest changes, declarations and rules. He should keep up to date
with the new accounting and auditing methodology.

D. Work Performed by Others:

The extent of an audit on occasion can be extremely immense. So an auditor can utilise his
representatives, delegates, and others who work under him. However the auditor, will be
completely liable for the work done by these individuals working for him. Hence the auditor
should cautiously oversee and audit such work.

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E. Documentation:
The examiner keeps a review notepad, a review or audit plan, and an evaluating document or
an audit file. It is significant the auditor tracks significant reports for his review work, as it is
proof of the work the evaluator has completed.

F. Planning:
A review plan permits the inspector to arrange his work and empowers him to conduct the
audit more efficiently.

G. Audit Evidence:
The auditor needs enough evidence for the final evaluation. This evidence is collected through
substantive and consistency methods. There are two origins of this proof – inward or internal
and outer or external.

H. Accounting Systems and Internal Controls:

The auditor must ensure that the organization's records are accurate and provide a true and
fair picture of its financial status. Additionally, they need to make sure that all important
information is recorded in the accounting records.

I. Audit Conclusions and Reporting:

Once the auditor gathers all evidence, they should form their opinion based on the following
principles:
 All applicable bookkeeping guidelines were applied consistently.
 Budget reports are consistent with all guidelines and legal prerequisites.
 All material data has been revealed.

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  Materiality: An auditor is conducting an audit of a company’s financial statements. The
auditor determines that a certain error in the financial statements is immaterial and does
not need to be corrected. However, the error is later discovered to be material and the
company faces legal action as a result. This case highlights the importance of properly
assessing materiality and the potential consequences of misjudging it.
 Risk Assessment: An auditor is conducting an audit of a manufacturing company. During
the risk assessment process, the auditor identifies a significant risk related to inventory
management. The auditor then designs audit procedures to test the controls related to
inventory management and discovers that there are significant weaknesses in the company’s
internal controls. This case highlights the importance of proper risk assessment and the
need to design appropriate audit procedures based on the identified risks.
 Lehman Brothers: Lehman Brothers’ bankruptcy in 2008 is another example of the failure
of audit principles and techniques. The company’s financial statements did not accurately
reflect its true financial position, and its auditors failed to identify the risks associated with
the company’s mortgage-backed securities

2. AUDIT TECHNIQUES
Audit techniques are the methods and procedures used by auditors to obtain sufficient and
appropriate audit evidence to support their audit opinion. Here are some common audit
techniques used by auditors:
1. Examination of Record:
This technique is commonly used by the auditors, the inspection of books and documents is
made to verity the validity of data.
2. Inquiry:
The auditor can also use the technique of inquiry. He can get the information from resource
persons inside or outside the enterprise.
3. Sampling:
The auditor can choose a few items from the entire set of accounting information. This method
allows them to gather and assess evidence about certain aspects of the entire group. It is
useful in reaching conclusions.

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4. Confirmation:
Confirmation is response to an inquiry to prove certain data recorded in the books.
5. Compliance Test:
These tests are designed to check the effectiveness and compliance of internal control. In
obtaining the audit evidence, auditor is concerned with the existence of effective internal
control.
6. Use of Computer Techniques:
There are large number of audit techniques like audit software, test packs and mapping which
can be used by the auditor to test the accuracy of the data.
7. Substantive Test:
There are designed to obtain evidence that data produced by accounting system is accurate or
not and is of two types:
a. Test of detail transaction.
b. Test of significant ratios and trends.

8. Dependence on Experts and Auditors:

The auditor has to rely on the internal and other auditors to complete his work, along with
experts like lawyers, engineers and doctors for their expert opinion about the business.

9. Analytical Review:
It consists of studying significant ratios, trends and investigating different changes. This review
procedure relies on comparing past and present data.

The selection of techniques depends on the auditor’s judgment and the nature of the entity
being audited.

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Background: ABC Corporation, a manufacturing company producing widgets, has undergone a
management change. The new CEO is concerned about the accuracy of the financial
statements prepared by the previous management team. As a response, the company has
engaged an independent auditor to perform a thorough audit of its financial statements.
Audit Techniques Used: The auditor initiates the audit by conducting an initial assessment of
the compny’s internal controls. This involves reviewing accounting policies, interviewing key
personnel, and walking through the accounting system to uncover any weaknesses in the
internal control structure.
Based on this assessment, the auditor decides to employ a combination of audit techniques to
gather sufficient and appropriate evidence for the audit opinion:
1. Analytical Procedures: The auditor begins by performing analytical procedures. They
compare
the current year’s financial statements to the prior year’s to identify significant changes or
trends. Additionally, ratio analysis is conducted to evaluate liquidity, profitability, and financial
stability.
2. Sampling: The auditor selects a sample of sales transactions from the company’s sales
ledger and tests them to verify proper recording in the accounting records. Similarly, a sample
of inventory items is chosen, and a physical count is performed to validate inventory
quantities and values in the financial statements.
3. Computer-Assisted Audit Techniques (CAATs): The auditor employs data analysis
software
(CAATs) to scan the accounting records for anomalies or trends that may indicate errors or
fraud. The software is also used to test the accuracy and completeness of inventory and
accounts payable balances.
Communication and Reporting: Throughout the audit process, the auditor maintains open
communication with the company’s management team. They keep the management informed
about any findings or concerns that arise during the audit. At the conclusion of the audit, the
auditor issues an audit opinion based on the evidence collected through the various audit
techniques employed.
Outcomes: By utilizing a combination of audit techniques, the auditor successfully identifies
potential risks and concerns within the financial statements. This approach allows the
company to address these issues promptly, leading to improvements in the accuracy and
reliability

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3. PRELIMINARY PREPARATION
Preliminary preparation is an essential step in the audit process. It involves planning and
preparing for the audit to ensure that the audit is conducted effectively and efficiently. Here
are some of the activities that auditors typically undertake during the preliminary preparation
phase:

1. Understanding the entity: The auditor needs to obtain a good understanding of the entity’s
business operations, industry, and environment. This includes understanding the entity’s
organizational structure, key personnel, accounting policies and procedures, and risk management
processes.

2. Assessing risk: The auditor needs to assess the risks associated with the entity’s business
operations and financial reporting. This includes identifying the risks of material misstatement,
evaluating the effectiveness of internal controls, and determining the materiality threshold for
the audit.

3. Developing an audit plan: The auditor needs to develop an audit plan that outlines the scope
and objectives of the audit, the audit approach, the timeline, and the budget for the audit.

4. Assigning audit team members: The auditor needs to assign audit team members based on
their experience, skills, and knowledge of the entity’s business operations and industry.

5. Communicating with the entity: The auditor needs to communicate with the entity’s
management team to discuss the audit plan, obtain necessary information, and establish a
timeline for the audit.

6. Developing audit programs: The auditor needs to develop audit programs that outline the
specific audit procedures to be performed during the audit. The audit programs should be based
on the audit plan and the risks identified.

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7. Establishing an audit file: The auditor needs to establish an audit file to document the audit
plan, the audit programs, and the evidence obtained during the audit.

Preliminary Preparation Activities in Auditing: A Case Study on XYZ Limited

Company Overview: XYZ Limited is a small manufacturing company specializing in widget production and
sales. The company has engaged an independent auditor to perform an audit of its financial statements.
Preliminary Preparation Activities: The auditor initiates the audit process by conducting various preliminary
preparation activities to ensure an effective and efficient audit:
1. Understanding Business Operations and Environment: The auditor gains a comprehensive understanding
of XYZ Limited's business operations, industry, and environment. This includes comprehending the
organizational structure, key personnel, accounting policies, procedures, and risk management processes.

2. Assessing Financial Performance and Complex Transactions: The auditor evaluates XYZ Limited's
financial performance and identifies any unusual or complex transactions that may have an impact on the
financial statements.

3. Risk Assessment: The auditor assesses the risks associated with the company's business operations and
financial reporting. This involves identifying potential risks of material misstatement, evaluating the
effectiveness of internal controls, and determining the materiality threshold for the audit.

4. Defining Audit Scope and Approach: Based on the risk assessment, the auditor determines the scope of
the audit and the approach to be taken. This helps in designing the audit plan that outlines the audit's
objectives, approach, timeline, and budget. The plan aligns with the understanding of the company and
the identified risks.

5. Consulting with Management: The auditor collaborates with XYZ Limited's management team to seek
their input on the audit plan, confirm details, and establish a timeline for the audit. This ensures mutual
understanding and cooperation.

6. Assigning Audit Team Members: The auditor assigns audit team members based on their relevant
experience, skills, and knowledge of XYZ Limited's business operations and industry.

7. Developing Audit Programs: The auditor designs audit programs that outline specific audit procedures to
be conducted during the audit. These programs are based on the audit plan and the identified risks. They
ensure that the audit is comprehensive and covers all critical areas.

8. Establishing an Audit File: The auditor creates an organized audit file that includes the audit plan, audit
programs, and evidence collected during the audit. This file structure facilitates efficient review by the
auditor's supervisor or peer reviewers.

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 9. Communication and Representation Letter: The auditor communicates with XYZ Limited's management
team to discuss the audit plan, collect necessary information, and establish an audit timeline. Additionally,
the auditor obtains a representation letter from the management team, which confirms the accuracy of
provided information.

Benefits of Preliminary Preparation: Conducting these preliminary preparation activities equips the
auditor with a solid foundation to effectively plan and execute the audit. By understanding the
company's operations, assessing risks, developing appropriate audit plans, and establishing
communication with management, the auditor is better positioned to select suitable audit procedures
that generate sufficient and appropriate audit evidence. This comprehensive approach ensures a high-
quality audit process that serves to enhance the accuracy and reliability of XYZ Limited's financial
statements.

4. QUESTIONNAIRE
i. Questionnaire is a comprehensive series of questions concerning internal control. This is the
most widely used from for collecting information about the existence, operation and efficiency
of internal control in an organisation.
ii. An important advantage of the questionnaire approach is that the oversight or omission of
significant internal control review procedures is less likely to occur with this method.
iii. In the questionnaire, generally questions are so framed that a ‘Yes’ answer denotes satisfactory
position and a ‘No’ answer suggests weakness.
iv. Provision is made for an explanation or further details of ‘No’ answers. In respect of questions
not relevant to the business, ‘Not applicable’ reply is given.
v. The questionnaire is annually issued to the client and the client is requested to get it filled by
the concerned executives and employees. If on a perusal of the answers, inconsistencies or
apparent incongruities are noticed, the matter is further discussed by auditors with the client
for a clear picture and accordingly the auditor prepares a report of deficiencies and
recommendation for improvements.
vi. A questionnaire can be a useful tool for auditors to gather information from the auditee (the
organization being audited) in order to gain a better understanding of the organization’s
operations, processes, and risks.

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 Here are certain points to be kept in mind as to how a questionnaire may be used in an audit:
1. Planning the audit: The auditor reviews the auditee’s documentation and identifies areas of
potential risk. The auditor designs a questionnaire that is tailored to the specific risks and
issues identified.
2. Administering the questionnaire: The questionnaire is sent to the auditee to complete. The
auditee is given a deadline to complete and return the questionnaire.
3. Analyzing the responses: The auditor analyzes the responses to the questionnaire to identify
areas of concern and potential risk which helps the auditor to identify areas where additional
information or documentation is needed.

4. Conducting follow-up interviews: Based on the responses to the questionnaire, the auditor
may conduct follow-up interviews with key personnel to gather additional information and
clarify any areas of concern.

5. Reporting the findings: The auditor prepares a report that summarizes the findings of the
audit, including any areas of concern identified through the questionnaire and follow-up
interviews.
CAN YOU SOLVE THIS?
XYZ Company Ltd is a manufacturing company that specializes in
producing high-tech electronics. The company has recently experienced a
decline in sales and profits, and the management team has requested an
audit to identify the root cause of the problem. The auditor decides to use
a questionnaire to gather information from the auditee (the company) to
gain a better understanding of the company’s operations, processes, and
risks. Draft a questionnaire for the company

5. INTERACTION THROUGH INTERVIEWS

The main purposes for an interview in context of an audit are orientation, examination and
confirmation. An interview can have one or two of these purposes, but normally not all three
at the same time.

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 Orientation
i. It is during the panning phase and a learning process for the team.
ii. It aims at exploring and giving an overview of a specific area or function, e.g., interpretation of
documents (reports, instructions or, budgets).
iii. The objective could be to identify possible audit subjects or to find out about other available
sources of information, such as key persons or documentation.
iv. Orientation involves a less structured approach, giving the auditor flexibility to explore new
themes and thoroughly examine the responses provided.
v. The auditor generally does not have a prior hypotheses or deep knowledge of the project or
activity.
Examination
i. It aims at specific issues with a view of collecting new information which can be used as audit
evidence.
ii. Sometimes, this information hasn't been recorded before but is known by the interviewee
through personal experiences or opinions. In other cases, the knowledge can be obtained through
the (joint) interpretation of internal documents, reports, or records.
iii. It should be noted that evidence obtained from interviews often needs to be corroborated by
evidence from other data collection methods.
iv. The objective is often a more focused examination of an area, in order to capture simple,
factual data, to document or clarify certain points or to test hypotheses.
v. Interviews will typically have a more structured form.
vi. The auditor has a firm grasp of the issues he wants to cover and should know in advance what
type of data he wants
Confirmation
i. It often goes together with either orientation or examination.
ii. Confirmation is based on information that has already been gathered.
iii. In the planning phase, it is important to have basic conditions and facts explicitly confirmed
by stakeholders. However, in the execution phase there might also be a need to confirm facts
and findings. If data is incorrectly understood, the quality of the whole audit may suffer and
a lot of work may be in vain.
iv. Needs a fairly structured approach in order to have important facts and conditions verified

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 6. AUDIT PROGRAMME
i. Most of the time audit is conducted by a team instead of just an individual. In smaller
businesses or less complex tasks, one person can handle the entire audit. Yet, due to workload,
time constraints, and other factors, multiple individuals are often necessary. In order to properly
assign work to each individual and what is required to be done by whom there must be some
kind of instructions set and work profile, otherwise, more than one member might be auditing
the same area or in other case some areas may be left completely unaudited. Audit programs
efficiently guide each person's work, ensuring an effective and thorough audit.
iii. Audit programme contains step by step instructions to be carried out by team members i.e. it
is simply a list of audit procedures to be executed by team members.
iv. The main purpose of audit programme is that every material area has been audited appropriately
and sufficient appropriate audit evidence has been obtained in respect of every important areas
of audit.
v. Audit programmes are prepared on the basis of audit plan usually by the auditor who is signing
the Audit Report of the company. But sometimes, auditors have a basic audit programme and
the same is used by the auditor after making some modifications according to the audit
engagement in hand.
vi. Mostly it is in the form of a checklist which can be used by the Audit executives to make
sure every required procedure has been implemented.
vii. The prepared audit program may be revised if needed in accordance with the prevailing
circumstances. An audit program largely depends on the size of the organization and other
relevant factors.
viii. Audit programme is documented in the Audit Working Papers, which are the official record that
contains the planning and execution of the audit agreement.

Difference between Audit Plan and Audit Programme

Audit Plan Audit Programme

Audit Plan lays down the audit strategies to be Audit programme is an outline of how the audit
followed for conducting an audit such as is to be done, who is to do what work and within
identifying the areas where special audit what time

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 consideration and skills may be necessary, obtain
the knowledge of business etc.

Plans should be made to cover the following It lays down the following audit procedure to be
among other things: followed:

(i) Acquiring knowledge of accounting systems, (i) Evaluation process

policies and internal control procedures (ii) Ascertaining accuracy
(ii) Establishing the expected degree of reliance (iii) Verification of Document
to be paced on the internal control
(iv) Scrutiny of supporting Documents
(iii) Determining the nature, timing and extent
(v) Checking of overall disclosure and
of the audit procedures to be performed
presentation of all items in the audit
(iv) Co-ordinating the work to be done completion.

(vi) Preparation and submission of audit report.

7. IDENTIFICATION OF APPLICABLE LAWS

i. In India, every mode of business needs to obey various laws, rules, regulations, orders etc.
depending on the manner of doing business, business activities and areas of doing business.
Sometimes, this may include laws from multiple countries and sometimes such laws have
conflicting requirements on each other.
ii. In such situations, the best approach is to work with legal team or with an expert to create
an outline of all the regulations and contractual obligations. Identify which requirements may
impact the organization and discuss the results with management to determine and
development of suitable measures which are sufficient for compliance.
iii. Further, the identification of the compliance requirements under applicable laws is just one
part of the auditor, but for the management of the company it is necessary to make sure
there is sufficient evidence that the company is compliant with each and every one of them.
iv. For ensuring the compliance of the applicable laws the company:

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  should have a documented inventory of every applicable law, regulation,
Inventory of
contractual obligation and any other form of compliance requirement
Applicable
which needs to comply
Laws

 should publish its compliance policy which should be supported by

Publishing standards, procedures, and guidelines
Compliance
Policy

 should exchange emails with legal\compliance team, functional heads,

compliance officers and others with information on compliance
Communi- obligations and skills ( e.g. Privacy, Procurement, HR, Finance, IT)
cation concerning compliance matters in the information security context;

 should share related agendas, minutes or notes of meetings with those

Agendas people on related matters;
Minutes etc.

 should place Internal reports concerning applicable compliance

Internal obligations, ideally with evidence that management is actively engaged
Reports on in assessing the extent to which compliance is needed and aware of the
Compliance risks of non-compliance;

 should conduct Compliance assessment\review\audit reports, noting the

Compliance content, form, distribution, status.
Assessment

For an auditor and the company, it is required to identify the applicable legal requirement of
act, regulation but should also identify the sections applicable under such regulation.

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 Further, the legal compliance for a holding company/subsidiary company/joint venture company
with diverse operations, the compliance requirement will vary from operation to operation based
on the nature of the operations and the locations of the different operation and also based on
the applicable legal instruments, and the applicable sections of the relevant laws referred in
those legal instruments. The diverse operation and different geographical location may create
a complexity in compliance.

Dealing with the amendment in the laws is another concern in fulfilling compliance requirement,
which requires that the company should keep up to date information on the compliance
requirement with an information of the changes in the laws and regulations. Further, the legal
team of the company should continuously communicate the effect of such changes on the
Company, its holding, subsidiary, Joint Venture Company or any of the geographical area where
the company operates.

Some of the regulators like MCA, RBI, SEBI, on time to time issue the Master Circulars, and
Master Direction, Removal of Difficulties Order etc., which helps in identifying and figure out
the actual requirement of the law which needs to be complied with.

8. CREATION OF MASTER CHECKLIST

i. The Audit is not a process of the collecting data and checking the checkbox, it is the
postmortem of the affairs of the company.
ii. The data and evidence collected during the execution of the audit shall be independently
reviewed by the auditor and submit its report to the shareholders. Unless the auditor
independently reviews the facts & data, the auditor is not able to give his independent opinion.
iii. Simply having a control chart doesn't guarantee compliance or lead to substantial, lasting
process improvement to complete the audit.
iv. Typically, an audit checklist can be categorized into different headings based on their
importance in the audit scope.

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 Entity Operation and Financial & Nonfinancial Legal and Regulatory
Organizations Reporting Requirement Requirement

Matter of Shareholder Review of Control

and Public Interest Environment

1. Entity operation and organizations:

This checklist contains the matters relating to:
– Product manufactured/ service delivered/ operation performed by the company
– Statutory status basis for these operations
– Objects of the company as per the memorandum of association
– Capital structure of the company and funding status
– Details of the promoters and directors of the company
– Details of subsidiaries, joint ventures and associate companies
– Transactions with the related parties
– Material changes took place during the audit period
– Recipient of the products/services of the company
– Details of the key managerial personnel
– Details of the functional head responsible for audit
– Details of the audit committee and its term of references
– Details of the geographical location where the company operates
– Audit observations of the previous year’s etc.

2. Financial & Non-financial Reporting Requirement

In case of financial disclosures, the audit team should familiarize itself with the format of
financial statement which needs to the submitted to the regulators which covers the points
relating to changes in laws, regulations, accounting standards, accounting rules or accounting

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 policies since the last audit, new heads of accounts introduced since the last audit, changes in
the format of accounts or any such item which require exercising of judgement or estimation.

In case of the non-financial disclosures the audit team should have the detailed requirements
under legal and regulatory framework along with the procedural requirements of the same. The
auditor should check the limits, eligibility, criteria etc. on the various dates to understand the
compliance requirement.

3. Legal and Regulatory requirement

The legal and regulatory requirement of every company differs according to the nature and
status of the company, its business activity, area of operation, geographical location etc.
depending on the relevant central, state and local laws, rules & regulations.

4. Matter of Shareholder and public interest

The audit team should identify the extent of the shareholder and public interest in the
company’s activities and the financial statement. The factors which might indicate such
interest includes the public deposit, loan and advances dividend, corporate social responsibility,
small shareholders interest, high level of comment in media etc.

5. Review of Control Environment

i. The control environment comprises the conditions under which the various process of the entity
are designed, implemented and functions and based on that the audit team should seek to
arrive at a conclusion as to whether the control environment is reliable and justifiable in
accordance with the size and operations of the company.
ii. If based on the understanding of the control environment, the audit team has fundamental
doubts about the effectiveness of the prevailing systems and controls, the same should be
reported to the entity and should be kept in mind while carrying the audit.
iii. The checklist shall contain the checkpoints relating to following:
– The operating environment and culture
– Management commitment to designing and maintaining reliable accounting systems
– The ability of management to control the operations

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 – The organizational structure of the entity
– Methods of assigning authority and responsibility
– Supervision and monitoring
– Senior management control methods.

9. WORKING PAPERS AND MAINTENANCE OF WORK SHEET

 Working Papers
i. The working paper file contains the documents relating to the work performed by the auditor.
ii. The working papers serve as the connecting link in between the audit assignment, the auditor’s
fieldwork and the final report.
iii. Working papers contain the records of planning and preliminary surveys, the audit program,
audit procedures, fieldwork, fact findings and other documents relating to the audit.
iv. In the working papers document the auditor’s conclusions and the reasons as to why those
conclusions were reached should be documented.
v. Audit working papers are used to support the audit work done in order to provide assurance
that the audit was performed in accordance with the applicable standards. (Auditing
standards).
vi. Working papers include all the evidence gathered by auditor indicating what work has been
done by him and provide information that whether:
a. audit was properly planned;
b. audit was carried out;
c. audit was adequately supervised;
d. the appropriate review was undertaken;
e. the evidence is sufficient and appropriate to support the audit opinion.

vii. The working papers may include:

a. Scanned Documents as working papers
When you are scanning a document, it should be noted where they came from and why, this
helps understand the audit work better.

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 b. Tick marks
Tick marks do not need to be standardized throughout the set of working papers, but must be
consistent throughout a particular work paper. Tick mark explanations must be a part of the
working paper or included in a separate tick mark legend work paper.

c. Cross Referencing
i. Cross-references should be used to refer information useful in more than one place.
ii. Cross referencing is an audit technique used to compare and match data from different sources
to ensure accuracy and completeness. This technique is especially useful when auditing financial
statements and transactions, as it helps to identify any discrepancies or errors in the data.
iii. A cross reference from the Audit Procedures to the primary working paper provides a reference
to where the work was performed. It is not necessary to cross refer all work papers to the
Audit Procedures - only the primary work paper should be cross referred.

There is a scenario where an auditor is conducting an audit of a company's financial statements. As part of the
audit process, the auditor is comparing the company's bank statements with its accounting records to ensure
the accuracy of financial transactions. One payment of Rs 10 Lacs to a vendor is identified as a discrepancy
because it doesn't match any recorded vendor payment in the company's accounting system.
To investigate this discrepancy, the auditor uses a technique called cross referencing. Cross referencing involves
comparing data from different sources to identify inconsistencies or errors. In this case, the auditor cross
references the bank statement with the company's accounting records. The auditor first identifies the check
number on the bank statement and searches for it in the company's check register. It's discovered that the
check was issued to a different vendor for a different purpose than what was recorded on the bank statement.
To further investigate, the auditor reviews the company's invoices and purchase orders to determine if there
were any other payments made to the vendor listed on the bank statement.
It's found that the vendor did provide services to the company, but the payment was not correctly recorded in
the accounting system.
The text then mentions that cross referencing is beneficial for ensuring the accuracy and completeness of
financial statements. However, a question is posed regarding which of the provided benefits is not associated
with cross referencing, and the correct answer is identified as (D) "All information in one document."
In summary, cross referencing is a technique that helps auditors identify discrepancies and errors by
comparing data from various sources. It ensures the accuracy of financial records and can lead to necessary
adjustments to the financial statements to correct any inconsistencies

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 d. Standard Working papers
A standard set of working papers will include at least the following documents:
(a) General File:
i. The General File contains key information through the various phases of the audit including
planning (audit objectives, planning comments including etc.), reporting process, audit programs
and comments for the next audit.
ii. The General File will include the draft and final reports.
iii. Audit responses will also be included in the file.

(b) Work paper File: This file should contain the detailed audit procedures and detailed audit
working papers. Detailed audit procedures provide detailed audit steps of the audit work to be
performed during fieldwork that will achieve the specific audit objectives outlined in the audit
program.

(c) Future Audit Considerations: Auditors are encouraged to develop and document future audit
ideas during the course of their work. These should be included in the “Comments for next
audit” section of the general file.

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short Note)

i. Working papers are the connecting link between the client’s records
and the audited records.
ii. These provide permanent historical record and serve as a great guide
to the staff to whom the work of audit has been assigned after the
previous year audit.
iii. These would come to the help of the auditor in future in case the
client files a suit against the auditor’s negligence.
iv. The working papers are the property of the auditor and the client
cannot ask the auditor for their custody. However, it is the duty of
the auditor to maintain confidentiality of the client information.

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 Types of Working Papers

Permanent Audit File Current Audit File

The auditor’s working papers are divided into two parts:

(i) Permanent File
The permanent file usually contains documents and matters of continuing importance of clients’
business which will be required for more than one audit. The data in these files are the
information, which is of continuous interest and relevant to succeeding audits. Data in this file
can include the following:
A. Statutory Documents
B. The rules and regulations of the company:
i. Memorandum of Association.
ii. Articles of Association.
iii. Certificate of Incorporation/Commencement of Business.
iv. Registration documents under various statutory bodies.

C. Copies of documents of continuing importance and relevance to the auditor:

i. Letter of engagement and Board Resolution for appointment of the auditor.
ii. Record of communication with the retiring auditor.
iii. Royalty Agreement/Technical collaboration.
iv. Copies of important legal documents/contracts.

D. Addresses of the registered office and business -The Company’s registered office address and
all other units/premises, with a short description of the work carried on at such places.
E. An organization chart - Details of all departments and sub-divisions thereof showing hierarchy
of management.

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 F. List of books and records with location - List of books and records maintained by the company
and place of their location. Names, positions, specimens of signatures and initials of persons
responsible for books and document should also be included.
G. An outline history of the organization.
H. Analysis of significant ratios and trends.
I. Internal Controls - Notes on internal control with Details of study & evaluation of internal
controls in the form of narrative record, questionnaires or flow charts etc.
J. The business structure within a group and associated companies - List of all holding, subsidiary
and associate companies.
K. Company’s advisors - list of the company’s advisors such as bankers, merchant bankers,
stockbrokers, solicitors, valuers, insurance brokers etc.

(ii) Current Audit File

These file contains information relating to the audit of the current period.
A. Appointment letter for the Current Year, along with the defined scope of Audit;
B. Extracts of important board/management meetings;
C. List of responsible persons with their designation and contact details;
D. Secretarial Audit Report/Financial Audit Report for current year as well as previous year;
E. Actions initiated by company towards Secretarial Auditor’s observations and suggestions in
previous years reports;
F. Audit Plan/Audit Program;
G. Current year’s Secretarial Records;
H. Communications with the company/management team;
I. Letters of representations, confirmations received from company;
J. Audit review points and highlights of analysis.

e. Working paper Review

The auditor should review all working papers to determine whether they are relevant and have
a useful purpose, evidence the audit work performed and sufficiently support the audit findings.
The review will consist of:

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 Compliance Reaching
Recognition Program

Discussion with the

Management Procedure Notes

(a) Determining compliance with working paper guidelines.

(b) Reviewing the audit program that outlines the major objectives of the audit, and ensure that
the procedures accomplish the objective(s).
(c) Reviewing the audit procedures and the referenced working papers to ensure the working papers
support the procedures performed and all procedures have been completed.
(d) Determine that the working papers adequately are documented and the conclusions reached in
the report.
(e) Ensuring that all findings prepared have been discussed with the appropriate member of
management, and that the disposition of the audit concerned is documented.
(f) Documenting review notes.

Filing and Protection of Working papers

All working papers that are considered confidential, are the property of the Auditor, and are to
be kept under adequate control. Working papers often contain sensitive information or data
that must be protected from unauthorized use or review.

Retention Policy
All working papers pertaining to an audit belong to the Auditor. All such data is to be kept by
the Auditor and is subject to the retention requirements as required by law.

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10. IDENTIFICATION OF THE EVENT AND CORPORATE ACTIONS
The following points considered as events/information on which the auditor should specifically
verify the compliance required under applicable laws.
1. Acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation/
merger/ demerger/ restructuring), or sale or disposal of any unit(s), division(s) or subsidiary
of the Company or any other restructuring.
2. Issuance or forfeiture of securities, split or consolidation of shares, buyback of securities, any
restriction on transferability of securities or alteration in terms or structure of existing securities
including forfeiture, reissue of forfeited securities, alteration of calls, redemption of securities
etc.
3. Revision in Rating(s).
4. Outcome of Meetings of the board of director relating to:
– dividends and/or cash bonuses recommended or declared or the decision to pass any dividend
and the date on which dividend shall be paid/dispatched;
– any cancellation of dividend with reasons thereof;
– the decision on buyback of securities;
– the decision with respect to fund raising proposed to be undertaken;
– increase in capital by issue of bonus shares through capitalization including the date on which
such bonus shares shall be credited/dispatched;
– reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for
future issue or the creation in any form or manner of new shares or securities or any other
rights, privileges or benefits to subscribe to;
– short particulars of any other alterations of capital, including calls;
– financial results;
– decision on voluntary delisting by the listed entity from stock exchange(s).
5. Agreements (viz. shareholder agreement(s), joint venture agreement(s), family settlement
agreement(s) impacting management and control of the Company,
agreement(s)/treaty(ies)/contract(s) with media companies) which are binding and not in
normal course of business, revision(s) or amendment(s) and termination(s) thereof.
6. Fraud/defaults by promoter or key managerial personnel or by Company or arrest of key
managerial personnel or promoter.

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 7. Change in directors, key managerial personnel (Managing Director, Chief Executive Officer,
Chief Financial Officer , Company Secretary etc.), Auditor and Compliance Officer.
8. Appointment or discontinuation of share transfer agent.
9. Corporate debt restructuring.
10. One time settlement with a bank.
11. Reference to IBC, 2016 and winding-up petition filed by any party/creditors.
12. Issuance of Notices, call letters, resolutions and circulars sent to shareholders, debenture holders
or creditors or any class of them or advertised in the media by the Company.
13. Proceedings of Annual and extraordinary general meetings.
14. Amendments to memorandum and articles of association.
15. Commencement or any postponement in the date of commencement of commercial production
or commercial operations of any unit/division.
16. Change in the general character or nature of business brought about by arrangements for
strategic, technical, manufacturing, or marketing tie-up, adoption of new lines of business or
closure of operations of any unit/ division (entirety or piecemeal).
17. Capacity addition or product launch.
18. Awarding, bagging/receiving, amendment or termination of awarded/bagged orders/contracts not
in the normal course of business.
19. Agreements (viz. loan agreement(s) (as a borrower) or any other agreement(s) which are
binding and not in normal course of business) and revision(s) or amendment(s) or
termination(s) thereof.
20. Disruption of operations of any one or more units or division of the Company due to natural
calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc.
21. Effect(s) arising out of change in the regulatory framework applicable to the Company.
22. Litigation(s)/dispute(s)/regulatory action(s) with impact.
23. Fraud/defaults etc. by directors (other than key managerial personnel) or employees of
Company.
24. Options to purchase securities including any ESOP/ESPS Scheme.
25. Giving of guarantees or indemnity or becoming a surety for any third party.
26. Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory
approvals.

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27. Any other information/event viz. major development that is likely to affect business, e.g.
emergence of new technologies, expiry of patents, any change of accounting policy that may
have a significant impact on the accounts, etc. and brief details thereof and any other
information which is exclusively known to the Company and which may be necessary to enable
the holders of securities of the Company to appraise its position and to avoid the establishment
of a false market in such securities.

11. TESTING METHODS USED DURING AUDIT PROCEDURES

i. There are five core testing methods that auditors use to confirm the facts and answers that
a business wants to attain during an audit.
ii. Each testing method helps the auditor issue a well-informed opinion, based on evidence.
iii. These are the five types of testing methods used during audits.
a. Inquiry
b. Observation
c. Examination or Inspection of Evidence
d. Re-performance
e. Computer Assisted Audit Technique (CAAT)

 Inquiry
Inquiry is a fairly straightforward testing method, where auditors ask questions of the
organization’s managers, accountants and any other key staff to help determine some relevant
information. Because the quality of the information gained from inquiry depends on the accuracy
and truthfulness of the interviewee, it is considered a weaker form of evidence.

Example of inquiry commonly used is asking the business owner how the company’s financial
and data security records are stored. The auditor takes the responses into account—but does
not accept the answers alone as confirmation—to establish additional testing criteria since this
method is often used in conjunction with other, more reliable methods.

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 Observation
This method involves an auditor’s observation of tasks, procedures and conditions and is most
often used when there is no documentation of the operation of a control.
Traditionally, observation has been performed on-site during the evidence-gather phase of a
SOC audit.
For example, management at an audited organization may state that certain noted records
have been appropriately secured in a locked drawer. Then, in order to verify that certain stated
records have been securely stored in locked cabinets, the auditor will watch an employee unlock
the specified drawer during normal daily activities and take out the records.

 Examination or Inspection of Evidence

This testing method helps auditors determine whether manual controls are being consistently
performed and properly documented.
For example, an auditor may check to make sure that backups are scheduled to run on a regular
basis or that data classification controls. In these cases, the auditor can use inspection to
verify that the control has been designed and is operating effectively. He or she will check to
see if forms are being filled out correctly.

 Re-performance
Re-performance is used when inquiry, observation, and physical examination and inspection
have failed to provide the requisite assurance that a control is operating effectively.
The auditor can leverage work done by an internal auditor and documented in work papers, so
that only a sample of the work needs to be re-tested to verify.
The re-performance method is helpful in decreasing the workload for auditors and determining
whether automated controls are operating effectively.

 Computer-Assisted Audit Technique (CAAT)

The CAAT method of testing is often used to analyze large volumes of data or a sample of
compiled data. Using special software, CAAT testing runs a script over a ledger, spreadsheet,
or an entire database, to spot trends, irregularities, and potentially fraudulent entries.

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12. AUDIT SAMPLING
Audit sampling is an investigative tool in which less than 100% of the total items within the
population of items are selected to be audited.
a. Purpose of Audit Sampling
No matter what kind of audit is being performed audit sampling needs to be used so that
auditors can complete their audits without wasting resources in checking every single item. The
objectives of audit sampling are as follows:
 Gather enough evidence to conclude an audit opinion
 Reduce the number of resources used
 Provide the basis for auditors to issue a conclusive audit opinion
 Detect any errors or fraud that can occur
 Prove that auditors have completed their audit fully in accordance with auditing standards
 Used as a tool for investigating
 Audit Sampling Importance.

While conducting audit, it is not feasible to audit and check every single item within the
financial statements. It will be very costly and will take a lot of resources and time to do so.
Audit sampling enables auditors to make conclusions and express fair opinions based on
predetermined objectives without having to check all of the items within financial statements.
The auditors will only verify selected items, and through sampling, can infer their opinion on
the entire population of items.

There are two forms of sampling:

1. Statistical audit sampling
Statistical audit sampling involves a sampling approach where the auditor utilizes statistical
methods such as random sampling to select items to be verified. Random sampling is used
when there are many transactions on record.

For example, with statistical sampling, ten items are selected from the total population
randomly. Every single item within the 100 has an equal probability of being selected and

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 tested for accuracy as a result. Again, it benefits auditors since they can still make an audit
opinion but do not have to check all 100 transactions.

2. Non-statistical audit sampling

In contrast to statistical audit sampling, non-statistical audit sampling items are not chosen
randomly. Instead, they are chosen based on the auditor’s judgment, and the result of the
testing from the selections is not used to infer the conclusion for the entire population. In the
example earlier, ten inventory transactions can be used to infer the opinion on all 100
transactions. In non-statistical audit sampling, the auditors may choose to select items based
on criteria such as: The value of items (e.g., items greater than Rs 10 lacs)

i. An external auditor was engaged to conduct an audit of a manufacturing company’s financial

statements. As part of the audit, the auditor used statistical sampling techniques to select a sample of
transactions to test for accuracy and completeness.
ii. The auditor used a combination of random sampling and systematic sampling to select the sample. The
sample was selected from the company’s sales and purchases transactions, as these transactions were
considered to be material and had a high risk of misstatement.
iii. After selecting the sample, the auditor examined the transactions to verify their accuracy and
completeness. The auditor found that a few of the transactions in the sample were not properly
documented, and there were some discrepancies in the amounts recorded in the company’s records
compared to the supporting documents.
iv. Based on the results of the sample, the auditor projected the findings to the entire population of sales
and purchases transactions and concluded that there were material misstatements in the financial
statements.
v. The auditor then communicated the findings to the company’s management and recommended
adjustments to the financial statements. The management of the company agreed with the auditor’s
findings and made the necessary adjustments to the financial statements.
vi. The auditor then issued an unqualified opinion on the financial statements, indicating that the financial
statements were fairly presented in all material respects. This case study demonstrates the importance
of audit sampling in conducting an effective audit.
vii. By using statistical sampling techniques, the auditor was able to select a representative sample of
transactions and test them for accuracy and completeness.
viii. The results of the sample allowed the auditor to draw conclusions about the entire population of
transactions and detect material misstatements in the financial statements.

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 13. TESTS OF INTERNAL CONTROLS
i. Internal controls are rules and procedures established by a company to ensure business
continuity, prevent fraud, and preserve the integrity and accuracy of financial reporting.
ii. The purpose of internal controls testing is to see if the controls are properly detecting or
preventing material errors or purposeful misstatement in financial reports.
iii. Although control audits cannot completely detect all fraud, auditors can use controls testing
to test operational controls for gaps, which can significantly reduce risk.
iv. Testing reveals what situation the company is in: If controls are found to be effective,
control risk is low, if controls are identified as vulnerable or ineffective, control risk is
high.

Purpose of Internal Controls Testing

There are two primary purposes for internal controls testing:
1. Shortening the audit process – if a controls test shows that internal controls are effective,
and are able to prevent errors or fraud in financial statements, additional audit actions will not
be needed.

2. Providing additional audit evidence to demonstrate compliance, in situations where individual

substantive procedures cannot provide sufficient evidence on their own.

 Types of Audit Tests of Internal Controls

As discussed earlier about testing methods used during audit procedures. There are below types
of internal control tests, each one is progressive and more comprehensive:
1. Inquiry—auditors ask managers and employees about the controls they are implementing.
2. Observation—auditors observe activities and operations to see how controls are implemented.
This is useful in cases where there is no documentation on how to operate the control unit.
For example, if there is no formal procedure to ensure security cameras are installed, the auditor
can simply observe if there are security cameras at the facility.
3. Examination or inspection—auditors determine if controls are really operational, using existing
documentation and logs. For example, a test of controls can involve visiting a secured facility
and ensuring that doors are locked and equipped with access control devices.

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4. Re-performance—the previous three methods cannot fully guarantee the effective operation
of the control. Re-performance involves the auditors actually trying to perform the control to
see if it is effective. For example, the audit can run backups and try to restore the system to
normal operation, or manually perform a financial calculation to ensure it is correct.
5. Computer-aided audit tools (CAAT)—auditors use technology to analyze large amounts of
data automatically. A simple CAAT can be a spreadsheet, but there are specialized tools
available that can test various types of internal controls. Most CAAT solutions are focused on
export based, point in time sample testing across a complete inventory of all transactions.

i. An external auditor was engaged to conduct an audit of a retail company’s financial statements. As part of
the audit, the auditor reviewed the company’s internal controls to assess their effectiveness in preventing
and detecting errors and fraud
ii. The auditor found that the company had several weaknesses in its internal controls. Specifically, the
company lacked proper segregation of duties, which meant that a single employee had control over several
critical functions, including approving and recording transactions, and reconciling accounts.
iii. The company also had inadequate documentation of transactions and did not have policies and procedures
in place to ensure that transactions were properly authorized and recorded.
iv. As a result of these weaknesses, the auditor was unable to rely on the company’s internal controls to
support the accuracy and completeness of the financial statements. The auditor communicated the
weaknesses to the company’s management and recommended improvements to the internal controls.
v. The management of the company agreed with the auditor’s findings and took corrective action to
strengthen the internal controls. The company implemented a new policy of segregation of duties, ensuring
that critical functions were assigned to different employees.
vi. This case study highlights the importance of strong internal controls in preventing and detecting errors and
fraud in financial reporting. By identifying weaknesses in the internal controls and recommending
improvements, the auditor helped the company to strengthen its financial reporting processes and provide
accurate and reliable financial statements.

14. SUBSTANTIVE TESTING

Substantive testing is an auditing technique that checks for any errors or material
misstatements in a company’s accounts, financial statements or supporting documents.

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 This traditional auditing method helps an auditor to form an overall opinion about the company’s
financial statements.

 Who does substantive testing?

i. Either a company’s internal audit staff or hired external auditors can conduct substantive
testing for a company.
ii. Company’s internal audit staff provide confirmation for whether their internal record systems
are performing correctly and if the internal record systems are not performing properly, the
internal audit staff can improve the system or eliminate the problem, so the company performs
better in the next audit.
iii. External auditors often get hired to conduct substantive testing once a year, usually at the
end of the year.

 How do substantive tests work?

Here are the steps:
1. A company makes assertions
A company’s management team makes implicit or explicit claims about their financial situation,
and these auditing assertions get presented to an auditor.
There are five general categories of assertions that companies make during audits, which are:

Occurrence or existence: This assertion states that financial statements listing assets,
liabilities and shareholder equity exist when the accounting period is over.

Disclosure and presentation: This is an assertion that the financial statements will include
and present all financial information and financial disclosures in a clear manner that auditors
can easily understand.

Obligations and rights: This assertion states that the company has usage rights or
ownership of all the assets listed in the financial statements and that all liabilities belong to
the company, not a third party.

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 Accuracy or valuation: This assertion states that all the calculations in the financial
statements are accurate, classified appropriately and based on a proper valuation of balances,
liabilities and assets.

Completeness: An assertion that the financial statements include and present all the
required items, transactions and inventory, including third parties with temporary possession.

2. The auditor creates a plan

The auditor creates a structured audit plan for the company based on the assertions. The
auditor identifies which auditing processes, including substantive tests, will best determine any
errors or misstatements in the assertions.
There are three general activities that an auditor includes in their audit plan for substantive
testing, which are:
 Examine physical adjustments and journal entries the company made while the company
prepared the financial statements.
 Match the underlying accounting records with the company’s financial statements and their
supporting documents.
 Test the different classes of account balances, transactions and disclosures.

3. An auditor shares audit results with a company

The auditor creates an official report noting any errors or important mistakes discovered. This
report is then shared with management, and if needed, the auditor may ask for additional
testing.

 What happens when substantive testing finds an error?

If an auditor finds any errors in a company’s financial statements or the supporting documents,
the auditor may require the company to do further audit testing.
The auditor writes a management letter with a summary of the errors they found and shares
the letter with the company and the audit committee.
There are errors or misstatements if:

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a. External auditors don’t detect an error during audit procedures, which is called detection risk.
b. Internal auditors or the internal record systems don’t identify or fix an error, which is called
control risk.
c. The company or auditor doesn’t detect initial errors when the financial process and reporting
begin.

 Examples of substantive testing

Here is a list of common substantive auditing procedures and tests that auditors do:
 Verify that approved dividends exist by reviewing board minutes from the board of directors;
 Confirm that the balances in accounts payable are correct by contacting suppliers;
 Confirm that the balances in accounts receivable are correct by contacting customers;
 Check that assets obtained from a business combination have fair values assigned to them by
confirming with experts;
 Watch the physical inventory count as it happens for each ending period;
 Test ending cash balances by issuing a bank confirmation;
 Contact lenders to confirm that loan balances are correct;
 Take fixed asset records and physically match them to fixed assets;
 Use inventory valuation calculations to confirm if inventory is valid;
 Recalculate the calculations that were already made by the client;
 Re-perform a company’s procedures to make sure they perform as planned;
 Confirm loan balances are correct by contacting lenders;
 Test end cash balances by getting bank confirmation.

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15. AUDIT TRAILS
Audit Trail is useful to trace all events right from transactions entered into the books of
accounts to all the changes such as alteration, deletion, etc. that may take place.

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short Note)

Notification of Ministry of Corporate Affairs- Audit trail rule
for businesses using accounting software from 1st April,2023.
According to the same notification, businesses that fall under the
purview of MCA and use accounting software for maintaining
books of accounts should have an audit trail feature. The
accounting software used by such businesses should create an
edit log of each and every transaction with changes made in the
books of accounts. The software should capture the date details
when such changes (edits) are made and ensure the edit trail
cannot be disabled.

Rule 3 (Manner of Books of Account to be Kept in Electronic Mode) of the Companies

(Accounts) Rules, 2014, states that for the financial year commencing on or after the 1st day
of April, 2023, every company which uses accounting software for maintaining its books of
account, shall use only such accounting software which has a feature of recording audit trail
of each and every transaction, creating an edit log of each change made in books of account
along with the date when such changes were made and ensuring that the audit trail cannot
be disabled.

 How does audit trail work?

1. Audit trails must have a few key details to provide comprehensive information about a
transaction.
2. Every access made to the accounts and records of the company should be tracked.

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 3. Every edit made to any information must be recorded with the name of the person
who did it and the time it was done.
4. If any information was deleted, that also should be recorded.
 Accounting software provides the ideal example for audit trails. Once you enter a transaction
in the software, the software will maintain a record of it. Any further edits made to the
details, such as a change in the amount or change in the name against which the entry is
made, will also be tracked by the software along with the user who made the changes and the
time it was changed. Even if some transaction were to be deleted, the software will track that
as well and keep the record of everything since the original entry was made.

Following are the key financial details to track as part of the audit trail:
 Any changes involved in the transaction
 The person who partook in the transaction
 The time at which the transaction took place
 The time at which the modification or edit took place
 Example of audit trail.

 What is the purpose of an audit trail?

The trail is basically a way to ensure that there are no gaps in data that may lead to a blind
spot, making it impossible to determine the cause of the error.
The main reason for documenting everything that a company or its employees do is to have a
record that can be revisited if the need arises. In case of any discrepancy, you have a pathway
that can lead to the erring or fraudulent transaction which is causing the discrepancy.

 What are the benefits of an audit trail?

1. Increased transparency: The audit trail system provides a detailed record of all transactions,
making it easier for regulators and stakeholders to monitor the activities of companies and to
detect any irregularities.
2. Improved accuracy: By requiring companies to maintain accurate electronic records, the audit
trail system helps to prevent errors and omissions in financial reporting.

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3. Greater accountability: The audit trail system holds companies and their employees
accountable for their actions by providing a detailed record of all changes made to electronic
records.
4. Enhanced regulatory compliance: The audit trail system helps to ensure that companies
comply with various laws and regulations related to corporate governance and financial reporting.
5. Foolproof: There is also the advantage of proving that the company books are clean and in a
healthy state which gives a big boost in the valuation of the company as well as generating
funds through loans or by raising capital.

This case study revolves around an auditor's audit of a large manufacturing company in India. The auditor's
review focuses on the electronic records maintained by the company, which are governed by the Audit
Trail system set up by the Ministry of Corporate Affairs (MCA). The case unfolds as follows:
1. Initial Review and Observations: The auditor examines the electronic records and detects several
entries that don't align with the company's financial statements. Furthermore, the auditor notices
multiple alterations made to the electronic records without documented explanations for these changes.

2. Investigation Process: To investigate these discrepancies, the auditor turns to the Audit Trail system.
This system offers a comprehensive log of all changes made to the electronic records, including
timestamps and details of the individuals responsible for the changes. The auditor cross-references
this information with the company's financial statements to trace the origin of the discrepancies.

3. Findings: Through this meticulous investigation, the auditor uncovers two significant issues. Firstly,
the company has misreported its revenues by recording them in a different financial year than when
they were actually earned. Secondly, there were unauthorized changes to the electronic records,
seemingly aimed at concealing these irregularities.

4. Reporting and Recommendations: The auditor communicates these findings to the company's
management and proposes corrective actions. The recommendation includes rectifying the discrepancies
and updating the electronic records accordingly. The company's management cooperates with the
auditor and takes steps to address the problems.

5. Outcomes and Improvements: As a direct consequence of the audit, the company enhances its
internal controls and financial reporting processes to safeguard against similar issues in the future.
The Audit Trail system, introduced by the MCA, proves invaluable in revealing these irregularities and
ensuring the company's compliance and responsiveness in addressing them.

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 This case study underscores the pivotal role of the Audit Trail system established by the MCA in promoting
transparency and accountability within corporate reporting, as well as in detecting financial discrepancies.
The system serves as a robust tool for auditors, allowing them to spot deviations in electronic records and
delve into the causes behind those discrepancies. Moreover, the system contributes to fostering good corporate
governance and safeguarding the interests of stakeholders.
In summary, the case study highlights how regulatory measures, such as the Audit Trail system, can play a
vital role in maintaining the integrity of financial reporting, uncovering irregularities, and fostering an
environment of trust and accountability in the corporate world.

16. ANALYSIS OF AUDIT FINDINGS

i. Audit Finding:
A written summary of deviations from required provisions and identified concerns during the
audit.
ii. Review by Lead Auditor:
The lead auditor reviews the completed audit report.
iii. Discussion with Department Head:
The lead auditor discusses the report contents with the relevant department head.
iv. Acceptance and Verification:
The department head accepts the report.
Signs the final audit report, verifying acceptance and taking responsibility for any required
changes.

 Determine Plan of Action

i. The entire reason for conducting internal management system audits is to verify conformance
and continually improve on the management system. Therefore, it is extremely important that
all identified non-conformances are corrected in a timely manner.
ii. Some companies place all audited non-conformances into their corrective/preventive action
process for tracking purposes. Others place only critical non-conformances into the
corrective/preventive action process. Regardless of the mechanics of tracking the identified
audited non-conformances, it is imperative that corrective action is taken.
iii. Once the corrective action is in place, the auditors should review the actions taken and verify
the root cause was identified properly and resolved. An accept or reject decision can then be

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 rendered for the change action. If acceptable, no further action is required, and the issue is
considered resolved.
iv. If unacceptable, the department head must complete a new root cause analysis, develop a new
action plan, and put the new action plan into place. The auditors will now review the new
action plan and make a determination of acceptance or rejection.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 11 – AUDIT PROCESS AND DOCUMENTATION

1. INTRODUCTION
The Auditor needs to plan and execute audit procedures to gather enough and appropriate
evidence for a reasonable opinion. When risks go up, the need for evidence increases. However,
high-quality evidence reduces the need for additional confirmation. More low-quality evidence
doesn't make up for the requirement of having enough evidence.

2. AUDITING STANDARD ON AUDIT PROCESS AND DOCUMENTATION (CSAS-2)

Auditing Standard CSAS-2 deals with responsibilities and duties of the Auditor with respect to
Audit Process in conducting audit and maintaining proper audit documents.
The objective of the Standard is to prescribe principles for an Auditor:
(i) to conduct audit as per the specified audit process;
(ii) to maintain documentation that provide:
(a) sufficient and appropriate record to form the basis for the Auditor’s Report; and
(b) evidence that the audit was planned and performed in accordance with the applicable Auditing
Standards and statutory requirements.

 “Audit Documents” means the working papers prepared or records obtained by the Auditor in
connection with the audit.
 “Audit Evidence” refers to relevant information and documents gathered in the course of the
audit for arriving at the conclusion on which the Auditor’s opinion is based.
 “Management” includes Board of Directors and persons who have been entrusted with the
responsibility of governance and compliances of the Auditee.

3. OVERVIEW OF THE AUDIT PROCESS

The audit process can be broadly grouped in three phases:

Planning Executing Reporting

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 Audit Planning:
For an effective audit, a timely, well thought out and well executed planning efforts is essential.
The Audit planning consists of the following actions:
1. Understanding the company;
2. Establishing audit objectives and scope;
3. Determining Materiality;
4. Assessment of Risk;
5. Preparation of Audit plan;
6. Preparation of detailed Audit Programme.

Execution of Audit:
The effective Audit Execution is based on the Audit plan and the efficiency of the Audit team.
It covers the following actions:
1. Sampling of various transactions or items;
2. Sampling for testing of controls;
3. Identification of events;
4. Performing controls testing procedures;
5. Performing analytical procedures;
6. Sampling for substantive test of details;
7. Performing substantive test of details;
8. Review of working papers;
9. Management discussion on draft Report.

Reporting:
In the reporting phase, the auditor covers evaluation of audit results, deriving conclusion, forming
of opinion and prepare the audit report.

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 Understanding the Auditee and its operation

Understanding the legal requirements and Applicability of Law, Rules and Regulations

Overview and Assessment, Internal Control Mechanism and Identification of

Material Event and Risk Areas

Risk Assessment considering the existing Internal Control Mechanism

Deciding the Audit Approach considering Reliance on the Internal Control and
Procedures to be Adopted for Audit

Identification of the Audit Evidences

Designing the detailed Audit Procedure for various Transactions & Events based on
the Materiality, Value and Nature

Perform Audit Procedures

Audit Conclusions based on the Audit Evidence

Forming of Opinion

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 4. AUDIT PLANNING
i. The audit plan, describes the processes and activities that are to be carried out in connection
with a particular audit and for the improving the quality of audit.
ii. Audit plan is very crucial and should be designed with due care.
iii. The Auditor should prepare an audit plan, which shall include detailed layout for conducting
audit procedures, timing, sample sizes, basis of selection of sample, etc.
iv. Audit plan addresses the specifics of what, where, who, when and how:
a. What are the audit objectives?
b. Where will the audit be done?
c. Whether there will be audit visits to other locations of the company?
d. When will the audit(s) occur?
e. Who constitute the audit team?
f. How will the audit be done? etc.
v. The basic purpose of an audit plan is:
 to develop an audit process which ensures that sufficient and appropriate evidence is gathered
to support the audit opinion;
 the audit should be planned in a manner which ensures that the audit is carried out in an
efficient and effective way in a timely manner;
 the audit plan should be documented and kept as audit working paper;
 the audit planning process should be framed on a thorough understanding of the Auditee, its
business, sector in which it functions and its operation;
 to determine the materiality for the audit.
vi. Audit planning means establishing and developing an overall audit process, including but not
limited to:
a. Identification of broad audit areas;
b. Seeking previous audit findings and observations from the Management and the Predecessor or
Previous Auditor, in case of change of Auditor;
c. Determination of subject matters and audit areas requiring special attention, when considered
necessary;
d. Risk Assessment and Materiality;
e. Audit technique;

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 Allocation of audit resources for the audit; and
 Preparation of audit schedule.

 Essentials of Audit Planning

Points to be considered by auditor:

Ensuring the quality of Audit: The Audit should be planned in such manner, which ensures the
high quality of audit in economic, efficient, and effective way and in a timely manner.

Documented Audit Plan: The Audit plan should be documented and should be kept with the audit
working papers.

Clubbing of inter related steps: The Inter related steps and events should be clubbed together.

Finalization type of Audit Plan: While the elements of an audit plan may be similar across
different entities being audited, the specific details can vary based on the nature, type, and
objective of the audit or authentication assignment for each specific entity.

Independent review of Audit Plan : The audit plan should be checked by an experienced auditor
who is usually not part of the assignment. Their experience can help adjust the plan to better
meet the audit objectives.

Flexibility: The audit plan should be flexible enough to accommodate modifications.

Reaching conclusion: Auditing means gathering and analyzing enough facts and data to make
trustworthy and accurate conclusions about what's being audited.

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 Training and communication to Audit Staff: The auditing staff should know the quality control
policies and procedures of the firm. The hierarchy, responsibilities, and decision-making
authority must be clearly defined and understood by the audit staff.

CASE STUDY
The provided case study outlines the process and steps involved in engaging a secretarial auditor
and planning the audit for Sun Moon Ltd. Secretarial auditing involves examining a company’s
compliance with applicable laws, regulations, and corporate governance practices.
Here is a breakdown of the case study:
a. Engagement of Secretarial Auditor: Sun Moon Ltd appoints M/s J J Associates, practicing
2. company secretaries firm, as the secretarial auditor. A consent letter and a board resolution
areobtained for the appointment.
3. Intimation to Earlier Incumbent: The new secretarial auditor informs the previous auditor about
the change in writing.
4. Acceptance of Appointment: Sun Moon Ltd issues an appointment letter to M/s J J Associates
along with the board resolution. The new auditor accepts or rejects the appointment in writing.
5. Preliminary Discussions/Surveys: The secretarial auditor gathers relevant information about the
company, interacts with personnel, and may conduct surveys to understand the business nature
and operations.
6. Preliminary Meeting: A meeting with senior management and administrative staff takes place.
The scope, objectives, timeline, preliminary questionnaire, and initial observations are discussed.
Audit activities and timeframes are outlined.
7. Finalization of Audit Plan and Briefing the Staff: An action plan is developed, including assigning
roles, responsibilities, and fieldwork tasks. Controls are reviewed to determine high-risk areas
and plan audit steps.
8. Testing, Interviews, and Analysis: The auditor employs various tools and technology to gather
information about company operations. Controls identified during the preliminary review are
evaluated, and compliance with policies, procedures, and laws is assessed through interviews,
reviews, and analysis.

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9. Working Papers: Working papers serve as a vital tool for the audit, connecting management’s
records to the auditor’s opinion. They provide support for the audit findings and conclusions.
10. Preliminary Report/Audit Summary for Discussions: Findings and recommended solutions are
summarized and discussed with management. The audit report’s content, including findings,
conclusions, and recommendations, is prepared based on fieldwork.
11. Audit Report Submission: The final audit report is prepared, presenting findings and
recommendations for improvements. The report includes the auditor’s opinion on statutory
compliance and whether the company is adhering to applicable corporate laws. Management
responses are reviewed and discussed.
12. Final Meeting and Report: A final meeting between management and the auditor takes place
to discuss the audit report, management responses, and any remaining issues. The final report
is provided with or without qualifications based on the audit findings.
13. Review of Audit Plan: After completing the audit, the secretarial auditor evaluates the
effectiveness of the audit plan, assesses the outcomes, and makes corrective measures for
future audits.
This case study highlights the detailed steps involved in secretarial audit engagement, from
appointment to final report submission. It underscores the importance of thorough planning,
effective communication, compliance assessment, and collaboration with management to ensure
accurate and compliant financial reporting and corporate governance.

 Developing the Audit Plan

The Auditor establishes the overall audit strategy and guides the development of the more
detailed audit plan
Details of Audit Plan
1. Introduction – a short introduction about the audit;
2. Audit field – A description of the audit field, including the regulatory framework for the audit
where relevant and recent significant changes and developments that may affect the audit;
3. Audit objectives – The audit objectives depend on the type of audit to be conducted;
4. Audit coverage – The audit coverage periods to be covered and locations to be visited; control
systems to be tested and sample to be audited;
5. Materiality – Identification of materiality in terms of value, nature and context;

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 6. Risks – A preliminary assessment of risks (e.g. changes in the regulatory environment or
internal control systems and evaluation of inherent and control risk);
7. Audit approach – The audit approach, including the audit procedures to be carried out in order
to provide the necessary audit evidence. This identifies the extent of planned reliance on control
systems and the extent of substantive procedures;
8. Organisation – Organisation of audit work: resources (including recourse to the work of other
Auditor and experts), timetable (including the reporting objectives of the audit), documentation
in electronic audit support system.

Keypoints to be kept in mind

i. The Auditor shall adhere to the audit plan.
ii. The audit plan may be modified, if circumstances so warrant.
iii. The audit plan should be documented in audit file, including significant changes made during
the course of the audit and the reasons for such changes.
iv. The Auditor should approach the audit with professional skepticism, enabling objective
professional judgment. Applying professional skepticism improves the effectiveness of audit
procedures and lowers the risk of reaching an incorrect conclusion when evaluating audit results.

CASE STUDY
The provided case study outlines the audit plan and process employed by the Case Western
Reserve Office of Internal Audit Services. This process involves several sequential steps aimed
at understanding, assessing, and managing risks within the university's management centers,
operating units, and significant departments. Here's a breakdown of the steps:
Step 1: Planning In this phase, the auditor begins by reviewing previous audits conducted in
the same area and relevant professional literature. The auditor also researches policies and
statutes that apply. Based on this preliminary research, a basic audit program is created to
outline the audit process.
Step 2: Notification The Office of Internal Audit Services informs the relevant departments
about the upcoming audit. The notification includes the purpose of the audit. An opening
meeting is scheduled to kick off the audit process.

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Step 3: Opening Meeting This meeting involves management and administrative personnel
from the audited area. The purpose and objectives of the audit are discussed, along with the
audit program. The audit program might be adjusted based on the insights gained during this
meeting.
Step 4: Fieldwork During this step, testing is performed as outlined in the audit program.
The auditor also conducts interviews with the appropriate personnel in the department to
gather more information.
Step 5: Report Drafting After the fieldwork is completed, a draft report is prepared. This
report encompasses various sections, including the audit's objective, scope, relevant
background information, and the findings and recommendations for any necessary corrections
or improvements.
Step 6: Management Response The draft audit report is shared with the management of
the audited area. Management provides their responses to the recommendations outlined in
the report. They should also include an action plan detailing how they intend to address the
issues identified.
Step 7: Closing Meeting A meeting is held with the department's management to discuss
the draft audit report and management's responses. Questions are addressed, and any
outstanding issues are clarified. Additionally, audit procedures not covered in the report are
communicated during this meeting.
Step 8: Final Audit Report Distribution After the closing meeting, the final audit report is
distributed to the personnel involved in the audit within the department. The report, along
with management's responses, is also sent to higher-level executives, including the President,
Chief Financial Officer, and the university's external accounting firm.
Step 9: Follow-up Approximately six months after the issuance of the audit report, a follow-
up review is conducted. This review's purpose is to determine whether the corrective actions
suggested in the audit report have been successfully implemented.

This case study illustrates the structured and comprehensive approach taken by the Office of
Internal Audit Services to assess and manage risks within the university's various
departments. The steps outlined ensure a thorough evaluation, documentation, and
implementation of corrective actions to improve internal processes and controls.

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5. RISK ASSESSMENT
Meaning of Risk
A risk is defined as ‘threat or possibility that an action or event will adversely or beneficially
affect an organization’s ability to achieve its objectives’.

Meaning of Risk Assessment

A systematic process of evaluating the potential risks that may be involved in a projected
activity or undertaking.
According to CSAS-2, The Auditor needs to assess the risk of the entity being audited in
relation to the audit engagement. This assessment should consider the industrial and business
environment, organizational structure, and compliance requirements, including regulatory
changes and legal orders.
The Auditor should focus on evaluating high-risk areas and activities of the entity.:

Internal control systems and processes of the Auditee for adherence to the
constitutional documents, applicable laws, act, rules, regulations and standards;

Transparency, prudence and probity

Changes or Attrition in the compliance team and frequency of such changes and
attrition.

Assessment of Audit Risk

The Auditor assesses thr Risk and identifies the critical and high risk areas by:
a. considering the underlying risk assessed by Management or internal and/or specific expert/
agencies and analysis thereof;
b. reviewing policies and procedures put in place to mitigate risk;
c. having insight into the objectives, key performance indicators, risks and control measures,
holding meetings with key executives of the Auditee.

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 CASE STUDY
The provided case study revolves around a practicing company secretaries firm, M/s ABC &
Associates, and their client acceptance policy, focusing on risk assessment and materiality
considerations. Let's break down the case study's key points:
Background of M/s ABC & Associates:
 M/s ABC & Associates is a medium-sized Practicing Company Secretaries Firm providing
services in secretarial and internal auditing, corporate laws, securities laws, capital markets,
and corporate governance.

 Their clients predominantly operate in the processed food industry.

Client Acceptance Policy:

 M/s ABC & Associates follows a strict Client Acceptance Policy that helps them decide whether
to accept a new client or engagement.

 The policy is essential for quality maintenance, risk management, regulatory compliance, and
protecting the firm's interests.

 A thorough due diligence process is conducted to evaluate risk characteristics of potential

clients.

 Adequate resources and commitment to ensuring high-quality audit services are crucial
considerations.

 The Managing Partner's approval is required for all new audit engagements.

 Clients are classified into risk categories: 'High Risk,' 'Moderate Risk,' or 'Low Risk.'

 A team is set up to recommend client acceptance decisions for FY 2023-2024.

Meeting with the Audit Committee Chairman:

 The Managing Partner of M/s ABC & Associates meets the chairman of the audit committee
of 'XYZ Ltd,' a company planning to change its secretarial auditor.

 Communication with the predecessor auditor (if applicable) is required according to CSAS-1
guidelines.

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 Determining Materiality:
Steps involved in determining materiality are outlined:

1. Identifying business risks specific to the processed food service sector.

2. Evaluating factors crucial in assessing business risk and the risk of material misstatement.

3. Understanding inherent and business risks associated with a new client.

4. Establishing planning materiality for an audit client.

5. Providing support for materiality decisions.

XYZ Ltd Engagement and Risk Assessment:

After accepting 'XYZ Ltd' as a new client, financial statements from the last three years are
provided for risk assessment purposes.

In summary, this case study underscores the meticulous client acceptance process adopted by
M/s ABC & Associates, where they evaluate potential clients based on risk classifications and
resource commitment. The case also highlights their interaction with a prospective client and
the importance of communication with predecessor auditors. Additionally, the study emphasizes
the significance of determining materiality in the audit process, especially when dealing with
clients in specific industries like the processed food sector. The information gathered from XYZ
Ltd's financial statements will be used to assess risks and tailor their audit procedures
accordingly

Components of Audit Risk

Auditing risk means that an auditor accepts/presumes some level of uncertainty in performing
the audit work, which means that the auditor accepts the risk that the audit opinion given by
the auditor might be wrong.
Only a very small degree of audit risk would be acceptable as otherwise the audit process may
lose its purpose.
The audit risk has three components
i. Inherent Risk: Inherent risk is the likelihood that a type of transaction could have errors or
inaccuracies that might be significant, either on its own or when combined with errors in other

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 transactions. This is considered without considering any internal controls. For instance, it
includes assessing whether related party transactions are genuine.
ii. Control Risk: Control Risk is the risk that a misstatement that could occur in an class of
transactions and that could be material individually or when aggregated with misstatement on
other transaction, will not be prevented or detected and corrected on a timely basis by the
internal control systems. For example, delay in the filing of forms.
iii. Detection Risk: Detection Risk is the risk that an auditor’s substantive audit procedures will
not detect a misstatement that exist in class of transactions that could be material, individually
or when aggregated with misstatement on other transaction. For example, while certification
of e-form, the auditor has overlooked the compliance of the Secretarial Standards.

Thoda Extra gyaaannnn……… Swaaad Anusaaar (Short

Note)
Assessment of Risk
 The auditor should maintain the high level of the
assurance/confidence while expressing the audit opinion.
 There is an inverse relationship between materiality and
the level of audit risk that is, the higher the materiality
level, the lower the audit risk and vice versa.

Risk Assessment Process overview:

IDENTIFY KEY RISK AREAS

Information should be gathered from all the departments with respect to:
a. Financial significance
b. Directional change, reorganizations, turnover
c. Past internal audits
d. Survey elected officials
e. Interviews

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f. COSO’s ERM PESTLE areas: (Political, Economic, Social, Technological, Legal Compliance,
Environmental) Capital, People, Process, and Technology.

EVALUATE RISK

Evaluate and rank departments by both inherent risks and risks identified through analysis and
interviews. Assess and prioritize major risks based on control objectives, considering
vulnerabilities, likelihood, and the potential impact of a negative event.

PRIORITIZE IDENTIFIED RISKS

a. Identify and link high-risk departments to control objectives.

b. Prioritize remaining risks.
c. Define the broad focus of internal audit projects based on prioritized risks.
d. Develop an initial Internal Audit Plan considering key risks and feedback from management.

DEVELOP AND REFINE INTERNAL AUDIT PLAN

a. Validate Internal Audit Plan internally.

b. Present Internal Audit Plan to Audit Committee.
c. Review and adjust Internal Audit Plan throughout the year

Sample Internal Audit Risk Assessment Questionnaire

a) Risk Assessment completed during the last year
b) Organizational Chart
c) Any reviews conducted in the area of responsibility either internally or by external auditors
and/ or consultants.
d) A copy of any report with results of the review.
e) What recent events have occurred in this unit (e.g. new degrees, centers, change in
management, turnover of staff)?
f) What do you have in place to manage and deal with these risks?

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g) What is the worst thing that has already happened in your unit?
h) How do you measure your performance? Have you obtained the desired outcome in recent
years?
i) Who are your key stakeholders or external constituents (e.g. donors, legislatures?)
j) Are there any particular areas within your unit or on campus which you currently have a concern
about.
k) Any areas or concerns that you would like reviewed by Internal Audit.
l) What unique systems do you have and how critical are they to the functioning of your unit?
Have you had any performance issues? Who supports these systems? Do you have any systems
that contain confidential or critical information such as student, or employee information (eg.
social security numbers, etc.)
m) Describe or List any areas in which you are aware of fraud and abuse and the nature of the
fraud and abuse.
n) How can Internal Audit meet the expectations of your unit? Do you feel comfortable calling
Internal Audit with a problem or concern?

6. INFORMATION ABOUT THE AUDITEE

a. Nature of the business of the Auditee
b. Sector in which the Auditee operates and how Government / Regulatory policies have evolved
specific to such sector
c. Size of the business of the Auditee including geographical locations; Organisation structures
including Directors and KMPs
d. Corporate structure, associates, joint ventures, subsidiaries
e. Laws applicable to business of the Auditee
f. Registrations and permissions obtained
g. Court & regulatory orders enforced
h. Media Reports

7. AUDIT CHECK-LISTS
i. The Auditor shall use systematic and comprehensive audit checklists for carrying out the audit
and to verify the compliance requirements.

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 ii. It is a useful tool to ensure that no compliance point is missed or omitted while conducting
audit.
iii. The Audit checklist should provide structure and continuity to an audit.
iv. Checklists provide a means of communication and a place to record data for use for future
reference.
v. Audit checklists should be developed to provide assistance to the audit process and should be
reviewed and updated from time to time to meet the scope of audit and its effectiveness.
vi. Audit team should be trained in the use of a particular checklist and be shown how to use it
to obtain optimal information.
vii. Audit checklists should:
a. promote overall planning and timelines of the audit;
b. ensure comprehensive,
c. consistent and focussed audit approach;
d. avoid duplication of data verification and information;
e. ensure that audit scope is being followed;
f. serve as a memory aid and provide a repository for notes collected during the audit process.

Illustration: Audit Findings are expressed in the following manner on the audit checklist:
 Non - conformty (major)
 Non - conformty (minor)
 Opportunity for improvement

Classification Non- Typical form Reaction of the audited

compliance unit
with
Non- Binding  Systematic and relevant  Immediate action
conformity requirements systematic deviations  Corrective action
(major) that must be  Accumulation of minor non-  Cause analysis
observed by Conformities  Deadline
the  Relevant impact on  Responsible person
audited unit occupational safety, health,
 Follow up

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 (laws, official environment, nearby areas or
regulaions, other finances
external  Relevant legal consequences
requirements, are to be expected
customer
requirements etc.)

Non- lndividual or minor cases and/or  Corrective action

conformity minor deviations  Cause analysis
(minor)
 Minor impact on occupational  Deadline
safety, health, environment,  Responsible person
nearby areas or finances
 Follow up
 Minor legal consequences are
to be expected
Opportunity for Best practices  The binding requirements Evaluation and feedback
improvement are observed on further action
 There are no immediately
recognizable negative
effects
 Possible improvement of
processes, procedure,
effectiveness, efficiency

8. COLLECTION AND VERIFICATION OF AUDIT EVIDENCE (CSAS-2 PARA 5)

The Auditor shall verify compliance with applicable laws, act, rules, regulations and standards.
Deviation, if any, shall be recorded. The Auditor shall satisfy himself about compliance of the
Auditee with the applicable laws, rules and regulations. If any deviation is observed, then the
appropriate noting of the same shall be made.

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 The Auditor shall obtain complete, relevant and necessary evidence to support the opinion.
Audit evidence is obtained using a variety of techniques such as the following:

1. Documents/Records Scrutiny
This is predominant mode of obtaining audit evidence and involves scrutiny of a wide variety
of documents e.g. board resolutions, agenda and minutes, notices, registers, records, procedure
manuals, reports, etc. In auditing, it is often not possible, due to limited resources, to check
every document or record. The Auditor, wherever necessary, may choose to sample a statistical
representative number of documented results, such as monitoring big data or incident reports.
An appropriate sampling method will manage any uncertainty to an acceptable level.

2. Testing, Interviews and Analysis

The Auditor should determine whether the controls identified during the preliminary review are
operating properly and in manner described by the Auditee. Fieldwork typically consists of
interviewing the staff of the Auditee whether formally or informally, reviewing procedure
manuals and processes, testing and analyzing compliance with applicable policies and procedures
and laws, rules, regulations and assessing the adequacy of controls. This exercise may result in
significant findings, which the Auditor should consider while preparing the audit report.

3. Questionnaires
This involves seeking information from relevant persons within the Auditee through issue of a
formal questionnaire to elicit further information and gather relevant audit evidence.

4. Third Party Confirmation

Third party confirmation is a type of inquiry and involves obtaining, independently of the
Auditee, a reply from a third party with regard to some particular information – for example
Registrar and Transfer Agents or other third party agencies.

5. Analytical Procedures
Analytical procedures involve comparing data, or investigating fluctuations or relationships that
appear inconsistent in various records.

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9. THIRD PARTY CONFIRMATION
The Auditor shall obtain confirmations from third party(ies), wherever required, with respect
to information which is related to such party(ies).

Third party confirmation is a type of inquiry and involves obtaining, independently of the
Auditee, a reply from a third party with regard to some particular information – for example
Registrar and Transfer Agents or other third party agencies.

During the course of audit, if circumstances warrant, the Auditor shall obtain the information
from the third parties. In such cases, a written request should be made to obtain the
information. An external confirmation is audit evidence obtained as a direct written response
to the Auditor from a third party in paper form, or through electronic or other medium.
Requesting external confirmations is a commonly used audit procedure in an audit. It can be
useful in obtaining audit evidence about significant transactions outside the normal course of
business, and related party transactions. Circumstances may exist where it may be difficult to
obtain responses to external confirmation requests. The auditor should plan alternative or
additional procedures.

10. ANALYSIS OF AUDIT EVIDENCE

The Auditor shall evaluate the Audit Evidence to arrive at the conclusion. The Auditor shall
verify compliance with applicable laws, rules and regulations and highlight deviations, if any.
Further, the Auditor has to obtain competent, relevant and reasonable evidence to support his
judgment as well as conclusions relating to the audit. The evidence gathering and evaluation is
a simultaneous, systematic and an interactive process and involves:

Gathering evidence by performing appropriate audit procedures;

Evaluating the evidence obtained as to its sufficiency (quantity) and appropriateness

(quality);

Re-assessing risk and gathering further evidence as necessary.

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 The evidence gathering and evaluation process should continue until the Auditor is satisfied
that sufficient and appropriate evidence exists to provide a basis for the Auditor’s conclusion.
Audit evidence should be evaluated against the identified criteria. This involves consideration
of evidence collected vis-à- vis the subject matter information as well as the written responses
obtained from responsible officers of the Auditee.
Auditor should check that the audit evidence is relevant and reliable. While evaluating evidence,
if the Auditor finds that Audit Evidence is conflicting, the Auditor shall assess the extent and
credibility of conflicting evidence in order to reach a conclusion or collect more evidence to
resolve the conflict. After evaluating the evidence and considering its materiality, the Auditor
should decide how best to conclude in the light of the evidence collected, which would be the
supporting key documents and arrive at audit conclusions. While evaluating evidence, Auditor
can find that audit evidence is conflicting i.e. while some evidence supports the subject matter
information other evidences seem to contradict it. In such circumstances, the Auditor needs to
assess the extent and credibility of conflicting evidence, undertake alternate audit procedure to
corroborate the evidences in hand for forming an appropriate opinion.

Price Waterhouse & Co. Vs. Securities & Exchange Board of India
The mentioned case law, "Price Waterhouse & Co. Vs. Securities & Exchange Board of India
Securities Appellate Tribunal Mumbai Appeal No. 6 of 2018," revolves around the determination
of evidence and intent in cases involving alleged fabrication, falsification, and manipulation of
financial records.
It was held that there must be evidence to show that there was fabrication, falsification and
fudging of the books of account of SCSL by the appellants and that the said fabrication, etc.
was done with intent, knowledge, connivance and collusion with the management in order to
play a fraud on the shareholders/investors. The evidence must be apparent and glaring and not
on the basis of preponderance of probabilities. There must be direct evidence of falsification
and fabrication of the books of account.

11. DOCUMENTATION
The Auditor shall adequately document the Audit Evidence in working papers, including the
basis and extent of planning, work performed and the findings of audit.

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 The word “document” is used to refer to a written or printed paper that bears the original,
official, or legal form of something and can be used to furnish decisive evidence or information.
“Documentation” refers to the act or an instance of the supplying of documents or supporting
references or records. Documentation of audit evidence supports audit conclusions and confirms
that the audit was carried out in accordance with scope of audit.

The Audit documentation is important for several reasons including:

 Confirm and support the Auditor’s opinion and reports;
 Increase the efficiency and effectiveness of the audit;
 Serve as a source of information for preparing reports and or answering any enquiries from the
Auditee or from any other party;
 Serve as evidence of the Auditor’s compliance with applicable standards;
 Facilitate planning and supervision;
 Help the Auditor’s professional development;
 Help to ensure that delegated work has been satisfactorily performed;
 Provide evidence of work done for future reference;
 The user of the audit report rely upon the audit report with proper documentation;
 It confirms that the Auditor’s report is in conformity with the applicable laws, rules, regulations
and standards, etc.

The Audit Documents shall contain sufficient information to enable an Auditor, having no
previous connection with the audit, to ascertain from such documents the significant findings
and conclusions of the Auditor. Audit documents should be comprehensive, understandable with
ease and contain all the significant information related to the scope covered under the audit.

According to the *Public Company Accounting Oversight Board (PCAOB): Audit documentation
should be prepared in sufficient detail to provide a clear understanding of its purpose, source,
and the conclusions reached. Also, the documentation should be appropriately organized to
provide a clear link to the significant findings or issues. Examples of audit documentation
include memoranda, confirmations, correspondence, schedules, audit programs, and letters of

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representation. Audit documentation may be in the form of paper, electronic files *The Public
Company Accounting Oversight Board (PCAOB) is a nonprofit corporation established to oversee
the audits of public companies. The PCAOB also oversees the audits of brokers and dealers
registered with the U.S. Securities and Exchange Commission (SEC).

Audit Documentation shall take place throughout the audit process. Working papers shall be
complete and appropriately detailed to provide a clear trail of the audit. Audit Documents shall
be properly indexed, referenced with and supplemented by the set of working papers.

Re V. Shankar Vs. Securities and Exchange Board of India SAT

It was held that the Company secretary, as part of his duty and responsibility is only required
to authenticate contents indicated in balance sheet or in offer document and is not required
to go into veracity of buy back offer document and its legal compliances before authenticating
such document and, therefore, company secretary could not be held guilty of making false or
misleading open offer which had been approved by board of directors of company.

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Some of the broad characteristics of Audit Documentation are set out below:

Completeness
• Provide support to audit conclusions

and accuracy

• Facilitates understanding the entire audit process without need for any
Clarity and supplementary examination.
conciseness

• Applies particularly to photocopies

Ligibility and
neatness

• Working papers may be organised in volumes in a manner that facilitates easy

Ease of reference
Reference

• Working papers should be restricted to matters, which are important, pertinent

and useful for the intended purpose
Relevance

• Working papers should contain cross references to audit plan, discussion papers,
audit observations, field audit report and the compliance audit report, as the
case may be, to enable Auditor to link the working papers to audit findings and
Ease of view
conclusions

• Working papers should provide a complete trail of the audit procedures performed,
Complete evidence that were gathered and evaluated, audit findings and conclusions that
Audit trail of were drawn.
analysis

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 Audit documentation may be divided into two categories:

Audit documentation

Static audit Current audit

documentation documentation

✓ Auditor appointment letter  Evidence that the work performed was

✓ Record of communication with the previous supervised and reviewed

Auditor and his resignation letter  Audit review points and highlights
✓ Information pertaining to the legal aspects  Major weakness in the internal control
of the Auditee systems
✓ Constitutional Documents - MOA, AOA, LLP
 Confirmations, if sought, received from the
Agreement, JV Agreement, Share Purchase
Auditee
Agreement etc.
 Communication with the third parties
✓ Complete details of the management
 Evidence of the audit planning process
✓ Copies of audited financial statements of the
previous years

✓ Details of holding, subsidiary, associate

companies and joint ventures.

Documentation of discussions held with management related to significant matters, where

written record is not available:
Relevant discussions with the Management along with confirmations if any obtained from the
auditee shall be recorded as documentation of audit evidence supports audit conclusions and
confirms that the audit was carried out in accordance with the scope of the audit.

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12. RECORD KEEPING AND RETENTION
The Auditor shall establish policies and procedures for retention of Audit Documents. A well
established policies and procedures should be in place for the documentation. Audit
Documentation is essential for the following purposes:

 To comply with legal duties and requirements, either statutory or regulatory;

 To avoid liability, the improper destruction or alteration of documents in a litigation situation;
 To support or oppose a position in an investigation or litigation;
 To protect from unnecessary expense and time during discovery;
 To maintain control over discovery and e-discovery; and
 To keep documents confidential and avoid leakage to attackers or competitors.

The Audit Documents shall be collated for records within a period of 45 days from the date
of signing of Auditor’s Report. The documents should be maintained in a manner which is safe,
secure and retrievable as and when required. The Audit Documents shall be maintained in
physical or electronic form and retained for a period of 8 years from the date of signing of
Auditor’s Report.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 12 – FORMING AN OPINION & REPORTING

1. INTRODUCTION TO PROCESS OF FORMING AN OPINION

i. The Auditing Standard on Forming of opinion (CSAS-3), deals with basis and manner for
forming Auditor’s opinion on subject matter of the audit. This standard aims to promote
consistency in opinion forming and reporting thereof to enable users of the report to identify
the audit findings.
ii. The evaluation under CSAS-2 refers to the evaluation of Audit Evidence to reach a conclusion,
whereas this Standard deals with evaluation of conclusion(s) reached during audit process. This
Standard also deals with the manner in which the opinion formed by the Auditor will be
expressed in writing and circumstances and manner to disclaim the opinion and the reporting
format.
iii. Upon the performance of the audit and conclusion thereof, the auditor is required to submit a
report stating that the affairs of the company are carried out in the fair manner and are free
from material misstatement.
iv. However, the content of the opinion should clearly indicate whether it is unmodified or modified
and if modified, whether it is modified as adverse or disclaimer of opinion.
v. The auditor should form his opinion on considering all material aspects, in accordance with the
applicable reporting framework and the requirement of the audit and after obtaining reasonable
assurance about whether the affairs of the company relating to the scope of audit as a whole
are free from material misstatement or not.
vi. In particular, the auditor shall evaluate whether, in view of the requirements of the applicable
reporting framework:
(a) The Company has adequately disclosed all relevant information about its affairs;
(b) The Company has followed all procedures as required under the applicable laws;
(c) The Company is in compliance with the applicable laws;
(d) The Company is consistent with the applicable reporting framework;
(e) The information presented by the company is relevant, reliable, comparable, and understandable;
and
(f) The company has provided adequate disclosures to enable the intended users to understand the
effect of material transactions and events on the information.

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 2. FORMS OF OPINION
Unqualified / Unmodified Opinion
i. The auditor shall report an unqualified opinion if the affairs of the company are found to be
free from material misstatements.
ii. An unqualified opinion contains no reservations concerning the company.
iii. This is also known as a “clean” opinion which means that the affairs of the company are
presented fairly.
iv. The Auditor should express an unmodified opinion when based on Audit Evidence, the Auditor
concludes that:
(a) there is due compliance with the applicable law in terms of timelines and process; and
(b) the records are free from misstatement and maintained in accordance with applicable laws.

“Records” include:
(i) Memorandum and Articles of Association, byelaws or any other constitutional documents;
(ii) Minutes, returns, forms, index and Registers;
(iii) Books and papers include books of accounts, deeds, vouchers;
(iv) Agreements, Memorandum of Understanding;
(v) Other documents maintained by the Auditee either in physical or electronic form; and
(vi) Correspondence.
Generally the Records means the Records for the audit period, however if an opinion forming
warrants the review of prior period Records, the same may also be considered as Records.

(c) the auditor concludes that the information on the affairs of the company in all material
respects, are in accordance with the applicable reporting framework.

Misstatement
“Misstatement” means any information or statement which is false, incorrect, incomplete,
misleading or misrepresents, omits or suppresses a material fact.
Causes of misstatement may include:
(a) an inaccuracy in gathering or processing data or information;
(b) an omission of a disclosure;

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(c) an incorrect or clear misinterpretation of the facts; or
(d) Management’s judgments that the Auditor considers unreasonable.

For Example:
1. XYZ an Auditee company has stated in its Annual Report that company has complied with all
applicable regulations of SEBI during the Financial Years whereas the material non-compliances
were not reported which impacts the Goodwill of the company, which can mislead the investors.
2. Company undertook a material related party transactions but it is not disclosed in the
company’s Annual Report.

In order to form unmodified opinion, Auditor shall conclude as to whether he has obtained
reasonable assurance about whether the documents, books or statements as a whole are free
from material misstatement, whether due to fraud or error.
An unmodified opinion is formed when based on all the Audit Evidences the Auditor states
that there is due compliance of all the applicable laws, or any other law for the time being in
force, or any rule or regulation in terms of timelines and process.

Compliance in terms of timelines: Compliance in terms of timelines implies that when the
adherence of the applicable laws, act, rules or regulations are made within the specified time
limits as provided in the law for the particular task or completing any business procedure etc.
Example:
As per law the due date of filing the Annual Returns, i.e., Form MGT-7 of the company with
Registrar of Companies is given as sixty days from the date of Annual General Meeting of the
company and company has also filed the said return within the prescribed limit of 60 days,
that means company has adhered to the applicable laws properly and within the given timelines

Compliance in terms of process: Compliance in terms of process means that, when the business
activities, say documentation, or any other transaction has been made, complying with the
applicable laws and as per the procedure or process given for performing that activity/procedure
or transaction etc. The process of doing or performing the task as per the given procedure in
the applicable laws is known to be compliances made in “in terms of process”.

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 Example:
If a company is required to shift its registered office from one place to another within same
state and RoC, the a whole set of procedures given in Companies Act, 2013 is required to be
followed e.g. conducting a Board Meeting for approval of shifting of Registered office, intimation
to Registrar of Companies in Form INC-22 along with various documents as attachment within
15 days of passing the Board Resolution.

Modified Opinion
The Auditor should express modified opinion when the Auditor concludes that:
(a) based on the Audit Evidence obtained, there is non-compliance with the applicable laws in
terms of timelines or process; or
(b) based on the Audit Evidence obtained, the records as a whole are not free from misstatement
or are not maintained in accordance with applicable laws or
(c) he is unable to obtain sufficient and appropriate Audit Evidence to conclude that there is due
compliance with the applicable laws in terms of timelines and process; or
(d) he is unable to obtain sufficient and appropriate Audit Evidence to conclude that the records
as a whole are free from misstatement.

Adjudication Order in respect of CHD Developers Ltd. and 3 others in the matter of CHD
Developers Ltd.

1. In this matter SEBI initiated adjudication proceedings against CHD Developers Ltd for violations of
the SEBI LODR Regulations in respect of disclosure of material false information.
2. Based on audit procedures performed and management explanations provided, the Auditors had
submitted a qualified opinion in their Report to the financial statements of the company and did
not receive any explanation or evidence from the Company with respect to progress on the
qualification made.
3. Instead, the report issued on June 29, 2019 had declared that the Auditors had given an unmodified
opinion.
4. It was observed that as the company failed to disclose its audited financial results as well as the
statement of impact of audit qualifications within the stipulated period of 60 days from the end
of the financial year, it has violated the provisions of SEBI LODR Regulations.

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 If the information prepared in accordance with the requirements of a fair presentation
framework is not sufficient and relevant enough so as to allow achieving of a fair presentation,
the auditor should discuss the matter with management and, depending on the requirements
of the applicable reporting framework and how the matter is resolved, should determine whether
it is necessary to modify the opinion in the auditor’s report. In case the auditor expresses a
modified opinion or disclaims an opinion, the text of the opinion shall be either in italics or
bold letters.

The Board of Directors, in their report made in terms of sub-section (3) of section 134, shall
explain in full any qualification or observation or other remarks made by the company secretary
in practice in his report.

CASE STUDY
The provided case study involves a listed company, ABC Ltd., on the BSE India, and its
secretarial audit conducted by M/s YY & Associates for the fiscal year 2021-2022. The
secretarial audit report issued by M/s YY & Associates highlighted certain observations regarding
the company's compliance with various regulations and acts. In response, the directors of ABC
Ltd. furnished explanations to address these observations. Here's a breakdown of the key points:
Observations in the Secretarial Audit Report:
1. Non-Compliance with Composition of Board and Audit Committee:
 The secretarial audit report mentioned that the composition of the board of directors did not
comply with Regulation 17 and 25 of the Listing Regulations and Section 149(3) of the
Companies Act, 2013.
 Additionally, the composition of the Audit Committee was not in compliance with Regulation
18 of the Listing Regulations.
2. Non-Compliance with Composition of Risk Management Committee:
 The audit report observed that the Risk Management Committee of the company had 50% of
its members who were directors of the company, which was not in compliance with Regulation
21 of the Listing Regulations.

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3. Non-Appointment of Chief Financial Officer (CFO):
 The audit report noted non-compliance with Section 203(4) of the Companies Act, 2013,
regarding the non-appointment of a Chief Financial Officer (CFO) by the company.
Directors' Explanations:
1. Board and Audit Committee Composition:
 The directors explained that due to the stressed situation of the company, finding suitable
persons as Independent Directors was challenging.
 With the appointment of new independent directors, including a woman independent director,
the company achieved compliance with the relevant regulations and acts from March 16, 2022.
 The non-compliance with the Audit Committee composition was due to the resignation of two
independent directors who were also Audit Committee members. This non-compliance was
rectified with the reconstitution of the Audit Committee from October 15, 2021.
2. Risk Management Committee Composition:
 The directors clarified that although 50% of the committee members were directors, the
committee composition was rectified to ensure stricter compliance with Regulation 21 of the
Listing Regulations from October 1, 2021.
3. Appointment of Chief Financial Officer (CFO):
 The directors clarified that the company always had a Group Chief Financial Officer in place.
 The appointment of a CFO was made effective from June 1, 2021, thus rectifying the non-
compliance with Section 203(4) of the Companies Act, 2013.

In summary, the case study showcases the interaction between the secretarial audit report's
observations and the directors' explanations to address those observations. The directors provided
justifications for the instances of non-compliance and demonstrated how the company took
corrective actions to rectify these issues in order to achieve compliance with relevant regulations
and acts. This emphasizes the significance of transparency, accountability, and timely corrective
measures to ensure compliance with applicable laws and regulations.

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The modification on Opinion can be in any one of the following three categories depending
upon the nature and severity/ extremity of the matter under consideration:

The Disclaimer of
The Qualified Opinion The Adverse Opinion
Opinion

Qualified Opinion
An Opinion can be considered as a qualified opinion when the auditor specifically provides the
specific instances where the company has failed to do compliance as required under the law,
or provides reasons for the not issuing the unqualified report on the affairs of the company.
Adverse Opinion
An Opinion can be considered as an adverse opinion where the auditor concludes that the
affairs of the company are not in line with its objectives, government rules, and the company
has neglected and grossly misstated its records.
An adverse opinion may be an indicator of fraud, and public entities that receive an adverse
opinion are forced to take corrective measures.

Disclaimer of Opinion
Where the auditor is unable to access the records of the company on any grounds such as
geographical reasons, regulatory, natural calamity or could not complete the audit due to absence
of requisite records or insufficient co-operation from management, the auditor issues a
disclaimer of opinion.
This opinion is formed when auditor is not able to conclude if affairs of the company are
conducted in true and fair manner.

Modified opinion is always in either Italics or Bold.

Emphasis of Matter
Emphasis of matter (EOM) is included in the audit report to make the reader aware about the
specific instances which are not in the general course of business.

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Ideally, such matters should be the part of the Directors Report or the Management Discussion
and Analysis report prepared by the company. If the same is not disclosed by the company in
the Directors report or in Management Discussion and Analysis Report, the auditor may opt to
place the same in the Auditor’s Report.

Major
Catastrop
-he

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The following are examples of the matters which should be considered as emphasis of matter:

an uncertainty relating to the future outcome of exceptional litigation or regulatory action

Legal
Uncertainty

Litigation when there is uncertainty about exceptional future events, pending litigations
certainty

adoption of new technology

New
Technology

Changes in
regulatory recent changes in the regulatory environment

environment

when a major catastrophe has had a major effect on the financial position.

early application (where permitted) of a new accounting standard (for example, a new
Early International Financial Reporting Standard) that has a pervasive effect on the financial
Application statements in advance of its effective date; and
of new AS

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 3. MATERIALITY
i. Materiality is a concept within auditing and accounting relating to the importance/significance
of an amount, transaction, or discrepancy in the records of the company.
ii. The assessment of what is material is a matter of professional judgement.
iii. Materiality is the threshold above which missing or incorrect information is considered to have
an impact on the decision making of the Auditor. Information is considered as material if its
omission or misstatement could influence the opinion of the Auditor.
iv. The auditor has to ensure that material items are properly and distinctly disclosed by the
company. It is very important for the auditor to constantly judge whether a particular item is
material or not.
v. There is an inverse relationship between materiality and the degree of audit risk. The higher
the materiality level, the lower the audit risk and vice versa.
vi. The Auditor shall consider materiality while forming his opinion and adhere to:
a. The principle of completeness that requires the Auditor to consider all relevant Audit Evidence
before issuing a report;
b. The principle of objectivity that requires the Auditor to apply professional judgement and
professional sceptics minor dertoen sure that all reports are factually correct and that findings
or conclusions are presented in a relevant and appropriate manner;
c. The principle of timeliness that implies preparing the report in due time; and
d. The principle of a contradictory process that implies checking the accuracy of facts and
incorporating responses from concerned persons.

vii. The concept of Materiality is applied by the Auditor both in planning and performing the audit,
and forming the opinion. It consists of both quantitative and qualitative factors.
viii. Determining Materiality is a matter of professional judgement and depends on the Auditor’s
interpretation of the user’s needs. What is material for one Auditee may not reach the
Materiality threshold for another.
ix. Materiality is important while conducting the audit process and also while forming the audit
opinion based upon the evaluation of conclusions drawn on the basis of the audit process.

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 4. PROCESS FOR FORMING OF OPINION
Forming of Opinion based on the audit observations is an important part of any audit, as
through this process the outcome of audit are presented in the form of Audit Report to the
intended users.

Principles for Auditors for forming opinion

i. Completeness
ii. Objectiveness
iii. Timelines
iv. Contradictory process

The Auditor shall consider Materiality while forming his opinion and adhere to:
(a) The principle of completeness that requires the Auditor to consider all relevant Audit Evidence
before issuing a report-
 It requires that the Auditor should gather sufficient and appropriate Audit Evidences to provide
the basis for the conclusion or opinion.
 Auditor should not be selective in using the available evidence before forming opinion.
 Auditor should use all the available evidence available to him, and only discard the contradictory
information, if any, after applying principle of contradiction process.

(b) The principle of objectivity that requires the Auditor to apply professional judgement and
skepticism in order to ensure that all reports are factually correct and that findings or
conclusions are presented in a relevant and appropriate manner;
 The Auditor must remain objective throughout the whole process, such that his integrity must
not allow any malpractice in the audit process. Objectivity is essential for any professional
person exercising professional judgement. It basically refers to independence.
 Professional scepticism is considered as corner stone of good auditing. Professional scepticism
requires an Auditor to have an enquiring mind. Whatever documents and information are
produced before the Auditor by Management/ Auditee should not be relied on the face of it.
An Auditor should see to it that documents and information are reasonable, appropriate,

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 inconsonance with attending circumstances and knowledge of the Auditor from other sources
as well.
 Auditor must obtain sufficient evidence from Auditee to support what Auditee says.

Threats to objectivity
i. Auditor should identify the threats and consider them in the light of the environment in which
he is working.
ii. He should also take into account the safeguards which assist them to withstand threats and
risks to their objectivity.
iii. The easiest way of avoiding such threats would be for Auditor to decline to act in any
circumstances where the slightest threat to objectivity might exist.
iv. Threats to objectivity might include the following:
a. Self-interest threat - A threat to the Auditor’s objectivity stemming from a financial or
other self-interest conflict. This could arise, for example, from a direct or indirect interest in
Auditee or from a fear of losing an audit work.
Example: The M/s ABC & Associates engaged its audit team for conducting audit of XYZ Ltd.
However, the audit team has not received its audit fees from XYZ Ltd for its audit. In this
case, the audit team may consider to issue a favorable audit report so that the company is
able to secure a loan to settle the fees outstanding for their audit.

b. Self-review threat - The apparent difficulty of maintaining objectivity and conducting what
is effectively a self-review, if any product or judgement of a previous audit assignment or a
non-audit assignment needs to be challenged or re-evaluated in reaching audit conclusions.
c. Advocacy threat - There is an apparent threat to the Auditor’s objectivity, if he becomes an
advocate for (or against) the Auditee’s position in any adversarial proceedings or situations..
Example: The auditor is assisting in selling XYZ Pvt Ltd and he is also serving as the auditor
for the company. In this scenario, the auditor may issue a favorable report to increase the sale
price of XYZ Pvt Ltd

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d. Familiarity or trust threat - A threat that the Auditor may become over-influenced by the
personality and qualities of the Directors and Management, and consequently too sympathetic
to their interest.
Example: XYZ Pvt Ltd has been audited by M/s ABC & Associates for over 8 years and the
audit partner of the firm regularly plays badminton with the CEO and CFO of XYZ Pvt Ltd.
Then in this case, the audit partner of Ms/ ABC & Associates may have become too familiar
with the client and, thus, lack objectivity in their work

e. Intimidation threat - The possibility that the Auditor may become intimidated by threat, by
dominating personality, or by other pressures, actual or feared, by a director or manager or by
some other party.

Example: XYZ Pvt Ltd is unhappy with the conclusions and qualifications made by M/s ABC
& Associates in the audit report and sensitized to switch auditors next year. XYZ Pvt Ltd is
the biggest client of the M/s ABC & Associates. In this case, the auditor’s independence may
be compromised, as XYZ Pvt Ltd is the biggest client of M/s ABC & Associates and they do
not want to lose such a client. Therefore, the auditor may issue a report that calms XYZ Pvt
Ltd.

Auditors should strive to develop the following characteristics in their audit firms, wherever
possible to provide safeguards against these threats:
 Auditors should behave with integrity in all their professional and business relationships and
to strive for objectivity in all professional and business judgements.
 Within every audit firm there should be strong peer pressure towards integrity. Reliance on one
another’s integrity should be the essential force which permits partners to entrust their public
reputation and personal liability to each other.
 Audit Firms of all sizes should establish strong internal procedures and controls over the work
of individual Auditors, so that difficult and sensitive judgements are reinforced by the collective
views of other Auditors, thereby also reducing the possibility of litigation.

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(c) The principle of timeliness that implies preparing the report in due time. Auditor must adhere
to timeline agreed at the time of engagement for issuing the report and any deviation, from
agreed timeline must be recorded with reason for such deviation.
(d) The principle of a contradictory process that implies checking the accuracy of facts and
incorporating responses from concerned persons.
When two contradictory facts emerge on same subject matter of audit, Auditor must strive to
find additional evidence/material which supports or negates one of the facts. This process of
finding additional evidence/ material must continue till one of the facts is eliminated. In case
Auditor is unable to find further evidence/ material and contradiction continues to persist,
Auditor should bring out that fact clearly in his report and if circumstances warrants, disclaim
opinion on that particular subject matter.

i. The Auditor should evaluate whether the evidence obtained is sufficient and appropriate so as
to reduce audit risk to an acceptably low level.
ii. After evaluating the sufficiency and appropriateness of evidence to determine the assurance
level of the audit, the Auditor should consider which conclusion is appropriate in light of the
evidence obtained.
iii. After evaluation, Auditors need to weigh the extent and credibility of conflicting evidence in
order to reach a conclusion or collect more evidence to resolve the conflict in such situations,
iv. Audit conclusion should clearly bring out the nature and extent of non-compliance, cause of
such non-compliance, its Materiality and also the effect of non-compliance, if possible.
v. The audit conclusions in case of regularity issues should also indicate whether non-compliance
is a solitary one-off case, or wide spread systemic issue in the Auditee.

1. Judgement, Clarification and Conflicting Interpretation (Not Important for Exam)

While forming an Audit opinion the Auditor may consider or refer the decided case laws or
judgements, clarifications issued, opinions formed in similar type of audits while framing the
final audit opinion.

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 Judgements
For example, while interpreting the issue of loans given by the Auditee company in terms of
Section 185, the Auditor may refer to the decided case laws in this respect, e.g in Dr. Fredie
Ardeshir Mehta v. Union of India, the terms “indirectly” and “loans”, has been explained as
below:
– The word “indirectly” means providing loan through agencies or any other medium but does
not include converting anything which does not qualify to be loan or loan represented by book
debt or security or guarantee into loan, any loan represented by book debt or guarantee or
security.
– The word “Loan” was defined by the court as a thing lent; something the use of which is
allowed for a time, on the understanding that it shall be returned or an equivalent given; esp.,
a sum of money lent on these conditions and usually with interest. The essential requirement
of a loan is the advance of money (or of some article) upon the understanding that it shall
be returned, and it may or may not carry interest.
– The phrase “any loan represented by book debt” is inserted in order to plug the loophole used
in the case of “Dr. Fredie Ardeshir Mehta v. Union of India” where court took the view that
book debt can’t be treated as loan and since the earlier Section 295 of Companies Act, 1956
does not explicitly include the phrase “any loan represented by book debt” hence any kind of
credit facility extended by company to directors will not cover under the “Loan to director”.

Therefore, while auditing, the Auditor may refer to the interpreted words given in court
judgements so as to interpret the meaning of the legal terms correctly and in their true sense
and can frame the opinion accordingly and accurately.

Clarifications in respect of forming the audit opinion implies that in case the true or clear
sense of law cannot be interpreted by the Auditor or if it was so interpreted, then contradictory
interpretations amongst various Auditors or professionals seem to exist; in such a case Auditor
may refer to the clarifications issued by various authorities e.g. Ministry of Corporate Affairs,
Institute of Company Secretaries of India, CBDT, or any other Govt. body etc., to frame a
reliable and accurate opinion.

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 Opinions formed by other Auditors,in similar types of Audits may also be referred by the
Auditor to form a judgement and frame its opinion. Similar type of Audit may also depend on
nature of business, transactions occurred and operation of scale of Auditee, etc.

Conflicting Interpretations may be sorted out by again referring to the decided judgements,
clarifications issued by the Govt. Authorities, Regulators, etc.

2. Role of Precedence and Practices

i. Auditor shall evaluate on the basis of general or ongoing practices or procedures that whether
the Records maintained, statements prepared in all material respects, in accordance with the
requirements of the applicable laws, rules and regulations.
ii. The Practices and precedence used by Auditor for forming the Audit opinion may be as per the
historical perspective i.e., methods used hitherto or generally used methods or practices or
procedures be implemented for framing the opinion.
iii. For Example: one of the method involves selecting a sample size of total work and activities
of a firm for conducting the audit process, which simultaneously depends upon the firm’s size,
operation of work and no. of branches, etc., or another practice includes having an unbiased
approach while conducting the audit process in order to frame the honest and unbiased opinion.

5. LIMITATION
i. Limitation on the scope of audit means when the Auditor appointed for performing the Audit
will not be able to obtain appropriate or complete Audit Evidences due to the restrictions or
limitations imposed on the process of Audit which ultimately affects the Auditor’s opinion. The
Auditor’s inability to obtain sufficient and appropriate Audit Evidence may arise from:
a. Circumstances beyond the control of the Auditee;
b. Circumstances relating to the nature or timing of the Auditor’s work;
c. Limitations imposed by Management.
ii. If, after accepting the Audit Engagement, the Appointing Authority imposes a limitation on
the scope of the Audit which, in the opinion of the Auditor, is likely to result in the need to
express a modified opinion or to disclaim an opinion, the Auditor shall request the Appointing
Authority to remove the limitation.

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iii. If the Appointing Authority refuses or fails to remove the limitation, the Auditor shall
communicate the matter to the Management and determine whether it is possible to perform
alternative procedure to obtain sufficient and appropriate Audit Evidence.
iv. If the Auditor is unable to obtain sufficient and appropriate Audit Evidence, the Auditor shall
determine the implications as follows:
(a) If the Auditor concludes that the possible effects of unavailable Audit Evidence could be non-
material, the Auditor shall modify the opinion; or
(b) If the Auditor concludes that the possible effects of unavailable Audit Evidence could be
material, the Auditor shall express disclaimer of opinion.

i. If after obtaining the Audit engagement, the Appointing Authority imposes a limitation on the
scope of Audit, which is likely to affect the Auditor’s opinion, the Auditor shall request the
Authority to remove the limitation.
ii. If Management refuses the Auditor’s request to remove a limitation that Management has
imposed on the scope of the audit, the Auditor should communicate the matter with those
charged with governance.
iii. When a limitation on the scope of the audit imposed by Management is not removed, the
Auditor should determine whether it is possible to perform alternative procedures to obtain
sufficient appropriate Audit Evidence on which to base an unmodified opinion.
iv. If the Auditor is unable to obtain sufficient appropriate Audit Evidence, the Auditor should
determine the implications as follows:
 if the possible effects of the scope limitation are material but not pervasive to the business
procedures, documents, or underlying transactions, the Auditor should modify the opinion;
 if the possible effects of the scope limitation are both material and pervasive to the compliance
of laws, rules and regulations or underlying transactions or other business procedures/activities
so that a qualification of the opinion would be inadequate to communicate the gravity of the
situation, the Auditor should disclaim an opinion.

6. THIRD PARTY REPORT OR OPINION

i. “Third Party” means any person who does not have a direct connection with the audit but
whose inputs or opinion might influence the audit conclusion and includes an expert

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 ii. Sometimes due to circumstances like geographical constraints or want of expertise on any
specific subject matter an Auditor may be required to rely on the Third-Party reports.
iii. The Third-Party reports may be arranged by the Auditee or Auditor directly.
iv. Third Party Report or Opinion is used as one of the external sources of obtaining the Audit
Evidences that would help in building the strong and quality Audit Opinion.

The Auditor shall adhere to the following while forming an opinion based on Third party reports
or opinions:
(a) The Auditor shall indicate the fact of use of Third party report or opinion and shall also record
the circumstances necessitating the use of Third party report or opinion;
(b) The Auditor shall indicate the fact if Third party report or opinion is provided by the Auditee;
(c) The Auditor shall consider the important findings/observation of Third party;
(d) The Auditor shall, if necessary and feasible, carry out a supplemental test to check veracity of
the Third party report or opinion.

While using the work of Third Party, the Auditor should:

(a) Consider the independence and objectivity of the Third Party;
(b) Take account of the Third Party’s professional competence for the specific audit;
(c) Consider the scope of the Third Party’s work;
(d) Determine the cost-effectiveness of using such work;
(e) Perform procedures too btain sufficient appropriate Audit Evidence that the work of the Third
Party is adequate in the context of the specific audit (which may require access to the Third
Party’s working papers); and
(f) Consider the significant findings of the other Auditor when analysing and interpreting the
results of that work. Where these findings are significant to the opinion, Auditor should discuss
these findings with the Third Party and consider whether it is necessary to carry out additional
audit testing him.
(g) When using the work of Third Party, Auditor should carefully consider that, the Third Party
may only recognise a duty of care to the addressee of the audit report.

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 7. MANAGEMENT REPRESENTATION LETTER
i. The auditor may obtain a management representation letter from the auditee company on
matters which are not capable of direct verification by the Auditor.
ii. The letter may be signed by Managing Director/Company Secretary/Senior Management who
would normally have authority to issue the same. The Auditor can use this letter of
representation as part of his audit evidence.
iii. Mere getting certification or written representation from management may defeat the purpose
of the audit, hence, it is advised to exercise all possible care, reasonable skill & due diligence

Specimen Management Representation Letter for Secretarial Audit

M/s ABC & CO, Date:

Company Secretaries,
ZYZ Road, India
---------------

Dear Sir,
This representation letter is provided in connection with your audit of the Secretarial Records
maintained under The Companies Act, 2013 (the Act) and the rules made thereunder; (ii) The
Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder; (iii) The
Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder; (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;
The Regulations and Guidelines prescribed under the Securities and Exchange Board of India
Act, 1992 (‘SEBI Act’) and other applicable laws including labour laws like Factories Act,
Payment of Gratuity Act etc for the year ended on 31st March, 20 ............... Environmental
Laws and Competition Laws for the purpose required in it. We the undersigned acknowledge
our responsibility for maintaining the Secretarial records referred above and confirm, to the
best of our knowledge and belief, the following representations:

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 Company Law
1. The Company has maintained books of accounts as required under Section 128 of the companies
Act, 2013.
2. The Company has complied with all the provisions of the Secretarial Standards.
3. The Company has complied with all the provisions of Companies Act, 2013 relating to Statutory
Audit/ Cost Audit/Internal Audit.
4. No request for transfer or transmission of shares have been received by the company during
the year other than as recorded.
5. Statutory Registers were kept open for public inspection during working hours on all working
days.
6. Notice of Board meetings were duly sent to all the Directors.
7. Notes and notes to agenda were duly sent to all the Directors.
8. No resolutions were passed by way of circulation during the year under review other than those
recorded in the minutes.
9. The views of all the dissenting Directors (if any) on important matters have been captured
and recorded in the minute.
10. The venue and time of Board meeting was finalized with the consultation of all board members.
11. Draft minutes and final minutes were properly sent to all the Directors.
12. Company has not obtained any secured loan from any financial institution/banks other than
those mentioned in the register of charges.
13. Notice of annual general meeting has been duly sent to all the members, Directors, Statutory
Auditor and Secretarial Auditors.
14. No show cause notice has been received by the company under the Acts referred above or any
other laws applicable on the company.
15. There are no pending litigation and claims other than those reported in the Financial Statements
- balance sheet by way of contingent liability.
16. No event other than reported to you specifically has occurred during the year which has a
major bearing on the company’s affairs in pursuance of the laws, rules, regulations, guidelines,
standards, etc. referred to above. We have provided to you all relevant information and have
given access to all data and records.

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17. The company has altered the memorandum/articles of Association and have recorded the
alterations in all copies of the Memorandum/Articles of Association.
18. Wherever the Share Certificates were issued in the physical form, they were issued in accordance
with the provisions of the Companies Act, 2013 and the rules thereunder.
19. .........................

Securities Laws
1. All price sensitive Information was furnished to the stock exchanges from time to time.
2. All investors complains directly received by the company are recorded on the same date of
receipt.
3. The Company has complied with provision of SEBI (LODR) Regulations, 2015.
4. .........................
Specific Applicable Laws

Labour Laws
1. All the premises and establishments have been registered with the appropriate authorities.
2. The Company has not employed any child labour/bonded labour in any of its establishments.
3. The company is ensuring the compliance of PF/ESI and other social security measures with
respect to the contract employees. One of the responsible officers of the company carries out
the survey regarding the compliance of this.
4. The company has held its internal complaints committee meeting regularly under POSH.
5. .........................

Environmental Laws
1. The Company is not discharging the contaminated water at the public drains/rivers. The
company has efficient water treatment plants at its factory premises (if applicable).
2. The company has been disposing the hazardous waste as per applicable rules. Competition Law.

Competition Law
List of other laws generally applicable to the company. We are attaching herewith the list of
laws:

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 1. Applicable specifically to the Company.
2. Other Laws applicable to the Company

Date: [For XYZ Limited]

Place: Director

Opinion obtained by Management

In the certain situations, upon the qualifying remarks of the auditors, the management of the
company may submit its replies which may be supported by the opinion provided by the third
party. In such cases the reliance on such opinion should be made by the auditor based on his
professional judgement and the company may provide the explanation on such qualifications in
the Directors report. Upon consideration of the information produced by the company as audit
evidence, the auditor should evaluate whether the information is sufficient and appropriate for
purposes of the audit by performing procedures to:
(a) Test the accuracy and completeness of the information, or test the controls over the accuracy
and completeness of that information; and
(b) Evaluate whether the information is sufficiently precise and detailed for the purposes of the
audit.

Exit Conference
While concluding the audit, the auditor should conduct a meeting with the management of the
company or with the group supervisory officers. Audit observations are ideally shared with
officials in advance, allowing them an opportunity to discuss findings and address any concerns
related to the audit observations.

8. EVALUATION OF AUDIT EVIDENCE AND FORMING OPINION

i. The Audit evidence plays a significant role in forming of Opinion. Based on such evidence the
auditors form their opinion in the report, accordingly the auditor should obtain competent,
relevant and reasonable evidence to support his judgement and conclusions.
ii. The competent evidence is information which is quantitatively sufficient and appropriate to
achieve the auditing results and is qualitatively impartial to inspire confidence and reliability.

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iii. The Reliable audit evidence is evidence that is impartial. The reliability of audit evidence is
dependent upon its nature, its source and the method used to obtain it.
iv. While collecting the audit evidence the auditor should consider the below:

Reliability of Documentary Documentary evidence is more reliable than oral

Evidence evidence.

Evidence on Direct Personal Evidence of which the auditor has direct personal knowledge
Knowledge is the most reliable evidence.
.
Independent evidence obtained from external sources is more
Evidence from External Source reliable than internal evidence, if that evidence is truly Independent
and complete.

Reliability of Visual Evidence Visual evidence is highly reliable for conforming the
existence of assets, but not their ownership value.

Drawing conclusions solely through examining relationship

Examining figures less reliable
between figures in the account (analytic Review) is less reliable
evidence.

Oral evidence must be considered as the least reliable, whenever

Oral Evidence Least reliable feasible, auditor should attempt to obtain documentary
confirmation of oral evidence.

The reliability of information generated within the auditee entity

Reliability of information
is a function of the reliability of internal control systems within
generated within entity
the entity.

Photocopies are less reliable than the originals, the source of

Photocopies less reliable photocopies should be identified by noting the source and as far
as possible the photocopies should be certified.

Accepted Evidences Evidence, which is accepted by the auditee entity, is always

reliable.

The auditor may gain increased assurance when audit evidence

Gain increased assurance
obtained from different source is consistent.

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  Sharing draft report with management with category of risk involved with each remark
and qualification
After the exit meeting and the completion of the audit procedures, the auditor should prepare
an executive summary of audit findings, which explains the key audit issues, the category of
risk, their resolution, agreed adjustments.
After discussing the executive summary the audit certificate should be signed by the auditor
and by the management or person authorized by the management of the company.
The executive summary should include:
(i) a summary of the auditee’s operations and purpose;
(ii) a summary of the regularly framework within which the auditee operates;
(iii) an explanation of the audit approach and the balance between test of controls and substantive
procedures;
(iv) a summary of the key risk identified;
(v) a commentary on key balances;
(vi) a commentary on the accounting policies and significant account areas;
(vii) a summary of the result of audit procedures;
(viii) details of areas where difficult questions of principle or judgement were involved;
(ix) matters brought forward from previous year audit;
(x) a summary of other important matters for attention;
(xi) outstanding matters, for example, outstanding reappointment orders or letter authorizing agreed
amendments to the financial statement;
(xii) a summary of matters carried forward to the next years audit; and
(xiii) a conclusion on the appropriate form of audit certificate.

Different stages of communication and discussion should be as under:

1. Preliminary Draft: At the conclusion of fieldwork, the auditor should draft the report and
present it to the entity’s management for auditee’s comments.
2. Exit Meeting: The auditor should discuss with the management the findings, observations,
recommendations and text of draft and obtain their comment on the draft, achieve consensus
and reach an agreement on the audit findings.

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 3. Formal Draft: The auditor should prepare a formal draft, in view of the outcome of the exit
meeting and other discussions. Upon review of such changes by the auditor and the
management, the final report should be issued.
4. Final Report: The report should be submitted to the appointing authority or such members of
management, as directed.
9. AUDITOR’S RESPONSIBILITY
i. The Auditor’s Report shall include a section with the heading “Auditor’s Responsibility”.
Auditor’s Report shall state that the responsibility of the Auditor is to express the opinion on
the compliance with the applicable laws and maintenance of Records based on audit and that
the audit was conducted in accordance with applicable Standard.
ii. Auditor’s Report shall state that due to the inherent limitations of an audit including internal,
financial and operating controls, there is an unavoidable risk that some misstatements or
material non-compliances may not be detected, even though the audit is properly planned and
performed in accordance with the standards.
iii. The Auditor has a responsibility to perform procedures to identify, assess and respond to the
risks of material misstatement or non-compliance arising from the Auditee’s failure
appropriately to account for or disclose an event or transaction.
iv. Auditor’s Report includes a separate section with heading “Auditor’s Responsibility” that will
state or express the opinion of the Auditor about the following:
a. Whether the audit has been conducted as per the applicable Auditing Standards.
b. Whether the Auditor has obtained reasonable assurance about whether the statements prepared,
documents or records maintained by the Auditee are free from misstatement.
c. That Auditor has the responsibility to only express his opinion on the evidences collected,
information received and records maintained by the Auditee or given by the Management.
d. Whether the Auditee has followed applicable laws, act, rules or regulations in maintaining their
records, documents, statements, or have complied with applicable laws or rules while performing
any corporate action

10. FORMAT OF REPORT

i. The report shall be addressed to the Appointing Authority unless otherwise specified in Audit
Engagement Letter or provided in the applicable law.

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 ii. Where specific formats (like MR-3 for Secretarial Audit Report) are prescribed, those formats
shall be followed for reporting.
iii. If any information cannot be conveniently captured within the paragraphs of the report, it shall
be given in the form of annexure(s).

iv. Signature block shall mention the name of the Audit Firm, the name of the Auditor, along
with certificate of practice number, the membership number of the Auditor specifying whether
associate or fellow member. The auditor shall clearly mention date and place of signing the
report. In case report is signed by two different persons on different dates or different places;
same shall be mentioned in the report.
v. The report is addressed to the Appointing Authority or otherwise, as may be prescribed in
applicable law, acts rules or regulations. The Appointing Authority would be the Board of
Company, in case Auditee is a Company and in other cases, it would be the persons who have
been entrusted with the responsibility of governance and compliances of the Auditee. Further,
the Appointing Authority may also include Court, Tribunal or Regulators or any officer thereof,
depending upon the type of Auditee’s entity as explained in the Guidance Note on CSAS-1.
vi. The Audit Report must be prepared in detail to showcase the true and fair view of the affairs
of the company, however, it should be precise, accurate, clear and should be unbiased with
suggestions and opinions.
vii. The detailed Audit Report means that Auditor must try to explain and point out each and every
minute compliance, non-compliance or any improvement in the business procedures, documents,
statements or any transactions or any other area that has been audited so as to form an
accurate Audit opinion and in case the provided format of Audit Report as per the laws, rules
or regulations is not enough to provide detailed statement, the Auditor shall attach additional
annexures or pages to give full disclosures and opinions thereon.
viii. The Audit Report must be signed by one or more Auditors as the case may be at the end of
the Audit Report along with the name of their Firm, Firm’s Registration No., Designation of
the Auditor in the Firm (like partner, proprietor etc.), Certificate of Practice No. and
Membership No. of the Auditor, whether the Auditor is a Fellow or Associate member of the
Institute. The report must mention the correct date and place of signing and if two Auditors
are signing the same report at different date and place then, the same shall be mentioned.

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ix. Further, as per Peer Review Guidelines of the ICSI, it is mandatory to mention the Peer Review
Certificate Number in Secretarial Audit Report/Annual Secretarial Compliance Report and the
signature of the PCS should be in following format:

Pre requisite for the Reporting:

An Audit report should be:
 Accurate - Free from errors and distortions and faithful to the underlying facts.
 Objective - Fair, impartial, and unbiased and is a result of a fair minded and balanced
assessment of all significant and relevant information.
 Clear- Easily understandable and logical, avoiding unnecessary technical language and providing
all significant and relevant information.
 Concise - To the point, avoid unnecessary elaboration, superfluous detail, redundancy,
repetitiveness and wordiness.
 Constructive - Helpful to the engagement client and the organization and leads to
improvements where needed.
 Complete - Lacking nothing that is essential to the target audience and includes all significant
and relevant information and observations to support recommendations and conclusions.
 Timely - Opportune and expedient, depending on the significance of the issue, allowing
management to take appropriate corrective action.

Submission of Audit Report

i. After considering the clarifications/replies of the management, the auditor should prepare the
audit report in prescribed format.
ii. Sometimes the report is addressed to the members but is to be submitted to the Board.
iii. The report shall contain the opinion on the statutory compliances examined by the Auditor and
shall state whether in his opinion the company is carrying out/not carrying out due compliances
of the applicable provisions of the various laws.
iv. The report shall be provided with or without qualifications.

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 Signing of Audit Report
i. The auditor’s signature is either in the name of the audit firm, the personal name of the
auditor or both.
ii. In addition to the auditor’s signature, in certain jurisdictions, the auditor may be required to
declare in the auditor’s report the auditor’s professional accountancy designation or the fact
that the auditor or firm, as appropriate, has been recognized by the appropriate licensing
authority in that jurisdiction.
iii. However, in case of secretarial audit report the report should be signed by the secretarial
auditor who conducted or under whose supervision the secretarial audit was conducted indicating
his FCS/ACS number along with certificate of practice number issued by the Institute of
Company Secretaries of India.
iv. In case of PCS firm, the secretarial audit report may be signed by the partner who conducted
or under whose supervision the secretarial audit was conducted indicating his FCS/ACS number
along with his certificate of practice number. The secretarial audit report cannot be signed by
an employee of the PCS firm even if he/she may be a member of the ICSI holding certificate
of practice number.

Reporting with Qualification

1. A qualification, reservation or adverse remarks, if any, should be stated by the auditor at the
relevant places in his report in bold type or in italics.
2. If the auditor is unable to express an opinion on any matter, he should mention that he is
unable to express an opinion on that matter and the reasons therefor.
3. If the scope of work required to be performed is restricted on account of restrictions imposed
by the company or on account of circumstantial limitations (like certain books or papers being
in the custody of another person who is not available or a government authority), the report
should indicate such limitations.
4. If such limitations are so material that the Auditor is unable to express any opinion, the Auditor
should state that in the absence of necessary information and records, he is unable to report
on compliance(s).

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5. The Board of directors, in its report prepared under section 134(3) of the Companies Act, 2013,
shall provide an explanation in full on any qualification or observation or other remarks made
by the Company Secretary in practice in the secretarial audit report.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 13 – SECRETARIAL AUDIT

1. INTRODUCTION
i. The term “Secretarial Audit” refers to the mechanism which is connected with the audit of
the non-financial aspects of the company.
ii. Secretarial Audit is not just an audit of the diligent compliance or that of the adherence to
the law in true letter and spirit but has proved to be a strong founding pillar of the governance
framework of the Indian.
iii. The Secretarial Audit is an independent verification of the records, books, papers and documents
by a Company Secretary to check the compliance status of the company according to the
provisions of various statutes, laws and rules & regulations and also to ensure the compliance
of legal and procedural requirements and processes followed by the company.
iv. The implementation of Secretarial Audit and the Annual Secretarial Compliance Report was an
important milestone for the Profession of Company Secretaries. It opened up new vistas for
Practising Company Secretaries.

2. SECRETARIAL AUDIT & COMPANY SECRETARY IN PRACTICE (PCS)

i. A Company Secretary in practice is a professional who is well-versed in matters of statutory,
procedural and practical aspects of laws applicable to companies, both listed and unlisted public
and private companies.
ii. As per section 204 of Companies Act, 2013, only a member of the Institute of Company
Secretaries of India holding certificate of practice (Company Secretary in Practice) can conduct
Secretarial Audit and issue the Secretarial Audit Report to the company.

3. SECRETARIAL AUDIT-LEGAL PROVISIONS

i. The emergence of secretarial audit can be tracked under the Companies (Amendment) Act, 1988
which amended Section 161 of the Companies Act, 1956. This amendment introduced the
requirement of certification of annual return of listed Companies by a Practising Company
Secretaries.
ii. Thereafter, Companies (Amendment) Act, 2000 amended Section 383A of the Companies Act,
1956. By this amendment, it was mandated that companies which had a paid-up share capital
of Rs.10 lakh or more and which did not require to employ a Whole-time Company Secretary had
to obtain a Certificate from a Practising Company Secretaries on an annual basis regarding the

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 compliance of the various provisions of the Act. This certificate was to be attached with the
Board’s Report.
iii. In 2002, Naresh Chandra Committee Report on Corporate Audit and Governance recommended
introduction of Compliance Audit.
iv. In the year 2003, the Ministry of Corporate Affairs (MCA) introduced the Companies
(Amendment) Bill, 2003, which introduced the concept of Secretarial Audit by giving powers to
Central Government to order, at any time, the secretarial compliance audit of the company for
any period.
v. Similarly, the Concept Paper published by MCA in 2004, contemplated to enact a new Company
Law in which the concept of the Secretarial Compliance Audit was included. Later on, Corporate
Governance Voluntary Guidelines, 2009 was released in December 21, 2009, which insisted on
adoption of Secretarial Audit for public companies and private companies, particularly the bigger
ones.
vi. The 21st report of the Parliamentary Standing Committee on Finance on the Companies Bill,
2009 also specified about Secretarial Audit.
vii. At last, Secretarial Audit for bigger Companies has been notified from 1st April 2014 under the
Companies Act, 2013 (the Act). As the Public shareholders subscribe to the shares of listed
entities and public companies, it is necessary that the interest of the public is protected from
the impact of non-compliances of the various provisions of the Act and other Corporate Laws.

4. THE COMPANIES ACT, 2013

i. Section 204(1) of the Companies Act, 2013 read with rule 9 of the Companies (Appointment
and Remuneration of Managerial Personnel) Rules, 2014 provides that:
i. Every Listed Company;
ii. Every public company having a paid-up share capital of Rs. Fifty crore rupees or more; or
iii. Every public company having a turnover of two hundred fifty crore rupees or more
iv. Every company having outstanding loans or borrowings from banks or public financial
institutions of one hundred Crore Rupees or more.

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 Secretarial Audit Report will be attached to the Board’s Report in form MR-1

ii. Section 204 (2) - It shall be the duty of the company to give all assistance and facilities to
the company secretary in practice, for auditing the secretarial and related records of the
company.
iii. Section 204 (3) - The Board of Directors, in their report made u/s 134, shall explain in full
any qualification or observation or other remarks made by the company secretary in practice
in his report under sub-section (1).
iv. Section 204 (4) - If a company or any officer of the company or the company secretary in
practice, contravenes the provisions of this section, the company, every officer of the company
or the company secretary in practice, who is in default, shall be liable to a penalty of 2,00,000
rupees.

Applicability of Section 204 to a Company which is a subsidiary of a Public Company:

Section 2(71) of the Companies Act, 2013 defines a “Public Company” as a company which –
(a) is not a private company; and
(b) has a minimum paid-up share capital as may be prescribed.

A company which is a subsidiary of a company, not being a private company, shall be deemed
to be public company for the purposes of this Act even where such subsidiary company
continues to be a private company in its articles.

Example:
PPP Pvt Ltd. was incorporated in the year 2010 as Private Company. Its paid up capital is Rs
35 crore, but the annual turnover for the financial year ended on 31st March, 2023, first time
crossed from Rs 240 crores to Rs 300 crores. SSS Ltd, a public company, controls the
composition of the Board of Directors of PPP Pvt Ltd, hence in terms of Section 2(87) of
Companies Act, 2013, PPP Pvt Ltd is treated as subsidiary company of SSS Ltd. A newly
appointed Company Secretary of PPP Pvt Ltd suggested the Board of Directors to get the

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 Secretarial Audit of this company. Whether the Secretarial Audit of a Private Limited Company
is mandatory as per the provisions of the Companies Act, 2013.

In view of this, it is clear that Section 204 is applicable to a private company which is a
subsidiary of a public company, and which falls under the prescribed class of companies.
Although, the companies which are not covered under section 204 may opt for conducting
Secretarial Audit voluntarily as it provides an independent assurance of the compliances of
applicable laws by the company.

5. SECRETARIAL AUDIT AND SECRETARIAL COMPLIANCE REPORT UNDER THE SEBI (LISTING
OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015
Uday Kotak Committee on Corporate Governance, in its report dated October 05, 2017,
recommended that-
(a) Secretarial Audit to be made compulsory for all listed entities under the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, in line with the provisions of the
Companies Act, 2013.
(b) Secretarial Audit to be extended to all material unlisted Indian subsidiaries in line with the
recommendations of the Committee on strengthening group oversight and improving compliance
at a group level for listed entities.
Accordingly, SEBI in 2019 notified the following provisions to be included in the SEBI (LODR)
Regulations, 2015:
 Regulation 24A: Secretarial Audit: Every listed entity and its material unlisted subsidiaries
incorporated in India shall undertake secretarial audit and shall annex with its annual report, a
secretarial audit report, given by a company secretary in practice.

The term ‘Material Subsidiary’ means a subsidiary, whose income or net worth exceeds ten per
cent (10%) of the consolidated income or net worth, respectively, of the listed entity and its
subsidiaries in the immediately preceding accounting year.

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 Amendment to the provision in 2021:
i. Regulation 24A: Every listed entity and its material unlisted subsidiaries incorporated in India
shall undertake secretarial audit and shall annex a secretarial audit report given by a company
secretary in practice, in such form as specified, with the annual report of the listed entity.
ii. Every listed entity shall submit a secretarial compliance report in such form as specified, to
stock exchanges, within 60 days from end of each financial year.
iii. The listed entities and their material subsidiaries shall provide all such documents/information
as may be sought by the PCS for the purpose of providing a certification under the Regulations
and this circular.
iv. SEBI has mandated the issuance of Annual Secretarial Compliance Report by a Company
Secretary in Practice to the listed entities to enable them to undertake certifications in
accordance with the Regulations and this circular in letter and in spirit.
v. Annual Secretarial Audit shall cover a broad check on compliance with all laws applicable to
the entity, listed entities shall additionally, on an annual basis, require a check by the Company
Secretary in Practice on compliance of all applicable SEBI Regulations and circulars / guidelines,
consequent to which, the Company Secretary in Practice shall submit a report to the listed
entity in the manner specified in this circular.
vi. The Annual Secretarial Compliance Report is applicable to all Listed Entities.
vii. The Annual Secretarial Compliance Report postulates for an independent verification of the
records, books, papers and documents by a Company Secretary in Practice to check the
compliance status of the company with the provisions of all applicable SEBI laws, Regulations
and circulars/ guidelines issued thereunder.

Exemptions:
As per regulation 15 of the SEBI (LODR) Regulations, 2015 the compliance specified in
regulations 24A, shall not apply, in respect of –
a. Listed entity having paid up equity share capital not exceeding rupees ten crore and net worth
not exceeding rupees twenty five crore, as on the last day of the previous financial year:
b. Once the above regulations become applicable to a listed entity, they shall continue to remain
applicable till such time the equity share capital or the net-worth of such entity reduces and
remains below the specified threshold for a period of three consecutive financial years.

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 c. Listed entity which has listed its specified securities on the SME Exchange.

6. AUDITING STANDARD ON SECRETARIAL AUDIT (CSAS-4)

i. The Auditing Standard on Secretarial Audit (CSAS-4) formulated by Auditing Standards Board
(ASB) of the Institute of Company Secretaries of India (ICSI) and issued by the Council of
ICSI, is effective from 1st July, 2019 on recommendatory basis and mandatory with effect from
1st April, 2021.
ii. The Standard shall apply to Secretarial Audit undertaken under Section 204 of the Companies
Act, 2013 and Regulation 24A of the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015.
iii. The Standard deals with basis and manner for carrying out the Secretarial Audit.
iv. The objective of the Standard is to lay down the principles for evaluation of statutory
compliances and corporate conduct in relation thereto.
v. It is not mandatory to apply the standard in following cases:
a. Annual Secretarial Compliance Report issued in terms of SEBI
b. Secretarial Audit entrusted on a voluntary basis by an Auditee to an Auditor

An Auditor while accepting Secretarial Audit, shall also comply with the principles laid down in
CSAS-1 to CSAS 3. For example, M/s. ABC & Associates, a practicing company secretaries firm,
accepts an audit assignment on 20th April, 2021 for the FY 2021-2022. The firm should adhere
to the principles laid down in the CSAS-1 (Audit Engagement) while accepting the audit
assignment, the Auditor should plan, proceed and perform the audit assignment as per the
CSAS-2 (Audit Process and Documentation) and give his opinion based on the Audit Process
performed by him in line with the principles given in CSAS-3 (Forming of Opinion).

7. CONCEPT & ADVANTAGES

CONCEPT
i. Secretarial audit gives assurance to the regulators, generate confidence amongst the
shareholders, the creditors and other stakeholders in companies.
ii. It is a tool of risk mitigation and will allow companies to effectively address compliance risk
issues.

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 BOX PAGE 457

iii. Once the Secretarial Audit Report is submitted by the secretarial auditor, the Government as
well as other stakeholders can gauge in first instance the level of compliances or non-
compliances by the company concerned.
iv. Corrective actions will be taken to keep a check on the fraud as well as reduce the number of
prosecutions by the Government and consequent litigation on account of non-compliance with
the provisions of corporate and securities laws, thereby resulting in healthy and orderly
development of the corporate sector. This will lead to reduction of investor grievances and
enhance various stakeholders’ confidence.
v. In addition to the Government and shareholders, introduction of secretarial audit would be in
the interest of companies themselves. Secretarial audit besides ensuring compliance with laws
act as an aid to the management by proving to be a strong internal control device. It can
relieve the company and their directors from consequences of unintended non-compliance of
law.
vi. Proactive Secretarial Audit on a continuous basis would help the company in initiating corrective
measures and strengthening its compliance mechanism and processes. It is advisable that the
Secretarial Audit is carried out periodically (quarterly / half year / annually)

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Few risks of non-compliance with laws and regulations: Failure to obtain proper
approvals/permissions/ Licenses

Failure of legal compliance Failure to keep proper books and records or non-compliance with the
provisions of corporate laws and securities laws, executing certain unviable
or undesirable corporate actions or transactions with related parties or
loan to directors, issue, allotment and transfer of security or otherwise,
without proper authority of the board of directors or the general meeting
or the memorandum of association, etc., could lead to the ability by third
parties to play with the stakeholder’s limited liability protection.
Failure to obtain proper Failure to obtain proper approvals/permissions/licenses could lead to fines,
approvals/permissions/ penalties or/and imprisonment in some cases, even closure of the business
Licenses by government or governmental agencies.
Regulatory actions Failure to comply with certain laws and regulations may lead to initiation
of action by the regulators like MCA, SEBI, RBI or others authorities, which
may jeopardize the very stability of the financial and manufacturing
operations.
Non-compliances of Failure to adopt proper environment law compliance and policies which
Environment Laws are reviewed periodically could give rise to governmental and civil liability,
besides causing risk to the environmental sustainability.
Failure to keep accurate Failure to keep accurate records and minutes of its decision-making
records procedures, proves that directors are not exercising informed judgment, and
may subject the company and its board to liability to its shareholders and
investors.
Failure to monitor the Failure to monitor the company’s reporting requirements may put the
company’s reporting company into a position of default with lenders or investors.
requirements
PCS as extended Arm Company secretary in practice acts as an extended arm of the regulators
in ensuring the compliances. Detecting and reporting any non-compliance
before it takes seriously alarming shape.

The inclusion of Secretarial Audit Report in the Directors’ Report would go a long way in
reassuring public, financial institutions and all others dealing with the company about the
quality of corporate governance in the corporate entity concerned. Companies entering into joint
ventures and foreign collaborations will need such an audit to assure foreign partners that the
laws of the land are duly complied with. A secretarial audit will serve as a first line due

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 diligence. The secretarial audit will provide an in-built mechanism for enhancing corporate
compliances generally and help restore the confidence of investors in the capital market through
greater transparency in the corporate functioning.

8. ADVANTAGES
Secretarial Audit facilitates monitoring compliances with the requirements of law through a
formal compliance management programme which can produce following positive results to the
stakeholders of a company:
i. Better compliance of laws leading to reduction in number of frauds and consequent prosecutions.
Protecting the interest of stakeholders and strengthening their faith in the corporates.
ii. Protecting the company/directors from the consequences of unintended non-compliance of laws.
iii. Independent assurance and comfort to independent/non-executive/nominee directors that the
affairs of the company have been conducted as per law.
iv. Instilling professional discipline and self-regulation.
v. Reducing workload of regulators due to better and timely compliances.
vi. Enhancing quality of services to investors.
vii. Any qualification in the Report will immediately alert the investor.

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 Other Management/

Stakeholders Directors

Audience

(a) Promoters: Secretarial audit assures the promoters of a company that those in-charge of its
management are conducting its affairs in accordance with the requirements of laws and the
owner’s stake is not being exposed to unintended risks.
(b) Non-executive/Independent directors: Secretarial audit provides comfort to the non-
executive/independent directors that appropriate mechanisms and processes are in place to
ensure compliance with laws applicable to the company, thus mitigating any risk from a
regulatory or governance perspective.
(c) Government authorities/regulators: It also facilitates reducing the burden of the regulators in
ensuring compliances and they can take timely actions against the offenders.
(d) Investors: Secretarial audit helps the investors in taking informed investment decision, as it
evaluates the company in terms of compliance and governance norms being followed by the
company.
(e) Other Stakeholders: It is an effective due diligence exercise for the prospective investors or
joint venture partners. Further financial institutions, banks, creditors and consumers can
measure the law abiding nature of company management.

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 9. RISK OF SECRETARIAL AUDITOR
Section 204(4) - Punishment for Contravention:
i. If a company or any officer of the company or the company secretary in practice, contravenes
the provisions of section 204, shall be liable to a penalty of two lakh rupees.
ii. In case the Practicing Company Secretary failed to comply with the provisions of section 143
is liable for a penalty:
(a) in case of a listed company, be liable to a penalty of five lakh rupees; and
(b) in case of any other company, be liable to a penalty of one lakh rupees.

Section 447- Punishment for fraud:

Section 448 - Punishment for false statement:

i. If in any return, report, certificate, financial statement, prospectus, statement or other
document required for the purposes of any of the provisions of this Act which is false in any
material particulars, knowing it to be false or which omits any material fact, knowing it to be
material, he shall be liable under section 447.
ii. Also, as per section 451 of the Companies Act 2013, punishment is provided for repeated
default:
If a company or an officer of a company commits an offence punishable either with fine or
with imprisonment and where the same offence is committed for the second or subsequent
occasions within a period of three years, then, that company and every officer thereof who is
in default shall be punishable with twice the amount of fine for such offence in addition to
any imprisonment provided for that offence.

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 Professional misconduct as per Company Secretaries Act, 1980:
i. Company Secretary in whole time employment and as well as Practicing Company Secretary
both are liable for disciplinary action for professional misconduct under provisions of Company
Secretaries Act, 1980.
ii. In addition to the penal provisions contained in the Companies Act, 2013, the Institute of
Company Secretaries of India (ICSI), has also made penal provision which are contained in
Part I of First and Second Schedule of Company Secretaries Act, 1980 which provides the
professional misconduct in relation to Company Secretaries in Practice.
iii. Section 21C of the Act provides that where the Disciplinary Committee is of the opinion that
a member is guilty of a professional or other misconduct mentioned in the Second Schedule or
both the First Schedule and the Second Schedule, it shall afford to the member an opportunity
of being heard before making any order against him and may thereafter take any one or more
of the following actions, namely:
(a) Reprimand the member;
(b) Remover the name of the member from the Register permanently or for such period, as it
thinks fit;
(c) impose such fine as it may think fit, which may extend to Rs 5 lacs.

CASE LAW: Non-Reporting of related party transaction led Secretarial Auditor to pay
penalty
On receipt of a whistle blower complaint an inquiry was ordered by MCA of M/s Sun
Pharmaceutical Industries Ltd under section 206(4) of the Companies Act, 2013. During the
inquiry it was observed by the inquiry officer that Secretarial Auditor of the company has not
reported “Aditya Medisales Ltd.’ as related party and as per section 204 of Companies Act,
2013 it is the duty of Secretarial Auditor.
The Practicing Company Secretary has to examine the transactions during the period of audit
to identify whether any fraud element is present in the transaction. ICSI has also issued
Guidance Note for Secretarial Audit which provides that Secretarial Auditor is need to adhere
the checklist to review the related party transaction.
After considering the facts and submissions, the adjudicating officer had reasonable cause to
believe that the Secretarial Auditor of the company has failed to discharge their duty as per

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 provisions of section 143(14) read with section 188 and 204 of the Companies Act, 2013 read
with ICSI Guidance Note on Secretarial Audit issued by ICSI and imposed a penalty on
Secretarial Auditor.

10. CODE OF CONDUCT

A Code of Conduct is a necessary component of any profession to maintain standards for the
individuals within that profession to adhere. It brings about accountability, responsibility and
trust to the individuals that the profession serves.
The fundamental principles which should govern the conduct of a professional with others have
been broadly identified as to encompass;
i. Integrity;
ii. Independence;
iii. Competence;
iv. Objectivity;
v. Ethical behaviour;
vi. Conformance to the prescribed technical standards; and
vii. Confidentiality of information acquired in the course of professional work.

In order to evoke the necessary interest and awareness among the members and to create the
necessary climate for laying down the right type of conduct which should govern the profession,
the ICSI organised in February 1976, a National Convention, primarily to evolve the necessary
framework for a code of conduct. After the conclusion of that Convention, the Council of the
Institute appointed a Code of Conduct Committee with the task of formulating a model code
of conduct.
The Council of the Institute accepted the recommendations of the Code of Conduct Committee
which inter alia prescribed:
(a) rules applicable to all members; and
(b) rules applicable to members in service or in practice.

The code of conduct acquired statutory status with the conversion of the Institute into a
statutory body under the Company Secretaries Act, 1980 (‘the Act’), with effect from 1st

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 January, 1981. In the year 2006 substantial amendments were made to Act and also to the
First and the Second Schedules to the Act which encompass in detail, various instances of
professional misconduct on the part of the members of the Institute in practice as well as in
service.

11. SCOPE OF SECRETARIAL AUDIT

Examination & Specific Reporting on Examination & Further Reporting Further Reporting
Compliance under: Specific reporting
on Compliance
of other laws as
may be Applicable
specifically to the
Company
The Companies Act, 2013 and the E.g. Banks-all Whether there are Constitution of Board
Rules made thereunder laws applicable to Adequate systems of Directors
banking Industry and processes in
Securities Contracts (Regulation) Act, Companies in the
Company Notices, Agenda and
1956 (‘SCRA’) and the rules made petroleum sector- All commensurate Minutes of Board
thereunder laws applicable to with its size & Meetings etc.
petroleum Industry operation to
monitor and ensure Board processes
compliance with
Depositories Act, 1996 and the
applicable laws
Regulations framed thereunder
including general
Foreign Exchange Management Act, 1999
laws like labour
Regulations and Guidelines under the law, environmental
SEBI Act, 1992 as enlisted in Form MR- laws.
3
Secretarial Standards issued by ICSI
Listing Agreement entered into by the
company with Stock Exchange(s) if any

The scope of Secretarial Audit comprises verification of the compliances according to the
provisions of following enactments, rules, regulations, notifications and guidelines:
(i) The Companies Act, 2013 (the Act) and the Rules made thereunder:

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(ii) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made there-under;
(iii) The Depositories Act, 1996 and the Regulations and Bye-laws framed there-under;
(iv) Foreign Exchange Management Act, 1999 and the rules and regulations made there-under to
the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial
Borrowings;
(v) The following Regulations and guidelines as prescribed under the Securities 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, 2015;
c. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018;
d. The Securities and Exchange Board of India (Share Based Employee Benefits) Regulations,
2014
e. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations,
2008;
f. The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents)
Regulations, 1993
g. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021;
h. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018;
i. The Securities and Exchange Board of India (Listing Obligations and Disclosures Requirements),
Regulations, 2015.
(vi) Mention the other laws as may be applicable specifically to the company.

‘Other areas’ which need to be checked

Secretarial Auditor needs to examine and report on the compliance with the applicable clauses
of the following:
(i) Secretarial Standards issued by The Institute of Company Secretaries of India.
(ii) The Listing Agreements entered into by the Company with the respective Stock Exchange(s),
if applicable;

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 Secretarial Audit report also requires reporting on whether –
i. The Board of Directors of the Company is duly constituted with proper balance of Executive
Directors, Non-Executive Directors, Independent Directors, and Women Director.
ii. The changes in the composition of the Board of Directors that took place during the period
under review were carried out in compliance with the provisions of the Act.
iii. Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed
notes on agenda were sent at least 07 days in advance.
iv. Majority decisions are carried through while the dissenting members’ views are captured and
recorded as part of the minutes.
v. There are adequate systems and processes in the company commensurate with the size and
operations of the company to monitor and ensure compliance with all applicable laws including
general rules like labour laws, competition law, environmental laws, regulations and guidelines.

Secretarial Auditor is required to report and provide details of specific events and actions that
occurred during the reporting period having major bearing on the affairs of the company in
pursuance of above referred laws/ rules & regulations.

12. SECRETARIAL AUDIT – THE PROCESS

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 minutes and records relating to such approvals or
decisions and implementation.

A. Appointment of Secretarial Auditor

As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with
Section 179 of the Companies Act, 2013, secretarial auditor is required to be appointed by
means of resolution passed at a duly convened board meeting and as per the auditing standard
issued by ICSI.

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 B. Communication to earlier Incumbent
i. Company Secretary shall mandatorily communicate to the earlier incumbent about the proposed
engagement in writing by registered/ speed post or any other mode of delivery, as may be
recognized by the Institute of Company Secretaries of India.
ii. The Council of ICSI at its meeting held on 16th March, 2019 has made amendments in
Guidelines where the Council has approved some services in respect of which it shall be
mandatory to communicate to the previous incumbent (Company Secretary) before accepting
the assignment.

C. Acceptance of Appointment
A formal letter for appointment should be issued by the company to the secretarial auditor
along with the copy of the board resolution for appointment. The secretarial auditor should
confirm acceptance of appointment in writing.

D. Preliminary Discussions/Surveys
It is important to have relevant information about the company. The secretarial auditor is
expected to take general overview of the obtain of the company and interact with the personnel
involved to know about the nature of the business. He may opt for surveys for generating
information about the company.

E. Preliminary Meeting
i. The preliminary meeting with the senior management and the administrative staff involved in
the audit will give a fair idea of what is expected and the manner in which audit activities are
to be undertaken.
ii. At this stage, a time frame of the secretarial audit is decided.
iii. The secretarial auditor shall discuss the scope and objectives of the audit, gather information
on important Board processes, evaluate existing control systems and prepare the audit plan.

F. Finalization of Audit Plan and Briefing the Staff

i. Auditor will make an audit plan which involves briefing the audit staff as to allotment of work,
fieldwork responsibilities and other roles.

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 ii. The audit plan should comprehensively outline the fieldwork and usage of auditing tools.
iii. It is essential that the audit plan adheres to the timelines.
iv. Detailed checklist for each aspect of secretarial audit should be prepared and audit staff should
be properly sensitized before commencement of audit.

G. Testing, Interviews and Analysis

i. The secretarial auditor may use a variety of tools and technology to gather information about
the company’s operations.
ii. The secretarial auditor should determine whether the controls identified during the preliminary
review are operating properly, and in the manner described by the Company.
iii. Fieldwork typically consists of interviewing with staff of the company whether formally or
informally, reviewing procedure manuals and processes, testing and analysing compliance with
applicable policies and procedures and laws, rules, regulations and assessing the adequacy of
controls. This exercise may result in significant findings which the secretarial auditor may bear
in mind while preparing the secretarial audit report.

H. Working Papers
Working papers are a vital tool of the audit process, in which auditor expresses his opinion.
They connect the management’s records and information to the auditor’s opinion.

I. Audit Summary for Discussions

It is recommended that the findings during the course of audit are summarized and presented
for initial discussions with the management for their views/ clarifications/replies.

J. Submission of Secretarial Audit Report

After considering the clarifications/replies of the management, the secretarial auditor shall
prepare the secretarial audit report in Form MR - 3. The report is addressed to the members
but is to be submitted to the Board and will contain the opinion on the statutory compliances
examined by the auditor and shall state whether in his opinion the Company is carrying out/not
carrying out due compliances of the applicable provisions of the various laws.

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 K. Auditing Standards
Secretarial Audit should be conducted in accordance with the Auditing Standard issued by the
Institute of Company Secretaries of India.

13. IDENTIFICATION AND SEGREGATION OF APPLICABLE LAWS

SECRETARIAL AUDIT – TO ENSURE COMPLIANCE OF SPECIFIC LAWS AND GENERAL LAWS
The Auditor shall take note of the industry specific laws and other laws as may be applicable
to the auditee based on the identification/ segregation by the Management and his own
verification.

Industry specific laws

i. Identification of all laws applicable to the auditee, as well as industry specific laws and the
segregation thereof, is the primary responsibility of the auditee.
ii. Auditor’s role is to verify that the laws identified and segregated by the management are
appropriate and sufficient having regard to the business of the auditee and the auditee should
communicate the same to the secretarial auditor.
iii. The Auditor shall exercise his professional judgment to verify that the identification and
segregation of the laws made by the Management, as may be applicable specifically to the
auditee, is correct.
iv. In case, the Auditor is not satisfied by the identification and segregation made by the
Management, or no such identification and segregation has been made, he should seek
explanation from the management to form the opinion and report accordingly.

Applicable Laws
“Other laws as may be applicable specifically to the company” shall mean all the laws, rules
and regulations that are applicable specifically to the company. The Secretarial Auditor may
take note of all such laws, rules and regulations identified by the management of the company.

Principles for making such segregation

Segregation of laws applicable on the Company into the industry specific and general is done
on the basis of following factors:

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 i. Registration with various authorities such as SEZ, Sectoral Regulators, etc.
ii. Segments such as Manufacturing/ Trading/ Service/ E-commerce and Industry classification
thereof
iii. Status of company such as listed/ unlisted h Geographic location of registered office, units/
divisions/ plants/ branches, etc.
iv. However, for identification of laws applicable on the company, in addition to above following
factors shall also be considered
v. Key financial parameters such as Turnover, Paid-up Share Capital, Net Worth, Borrowings, etc.
vi. Type/Class of company such as Private, Public, Holding, Subsidiary, Foreign, Nidhi, Producer,
Section 8, etc.
vii. Agreements governing rights, obligations of shareholders such as Joint venture agreements,
shareholders agreements etc.
viii. Number, class and category of employees/ workers such as women, contractual employees, etc.

Adequacy of systems and processes

The Form MR-3 provides for reporting on the status of the compliance along with the comments
on the adequacy of the systems and procedures in the company to manage the compliance of
the laws, rules, regulations and guidelines applicable to the company under the following
paragraph of the report.
This part of the Secretarial Audit report specifically refers to the compliance of the other
applicable laws apart from the Laws covered in the Form MR- 3 and Laws specifically applicable
to the company.

REPORTING OF GENERAL LAWS

As stated above, the Secretarial Auditor should verify and report that adequate system and
processes are in place to monitor and ensure compliance with general laws like labour laws,
competition law, and environmental laws.

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 14. VERIFICATION OF CORPORATE CONDUCT AND COMPLIANCE OF LAWS
Identification of Events/ Corporate Actions
The Auditor shall identify events/ corporate actions that took place during the audit period by
reviewing the website of the regulators, website of the Auditee, statutory records including
books and papers, interaction with the Management and in any other appropriate manner.

Events/ corporate action

i. A corporate action is an event initiated by a company that brings or could bring an actual
change to the working of the company, for example, change in the borrowing limits, issuance
of the securities-equity or debt, appointment of the KMPs, etc., as approved by its board of
directors and/or shareholders.
ii. An action-based event may be defined as any activity that amends the functioning of an
organization and impacts its stakeholders, including Shareholders, both common and preferred,
as well as Lenders. For Example:
a. Events/ actions altering the Charter documents of the company;
b. Changes in the Capital structure of the company;
c. Change in the Affairs/ Management of the company;
d. Change in the Licensing or permission for the business operation of the company;
e. Casual Vacancy of statutory auditor/ director/ KMP;
f. Borrowing in excess of limits specified in Section 180 of the Companies Act, 2013.

Identification of Events/Corporate Events

The Auditor is expected to identify the Corporate Actions from which a compliance requirement
may arise, which can be identified from following:-
a. Financial statements;
b. Agenda and Notes on Agenda of Board/ Committee/ Members’ Meetings;
c. Minutes of the Board/ Committees/ Members’ Meetings;
d. Reporting and Filing to the regulators;
e. Annual Report;
f. Statutory Disclosures on website of the company, website of the Ministry of Corporate Affairs
and on any other platform such as Stock Exchange;

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 g. Third party sources which may include registrar and transfer agents, banks, financial auditor,
stakeholders etc.

Verification of Compliance
i. The Auditor shall verify all event and calendar-based compliances from the Records of the
Auditee, database or website of the regulators and other relevant sources.
ii. The Auditor shall use systematic and comprehensive audit checklists for carrying out the audit
and verifying the compliance requirements.
iii. The Auditor shall compile and validate the checklists for use in the audit process on the basis
of information gathered about the Auditee and scope of the audit. It is a useful tool to ensure
that no compliance point is missed or omitted while conducting the audit.
iv. Audit checklists should be reviewed and updated from time to time to meet the scope of audit
and its effectiveness.
v. The Auditor should verify the compliances of applicable laws and rules based on the information
gathered by the Auditor.

15. BOARD COMPOSITIONS

The Auditor shall verify compliance of the Companies Act, 2013, SEBI (Listing Obligations and
Disclosure Requirements) Regulations 2015, Agreement with Lenders/ Investors, Articles of
Association and provisions of other Acts/ Rules/ Regulations specific to the industry, Guidelines
and Policies of the Government for promotion of particular industry or location-specific industry,
board decisions, shareholders decisions, as may be applicable to the Auditee with regard to:

2. The overall composition of the Board including the minimum and maximum strength of
the Board.
Various provisions mandating the Board Composition
There are certain companies which are governed by the Specific Acts and legislations, as
applicable in addition to the Companies Act, 2013 with certain exemptions, for example.,
Banking Companies, Insurance Companies, State Financial Corporations, Public Sector
Undertakings, in such cases the Auditor shall ensure the Board Composition is as per the
requirements of the applicable laws and acts to the Auditee.

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 Role of Auditor in the verification of Board Composition
The Auditor should identify the laws and rules that govern the company and check the
compliances of the Board Composition in accordance with those applicable laws and rules. For
example, a Banking Company is regulated by the Banking Regulation Act, 1949, therefore, the
Auditor should ensure that the Board Composition is in compliance of the Banking Regulation
Act, 1949 or any other law specifically applicable to the Auditee in addition to the basic
governing laws enumerated under the Companies Act, 2013 or SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015.

The Auditor should examine the applicability of the various laws and regulations applicable to
the Auditee to verify the requirement of a minimum and maximum number of directors on the
Board of the Auditee.

3. Optimum Combination of the Board include a proportion of executive, non-executive,

independent, non-independent, retiring, non-retiring, women and nominee directors.
Various provisions mandating optimum combination
The optimum combination of the Board should be as per the provisions laid down in various
Statutes such as the Companies Act, 2013, the SEBI (Listing Obligation and Disclosure
Requirement) Regulations, 2015, the Banking Regulation Act, 1949, the Insurance Act, 1938,
etc., as may be applicable to the company.
Provision wrt to Board Composition under Companies Act, 2013:
i. As per section 149(2), Every Company shall have at least 01 director who stays in India for a
total period of not less than 182 days during the financial year. In the case of a newly
incorporated company the requirement under this sub-section shall apply proportionately at the
end of the financial year in which it is incorporated.
ii. As per section 149(3), Every Listed Public Company shall have at least one-third of the total
number of directors as independent directors and the Central Government may prescribe the
minimum number of independent directors in case of any class or classes of public companies.
iii. As per second Proviso to Section 149(1) read with Rule 3 of The Companies (Appointment and
Qualification of Directors) Rules, 2014 of the Companies Act, 2013, the following classes of
companies are required to appoint at least 01 Woman Director:

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 (i) Every Listed Company;
(ii) Every Other Public Company having –
(a) paid–up share capital of 100 crore Rupees or more; or
(b) turnover of 300 crore Rupees or more.

iv. For the appointment of Woman Director, paid up share capital or turnover, as the case may be,
as on the last date of latest audited financial statements has to be taken into account.
v. Similarly, Regulation 17 of SEBI (Listing Obligation and Disclosure Requirements) Regulations,
2015 provides Board Composition as under:
1. The composition of the Board of Directors of the listed entity shall be as follows:
(a) Board of Directors shall have an optimum combination of executive and non-executive directors
with at least 01-woman director and not less than 50% of the Board of Directors shall comprise
of non-executive directors.
(b) The Board of Directors of the top 500 listed entities shall have at least 01 independent woman
director by April 1, 2019 and the Board of Directors of the top 1000 listed entities shall have
at least 01 independent woman director by April 1, 2020.
(c) Where the Chairperson of the Board of Directors is a non-executive director, at least onethird
of the Board of Directors shall comprise independent directors and where the listed entity does
not have a regular non-executive Chairperson, at least half of the Board of Directors shall
comprise independent directors.
(d) Where the regular non-executive chairperson is a promoter of the listed entity or is related to
any promoter or person occupying management positions at the level of the Board of Directors
or at one level below the Board of Directors, at least half of the Board of Directors of the
listed entity shall consist of independent directors.
(e) The Board of Directors of the top 1000 listed entities (with effect from April 1, 2019) and the
top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six
directors.
(f) Where the listed company has outstanding Superior Voting Rights (SR) equity shares, at least
half of the Board of Directors shall comprise of independent directors.

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 Requirements of NSE Prime Companies

NSE prime allow listed company to choose higher governance standards than what is
required under the law.

Composition:

a. The Board of Directors shall consist of a minimum of 8 directors.

b. The Chairperson of the Board of Directors shall not be a relative of the Managing
Director or Chief Executive Officer of the NSE Prime Company.
c. Where the public shareholding is in excess of 50%, more than half of the Board
of Directors shall comprise Independent Directors; and in case of any fractions,
the same shall be rounded to the higher number.
d. Where the public shareholding is 50% or less, at least half of the Board of
Directors shall comprise Independent Directors; and in case of any fractions, the
same shall be rounded to the higher number.
e. With effect from July 01, 2025, at least 2 directors shall be women, with at
least one such Woman Director also being an Independent Director.

Role of Auditor in the verification of optimum combination

Laws specifically applicable to the company may also mandate to have optimum combination
of directors. The Auditor should also verify the compliance thereof and report deviations, if any.

3. Eligibility criteria including disqualifications of directors

Various provisions mandating qualifications/ disqualification
The conditions for qualifications/ disqualification of a director prescribed in the Companies Act,
2013 or any other industry specific Act or law, need to be checked while verifying the Board
Composition of the company. For example, Section 164 of the Companies Act, 2013 lays down
the provisions for disqualifications for the appointment as Director on the board of the company.
Further, the Auditor also needs to check the eligibility criteria including disqualifications of the
directors as may be prescribed in any other industry specific Act or laws applicable to the
company.

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4. Constitution and Composition of Committees of the Board
Various provisions mandating Board Committees
The constitution of various Committees and the terms of reference of the Committees can be
as per various regulatory requirements. For example, for banking companies, stipulated
Committees shall mean committees constituted in compliance with the Banking Regulation
Act, 1949, Circulars issued by the Reserve Bank of India (RBI) and the Government of India
(GOI) from time to time.
There are certain mandatory committees that are required to be constituted by certain class
or classes of companies as per the Companies Act, 2013, SEBI (Listing Obligation and Disclosure
Requirement) Regulations, 2015 and certain industry/ sector specific laws. Such mandatory
committees include:
 Audit Committee
 Nomination and Remuneration Committee
 Stakeholders Relationship Committee
 CSR Committee
 Risk Management Committee (Note: Secretarial Standard - 1 is not applicable as it is not a
Board’s Committee under the Companies Act, 2013)
 Internal Committee constituted under the POSH Act

Role of Auditor in verification of Board Committees

The Auditor needs to check whether the constitution of committees, as constituted by the
auditee, is as per the laws, act, rules, regulations and standards applicable to the Auditee.

Preferable Board size as per Proxy Advisors Guideline

1. Iias: Iias prefers a Board size of 6-15 members. Board size should be commensurate with the
size and operations of the company. Iias believes that, given the nature and quantum of work
involved, three directors may not be optimal. Their guidelines are therefore aligned with the
Kotak Committee threshold of at least 6 directors. On the other hand, consensus on many
critical issues may be difficult to achieve if Board size exceeds 15 members.

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 2. InGovern: InGovern prefers a Board size of 7-15 members. A Board size outside of this range
is considered less effective either due to low diversity of expertise and opinion, and low
representation of Independent Directors on Kay Committees or a big Board size of greater than
15 members present the disadvantages of delayed decision making that come along an
uncontrollable size and risk of having majority of promoters and related parties on board,
InGovern too is not in favour of huge Board size.
3. SES: SES prefers a Board size of 6-15 members. If the proposed Board size is outside this
range, SES expects that the company must provide a rationale for the same

16. BOARD PROCESSES

i. The Board of directors plays a crucial role in Corporate Governance and act as fiduciaries.
Accordingly, the law foists on the directors duties and liabilities as instruments that modulate
their conduct.
ii. Directors are, however, entitled to various protective measures in the form of mitigating factors
either conferred upon them by law or through practical mechanisms they may establish. The
Section 118(10) mandates on every company to observe the Secretarial Standards on the
meeting of the Board of Directors (SS-1) as specified by the Institute of Company Secretaries
of India (ICSI).
iii. The SS-1 helps in providing clarity in certain areas where the law is either silent or ambiguous.
Wherever the law is silent, certain good governance practices have been recommended and
where it is ambiguous, the standards try to bring in more clarity and adhere the common board
processes across country.
iv. To ensure the effective board processes, the auditors shall verify that the decisions of the
Board and its Committees are taken and recorded in compliance with applicable laws, rules,
regulations, guidelines, standards and defined internal processes.
v. Various provisions mandating Board Processes Provisions w.r.t Board processes may include:
a. Meetings of Board and Committees
b. Meetings of Committees that exercise powers of the Board under Section 179 of Companies
Act, 2013
c. Meeting of Members
d. Board’s performance evaluation and training

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 e. Appointment and Resignation of the members of the Board.

Role of Auditor in the verification of Board Processes

i. The Auditor shall verify notice of the meetings, minutes, and supporting records, including the
agenda, to satisfy himself whether the Auditee has complied with the applicable laws, rules,
regulations, guidelines, standards and defined internal processes.
ii. Some corporates have manuals for Board Processes, the Auditor should verify whether the
Auditee has complied with the policy and processes laid down in the manual of the Auditee.
iii. The Board of Directors, plays a crucial role in ensuring the company follows transparent, ethical,
and responsible governance. To achieve this, the company's board processes, which involve
decision-making by the Board and its committees, must be strong and effective.

CASE STUDY
Mr. CS is appointed as a Company Secretary of Flowers Pvt Ltd. Mr. CS have to conduct the
audit for the financial year 2022-23. Mr. CS is required to draft the guidelines for verification
of Board Composition & Board Process as per the CSAS-4 (Auditing Standard on Secretarial
Audit).
Board Composition the auditor shall verify:
1. Overall composition of the Board including the minimum and maximum strength of the Board
as per provisions of the Companies Act, 2013, SEBI (Listing Obligations and Disclosure
Requirements) Regulations 2015, Articles of Association and provisions of other
Acts/rules/regulations as may be applicable to the Company.
2. Optimum combination of Executive, Non-executive, Independent, Non-independent, retiring,
non-retiring, woman, nominee in the Board as per provisions of the Companies Act, 2013, SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015, Articles of Association,
agreement with Lenders/Investors and provisions of other Acts/rules/regulations as may be
applicable to the company.
3. Eligibility criteria including qualifications of Directors in accordance with the
provisions/principles laid down in the Companies Act, 2013, SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015, Articles of Association and provisions of other
Acts/rules/regulations as may be applicable on the Company

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 4. The constitution and composition of Committees of the Board

17. SYSTEM AND PROCESS

System and process broadly refer to the framework of legal and procedural compliances of the
Auditee including but not limited to internal regulations, control, guidance and governance.

Meaning of systems and processes

i. A system is the core element, that company management has and/or implements in its
business. It’s something that helps the business run.
ii. The processes are all the things that company management do in order to make any given
system work most efficiently.
iii. System and process in the context of Secretarial Audit includes internal policies, decisions or
procedures, etc. laid down by the Auditee for ensuring the compliance of the various laws, rules,
standards and guidelines as may be applicable to the company.
iv. The Auditor should check the Auditee's policies, decisions, and procedures to ensure they are
followed. This includes confirming that the systems and processes are suitable for the Auditee's
size and operations, ensuring compliance with relevant laws, rules, regulations, standards,
guidelines, and internal processes.
v. The Auditor shall assess the efficacy and adequacy of the system and processes of the Auditee
commensurate with its size and operation for verifying compliance of applicable laws, rules,
regulations, standards, guidelines, and defined internal processes, if any by:
a. Reviewing records maintained by the Auditee.
b. Understanding compliance responsibility centers, control points, matrix, the flow of information,
escalation of non-compliances to different levels, reporting of any non-compliance.
c. Assessing compliance mechanism and understanding its extent, coverage and severity mapping.
d. The Auditor shall also assess compliance manual/ standard operating procedures, if any, available
with the Auditee.
e. Analysing instances of show cause notices received, prosecution initiated, fine or penalties
levied, imprisonment ordered, qualification, adverse remark or observations in the statutory,
internal or industry specific audit, orders passed by regulatory bodies or judicial/ quasi-judicial
authorities.

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 Companies which observe best practices for Board Process

Bharti Airtel Limited –

a. The company submits audited quarterly results to the Stock Exchange.

b. Separate meeting of Independent Directors on a quarterly basis.
c. The evaluation of the Board of Directors is done by an external agency
d. Linkage of remuneration of MD & CEO and Senior Management with ESG/sustainability targets.

Hindustan Unilever Limited The Board of directors has adopted ‘Corporate Governance Code’ a
statement of practices and procedures to be followed by the company and its officers and employees.

Mahindra Logistics Limited

a. The company has voluntarily adopted the practice of scheduling its AGM within 5 month of
end of financial year as a god governance measure.
b. The company, voluntarily as a good governance practice, observes a ‘silent/quiet period’ for 15
days prior to the announcement of quarterly and annual financial results.
c. The company has structured system-based PAN India compliance mechanism, with process
management and end-to-end visibility for its compliance process.

AU Small Finance Bank Limited The Executive Directors are duty bond with Malus and Claw back
clause, which activates in the event of subdues or negative financial performance of the Bank.

18. DETECTION OF FRAUD

i. According to Section 143 of Companies Act, 2013 it is the duty of auditor to report fraud.
ii. The Auditor shall exercise professional judgment and maintain professional scepticism
throughout the planning and performance of the audit to detect and report the fraud. Here,
professional scepticism means, an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
iii. Professional scepticism includes being alert to, for example:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents and inquiries to be used as
audit evidence.

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 iv. Professional Judgment involves using the knowledge and experience gained from accounting or
auditing training to make informed decisions based on ethical standards in specific
circumstances.
v. During the course of the audit, if the Auditor suspects commission of any fraud, he shall
endeavour to collect further evidence for the same.
vi. Suspicions may arise through a review of internal control systems, reports from whistleblowers,
and feedback from other auditors.

 ‘Suspicion’ is a state of mind more definite than speculation, but falls short of
knowledge based on evidence. It must be based on some evidence, even if that
evidence is tentative – simple speculation that a person may be engaged in fraud
is not sufficient grounds to form a suspicion. Suspicion is a slight opinion but
without sufficient evidence.
 Recurring negative cash flows from operations or an inability to generate cash flows
from operations while reporting earnings and earnings growth, is an example of
suspicion

vii. The Auditor may communicate directly with the internal auditors and statutory auditors to
verify whether they have suspected/identified any fraud during the course of their audit.
viii. During the course of the audit, if the auditor suspects any commission of fraud, he shall
endeavour to collect further evidence for the same.
ix. The auditor shall ensure to collect sufficient evidence which substantiates his suspicion of the
commission of the fraud against the Company by the employees and officers of the company.
x. The auditor shall ensure that he has sufficient reason to believe that there is commission of
fraud and should have justifiable grounds for the same.

Transaction which may involve the fraud

In the past, “Fraud” has been noticed in many cases of scams in the following kinds of
transactions:-
 Related Party Transactions

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  Excessive Managerial remuneration
 Insider Trading
 Inter Company transactions
 Mergers/demergers/acquisitions
 IPO frauds
Other means of corporate fraud are the inadequate disclosures, false or misleading information,
theft of assets, false expenses, corruption, theft in formation, fraudulent applications, misuse
of assets, dishonest business partners, fraudulent billing.

These areas are not exhaustive but only some examples are given so as to guide fraud detection.

19. REPORTING OF FRAUD

A very significant duty has been cast on the Company Secretary in Practice under section 143
of the Companies Act, 2013. It provides that if the Company Secretary in Practice, in the
course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or employees
of the company, he shall immediately report the matter to the Central Government, or to the
Audit Committee or the Board.

Duty of Report Fraud to Central Government

The section 143(12) read with the Companies (Audit and Auditors) Rules, 2014 provides that
if an auditor of a company in the course of the performance of his duties as auditor, has
reason to believe that an offence of fraud which involves or is expected to involve individually
an amount of rupees one crore or above, is being or has been committed against the company
by its officers or employee, the auditor shall report the matter to the Central Government.

Duty of Report Fraud to Audit Committee/ Board

In case of a fraud involving lesser than rupees one crore, the auditor shall report the matter
to audit committee or to the board immediately but not later than two days of his knowledge
of the fraud and he shall report the matter specifying the following: -
(a) Nature of fraud with description;

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(b) Approximate amount involved; and
(c) Parties involved.

Disclosures in the Board’s Report

The following details of each of the fraud reported to the Audit Committee or the Board during
the year to be disclosed in the Board’s Report: -
(a) Nature of fraud with description;
(b) Approximate amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.

Consequence on failure in Reporting of fraud

In case, Company Secretary in Practice does not comply with the provisions of section 143(12),
he shall be punishable with fine which shall be liable to a penalty of five lakh rupees in case
of a listed company, and one lakh rupees in case of any other company.

Who is considered as an Auditor for Fraud Reporting?

The auditor includes the-
 Statutory Auditors of the company appointed under section 139 of the Companies Act, 2013;
 Company Secretary in Practice conducting Secretarial Audit under section 204 of the Companies
Act, 2013;
 Cost Accountant in practice conducting Cost Audit under section 148 of the Companies Act,
2013 and the Branch Auditors.
However, the Internal Auditor or such other professionals appointed under any other statutes
rendering other services to the company such as a tax auditor appointed under Income Tax Act,
GST auditors appointed under the respective GST legislations are not covered under section 143
of the Companies Act, 2013.

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 Difficulties in estimating the quantum of fraud
a. By and large the Auditor including the Secretarial Auditor goes by the estimates or reasonable
range provided by the management for the purpose of estimating the quantum of the fraud
amount and reporting. Depending upon the complexity and duration of the fraud, at times it
could be difficult for the auditing personnel to determine the quantum of fraud and loss
suffered.
b. In the event, after some time, it is discovered that the quantum of fraud has exceeded the
threshold limit of one crore, then subsequent reporting may be required and thus the Secretarial
Auditor may have to report to the Central Government within 45 days of the determination of
the revised fraud estimate or loss which crossed one crore limit.
c. In view of the above, the estimation of the amount of fraud is very critical and if the estimation
goes wrong even after taking reasonable care, then it will impact the decision whether to report
to the concerned Authorities or otherwise.
d. Since the provision says that in case of fraud exceeding one crore is only required to be reported
to Central Government and fraud involving less than a crore is required to be reported only to
Audit Committee / Board. Hence, the secretarial auditor is required take extreme care in
estimating the quantum of fraud.

Whether regulatory non-compliance would come under the purview of fraud reporting?

It may be noted that as per Ministry of Corporate Affairs notification there is no distinction
between fraud and regulatory non-compliance as long as the quantum of fraud loss can be
reasonably quantified due to regulatory non-compliance.
Where the secretarial auditor discovers instances involving bribery, money laundering, corruption
or other regulatory non-compliance committed by either by the company or its employees or
its management, then the secretarial auditor is duty bound to communicate the same to the
Audit Committee / Board and depending upon the quantum he is also required to report to the
Central Government if the determination of fraud exceeds the threshold limit of one crore.

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 20. PROCEDURE FOR REPORTING OF FRAUD
(i) Reporting of frauds by auditor involving amount more than Rs. 1 crore
If an auditor of a company, in the course of the performance of his duties as statutory auditor,
has reason to believe that an offence of fraud, which involves or is expected to involve
individually an amount of rupees one crore or above, is being or has been committed against
the company by its officers or employees, the auditor shall report the matter to the Central
Government. Auditor should report such frauds as soon as possible but not later than 60 days
of his knowledge about the frauds

STEP-I - Report to Board & Audit Committee

Auditor shall forward his report to the board of directors or the audit committee, as the case
maybe, within 2 days of his knowledge of the fraud, seeking their reply or observations within
45 (forty-five) days;

STEP-II - Report to Central Government after reply of board

On receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the board or the audit committee along with his comments (on such reply or
observations of the board or the audit committee) to the central government within 15 fifteen
days of receipt of such reply or observations;

STEP-III - Report to Central Government if no reply received

In case the auditor fails to get any reply or observations from the board or the audit committee
within the stipulated period of forty-five days, he shall forward his report to the Central
Government along with a note containing the details of his report that was earlier forwarded
to the board or the audit committee for which he failed to receive any reply or observations
within the stipulated time.

(ii) Reporting of frauds by auditor involving amount less than Rs. 1 crore
In case of fraud involving an amount less than Rs. 1 Crore, the auditor shall report the matter
of fraud to the audit committee or to the board within 2 days of his knowledge of the fraud.
The report should specify the nature of the fraud with description, approximate amount of the

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 fraud and parties involved in the fraud. In such case, the Board shall disclose in its report
(Board’s Report) the nature of fraud with description, approximate amount of the fraud, parties
involved in the fraud and remedial action taken. Name of parties should be disclosed only when
the board or audit committee has not taken any remedial action against the fraud.

CASE LAW
Globe Motors Limited v. Mehta Teja Singh & Company
The Delhi High court observed that although an agreement in which a director was interested
could not said to be invalid in view of compliance with the requirements of the Act, yet it is
only a formal aspect of compliance with the statutory provisions; the basic question is as to
the conduct of the director and whether it satisfies the test considering their fiduciary
relationship to the company. Justice Sachar further observed that the directors are expected
to display utmost good faith towards the company in their dealings with the company or on
behalf of the company; they should not use the company’s money or other property or
information or other matters in their possession in order to gain any advantage to themselves.
Therefore, a practicing company secretary should not be satisfied only with compliance during
secretarial audit. He needs to look beyond and satisfy himself that the transactions which
have taken place during audit period do not contain any fraud element

21. FRAUD V/S NON-COMPLIANCE

The term fraud can be defined as act or course of deception, an intentional concealment,
omission, or perversion of truth, to
5. gain unlawful or unfair advantage,
6. induce another to part with some valuable item or surrender a legal right, or
7. inflict injury in some manner.

Wilful fraud is a criminal offense which calls for severe penalties, and its prosecution and
punishment. However, incompetence or negligence in managing a business or even a reckless
waste of firm’s assets does not normally constitute a fraud.

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 Non-Compliance:
The term non-compliance refers to failure to comply with the laws, rules regulations etc., the
term non-compliance is commonly used in regard to a failure to meet the compliance
requirements or failure to doing compliance be it the failure in following procedures, filing of
information, eligibility conditions, reporting etc.
The relationship between Fraud and non-compliance can be constructed as the non-compliance
in the company may lead to a fraud, however it may also be noted that the fraud can also be
made in the compliant company.

22. IDENTIFICATION AND REPORTING OF THE EVENTS/ACTIONS HAVING MAJOR BEARING ON

AUDITEE’S AFFAIRS
An event/action may be considered as having major bearing on Company’s affairs includes the
following situations:
1. The Auditor shall assess and identify the material action or events having bearing on the
Auditee’s affairs in pursuance of the applicable laws, act, rules, regulations, guidelines,
standards, etc. and report accordingly.
2. The identification of the corporate actions or events having bearing on the Auditee’s affairs in
terms of applicable laws, act, rules, regulations, guidelines, standards, etc. is a subjective matter
and needs to be concluded keeping in mind various parameters. Such parameters may include
the following:
a. The consideration involved in the transaction as a percentage of the consolidated turnover, net
worth or profit;
b. The transaction whether or not in the ordinary course of business;
c. The transaction representing a significant shift from the company’s strategy;
d. The omission of an event or information is likely to result in significant market reaction if the
said omission came to light at a later date.
3. Further, following are indicative actions and/or events may be considered to have a bearing on
the Auditee’s affairs:
a. Future plans of Merger or Amalgamation.
b. Revision in Rating(s).

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c. Fraud/ defaults by promoter or key managerial personnel or by listed entity or arrest of key
managerial personnel or promoter.
d. Agreements [viz. shareholder agreement(s), joint venture agreement(s), family settlement
agreement(s) (to the extent that it impacts management and control of the listed entity),
agreement(s)/ contract(s) with media companies)], which are binding and not in normal
course of business, revision(s) or amendment(s) and termination(s) thereof.
e. Corporate Debt Restructuring.

4. The Auditor shall disclose the material non-compliances and transactions as observed during
the course of Audit.

Further, the SEBI (LODR) Regulations, 2015 include the following events which are
considered as having bearing on affairs of the company:
1. default in timely payment of interests/preference dividend or redemption or repayment amount
or both in respect of the non-convertible debt securities and non-convertible redeemable
preference shares and also default in creation of security for debentures as soon as the same
becomes apparent;
2. any attachment or prohibitory orders restraining the company from transferring non-convertible
securities from the account of the registered holders along-with the particulars of the numbers
of securities so affected, the names of the registered holders and their demat account details;
3. any action which shall result in the redemption, conversion, cancellation, retirement in whole
or in part of any non-convertible securities;
4. any action that shall affect adversely payment of interest on non-convertible debt securities
or payment of dividend on non-convertible redeemable preference shares including default by
issuer to pay interest on non-convertible debt securities or redemption amount and failure to
create a charge on the assets;
5. any change in the form or nature of any of its non-convertible debt securities or non-convertible
securities that are listed on the stock exchange(s) or in the rights or privileges of the holders
thereof and make an application for listing of the securities as changed, if the stock
exchange(s) so require;

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 6. any changes in the general character or nature of business/activities, disruption of operation
due to natural calamity, and commencement of commercial production/commercial operations;
7. any events such as strikes and lock outs which have a bearing on the interest payment/dividend
payment/ principal repayment capacity;
8. details of any letter or comments made by debenture trustees regarding payment/non-payment
of interest on due dates, payment/non-payment of principal on the due dates or any other
matter concerning the security, listed entity and/or the assets along with its comments thereon,
if any;
9. delay/default in payment of interest or dividend/principal amount/redemption for a period of
more than three months from the due date;
10. failure to create charge on the assets within the stipulated time period;
11. any instance(s) of default/delay in timely repayment of interests or principal obligations or
both in respect of the debt securities including, any proposal for re-scheduling or postponement
of the repayment programmes of the dues/debts of the Company with any
investor(s)/lender(s).
12. any major change in composition of its board of directors, which may amount to change in
control as defined in Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011;
13. any revision in the rating;
14. the following approvals by board of directors in their meeting:-
(a) the decision to pass any interest payment;
(b) short particulars of any increase of capital whether by issue of bonus securities through
capitalization, or by way of right securities to be offered to the debt security holders, or in
any other way;
15. all the information, report, notices, call letters, circulars, proceedings, etc. concerning non-
convertible debt securities;
16. fraud/defaults by promoter or key managerial personnel or director or employees of listed entity
or by listed entity or arrest of key managerial personnel or promoter.

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 23. IMPACT OF AUDIT REPORT
i. Secretarial Audit helps the investors in taking informed investment decision, as it evaluates
the company in terms of compliance and governance norms being followed by the company.
ii. The Secretarial Audit Report should be prepared in accordance with the Auditing Standards
issued by the Institute of Company Secretaries of India and be signed by the Secretarial
Auditor who has been engaged by the company to conduct the Secretarial Audit and in case
of a firm of Company Secretaries, by the partner under whose supervision the Secretarial Audit
was conducted.
a. An effective mechanism to make sure of the compliance with the legal and procedural
Requirements.
b. Provides a level of confidence to the directors & Key Managerial Personnel etc.
c. Secretarial Audit ensures legal and procedural requirements so directors can concentrate on
important business matters.
d. Strengthen the goodwill of a company for their regulators and stakeholders.
e. Secretarial Audit is an effective governance and compliance risk management tool.
f. It helps the investor in analysing the compliance level of companies, thereby increases the
reputation.

Annexure -A
FORM NO. MR-3
SECRETARIAL AUDIT REPORT FOR THE FINANCIAL YEAR ENDED
[Pursuant to section 204(1) of the Companies Act, 2013 and rule No.9 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014]

To,
The Members,
……….… Limited

I/We have conducted the secretarial audit of the compliance of applicable statutory provisions
and the adherence to good corporate practices by……. (name of the company).(hereinafter
called the company). Secretarial Audit was conducted in a manner that provided me/us a

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 reasonable basis for evaluating the corporate conducts/ statutory compliances and expressing
my opinion thereon.

Based on my/our verification of the .....………………………….. (name of the company’s) books,

papers, minute books, forms and returns filed and other records maintained by the company
and also the information provided by the Company, its officers, agents and authorized
representatives during the conduct of secretarial audit, I/We hereby report that in my/our
opinion, the company has, during the audit period covering the financial year ended on, complied
with the statutory provisions listed hereunder and also that the Company has proper Board-
processes and compliance mechanism in place to the extent, in the manner and subject to the
reporting made hereinafter:

I/we have examined the books, papers, minute books, forms and returns filed and other records
maintained by ………….. (“the Company”) for the financial year ended on, according to the
provisions of:
(i) The Companies Act, 2013 (the Act) and the rules made thereunder;
(ii) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;
(iii) The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;
(iv) 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;
(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;

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 e. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations,
2008;
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.

(vii) ............................................. (Mention the other laws as may be applicable specifically to the
company) I/we have also examined compliance with the applicable clauses of the following: (i)
Secretarial Standards issued by The Institute of Company Secretaries of India. (ii) The Listing
Agreements entered into by the Company with ….. Stock Exchange(s), if applicable; During
the period under review the Company has complied with the provisions of the Act, Rules,
Regulations, Guidelines, Standards, etc. mentioned above subject to the following observations:

I/we further report that :

The Board of Directors of the Company is duly constituted with proper balance of Executive
Directors, Non-Executive Directors and Independent Directors. The changes in the composition
of the Board of Directors that took place during the period under review were carried out in
compliance with the provisions of the Act.

Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed
notes on agenda were sent at least seven days in advance, and a system exists for seeking
and obtaining further information and clarifications on the agenda items before the meeting
and for meaningful participation at the meeting.

Majority decision is carried through while the dissenting members’ views are captured and
recorded as part of the minutes.

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 I/we further report that there are 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: Please report specific observations / qualification, reservation or adverse remarks in respect
of the Board Structures/system and processes relating to the Audit period.

I/we further report that during the audit period the company has................................. (Give
details of 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 collaborations.

Place: Signature:
Date: Name of Company Secretary in Practice/Firm:
ACS/FCS No. C P No.:

Note: Parawise details of the Audit finding, if necessary, may be placed as annexure to the
report.

Annexure-B
Format of Annual Secretarial Audit Compliance Report - ICSI
Secretarial Compliance Report of [•] [Name of the listed entity] for the year ended ____

I/We have conducted the review of the compliance of the applicable statutory provisions and
the adherence to good corporate practices by ............................. (hereinafter referred as ‘the

CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 13.43
 listed entity’), having its Registered Office at ....................... Secretarial Review was conducted
in a manner that provided me/us a reasonable basis for evaluating the corporate
conducts/statutory compliances and to provide my/our observations thereon. Based on my/our
verification of the listed entity’s books, papers, minutes books, forms and returns filed and
other records maintained by the listed entity and also the information provided by the listed
entity, its officers, agents and authorized representatives during the conduct of Secretarial
Review, I/we hereby report that the listed entity has, during the review period covering the
financial year ended on __________ complied with the statutory provisions listed hereunder
in the manner and subject to the reporting made hereinafter:

I/We __________________ have examined:

(a) all the documents and records made available to us and explanation provided by [ ] [Name of
the listed entity] (“the listed entity”),
(b) the filings/ submissions made by the listed entity to the stock exchanges,
(c) website of the listed entity,
(d) any other document/ filing, as may be relevant, which has been relied upon to make this report,

for the financial year ended [ ] (“Review Period”) in respect of compliance with the provisions
of :
(a) the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and the Regulations,
circulars, guidelines issued thereunder; and
(b) the Securities Contracts (Regulation) Act, 1956 (“SCRA”), rules made thereunder and the
Regulations, circulars, guidelines issued thereunder by the Securities and Exchange Board of
India (“SEBI”);

The specific Regulations, whose provisions and the circulars/ guidelines issued thereunder, have
been examined, include:-
(a) Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations, 2015;
(b) Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018;

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(c) Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011;
(d) Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018;
(e) Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity)
Regulations, 2021;
(f) Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities)
Regulations, 2021;
(g) Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
(h) (other regulations as applicable) and circulars/ guidelines issued thereunder;

a. (**) The listed entity has complied with the provisions of the above Regulations and circulars/
guidelines issued thereunder, except in respect of matters specified below:

Sr. Com- Regu- Deviati Actio Type Det Fine Obser- Man- Re-
No. pliance lation/ ons n of ails Amount vations/ Re- age- ment marks
Require- Circula Taken Actio of marks of the Re-
ment r No. by n Vio- Prac- ticing sponse
(Regu- lati Compa- ny
lations/ on Sec- retary
circulars/
guide-
lines
including
specific
clause)
Advisory/
Clarificati
on/
Fine/Sho
w Cause
Notice/
Warning,
etc.

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 b. The listed entity has taken the following actions to comply with the observations made in
previous reports:

Sr. Com- Regu- Deviations Action Type of Detail Fine Obser- Man- Re-
No. pliance lation/ Taken Action s of Amount vations/ age- marks
Require Circular by Vio- Re- ment
- ment No. lation marks of Re-
(Regu- the sponse
lations/ Prac-
circulars ticing
/ guide- Compa-
lines ny Sec-
includin
retary
g
specific
clause)
Advisory/
Clarificatio
n/
Fine/Show
Cause
Notice/
Warning,
etc.

II. Compliances related to resignation of statutory auditors from listed entities and their material
subsidiaries:

Sr. Particulars Compliance Observations/

No. Status (Yes/No/ Remarks by
NA) PCS*
1. Compliances with the following conditions while appointing/re-appointing an auditor

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 i. If the auditor has resigned within 45 days from the
end of a quarter of a financial year, the auditor before
such resignation, has issued the limited review/ audit
report for such quarter; or

ii. If the auditor has resigned after 45 days from the end
of a quarter of a financial year, the auditor before such
resignation, has issued the limited review/ audit report for
such quarter as well as the next quarter; or

iii. If the auditor has signed the limited review/ audit report
for the first three quarters of a financial year, the auditor
before such resignation, has issued the limited review/
audit report for the last quarter of such financial year as
well as the audit report for such financial year.
2. Other conditions relating to resignation of statutory auditor
i. Reporting of concerns by Auditor with respect to the
listed entity/its material subsidiary to the Audit
Committee:

a. In case of any concern with the management of the

listed entity/material subsidiary such as non-
availability of information / noncooperation by the
management which has hampered the audit process,
the auditor has approached the Chairman of the Audit
Committee of the listed entity and the Audit
Committee shall receive such concern directly and
immediately without specifically waiting for the
quarterly Audit Committee meetings.

Sr. Particulars Compliance Observations/

No. Status (Yes/No/ Remarks by
NA) PCS*
b. In case the auditor proposes to resign, all concerns
with respect to the proposed resignation, along with
relevant documents has been brought to the notice
of the Audit Committee. In cases where the proposed
resignation is due to non-receipt of information /
explanation from the company, the auditor has

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 informed the Audit Committee the details of
information/ explanation sought and not provided by
the management, as applicable.
c. The Audit Committee / Board of Directors, as the
case may be, deliberated on the matter on receipt of
such information from the auditor relating to the
proposal to resign as mentioned above and
communicate its views to the management and the
auditor.
ii. Disclaimer in case of non-receipt of information:
The auditor has provided an appropriate disclaimer in its
audit report, which is in accordance with the Standards
of Auditing as specified by ICAI / NFRA, in case where the
listed entity/ its material subsidiary has not provided
information as required by the auditor.
3. The listed entity / its material subsidiary has obtained
information from the Auditor upon resignation, in the format
as specified in Annexure-A in SEBI Circular CIR/
CFD/CMD1/114/2019 dated 18th October, 2019.
Sr. Particulars Compliance Status Observations/
(Yes/No/ NA) Remarks by
No.
PCS*

1. Secretarial Standards:

The compliances of the listed entity are in accordance with

the applicable Secretarial Standards (SS) issued by the
Institute of Company Secretaries of India (ICSI).

2. Adoption and timely updation of the Policies:

 All applicable policies under SEBI Regulations are

adopted with the approval of board of directors of the
listed entities
 All the policies are in conformity with SEBI Regulations
and have been reviewed & updated on time, as per the
regulations/circulars/guidelines issued by SEBI.

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3. Maintenance and disclosures on Website:

 The Listed entity is maintaining a functional website

 Timely dissemination of the documents/ information
under a separate section on the website
 Web-links provided in annual corporate governance
reports under Regulation 27(2) are accurate and
specific which re- directs to the relevant document(s)/
section of the website
4. Disqualification of Director:

None of the Director(s) of the Company is/ are disqualified

under Section 164 of Companies Act, 2013 as confirmed by
the listed entity.

5. Details related to Subsidiaries of listed entities have been

examined w.r.t.:

(a) Identification of material subsidiary companies

(b) Disclosure requirement of material as well as other

subsidiaries
6. Preservation of Documents:

The listed entity is preserving and maintaining records as

prescribed under SEBI Regulations and disposal of records as
per Policy of Preservation of Documents and Archival policy
prescribed under SEBI LODR Regulations, 2015.

7. Performance Evaluation:

The listed entity has conducted performance evaluation of the

Board, Independent Directors and the Committees at the
start of every financial year/during the financial year as
prescribed in SEBI Regulations.

8. Related Party Transactions:

(a) The listed entity has obtained prior approval of Audit

Committee for all related party transactions; or
(b) The listed entity has provided detailed reasons along with
confirmation whether the transactions were subsequently
approved/ratified/rejected by the Audit Committee, in

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 case no prior approval has been obtained.

9. Disclosure of events or information:

The listed entity has provided all the required disclosure(s)

under Regulation 30 along with Schedule III of SEBI LODR
Regulations, 2015 within the time limits prescribed
thereunder.

10. Prohibition of Insider Trading:

The listed entity is in compliance with Regulation 3(5) &

3(6) SEBI (Prohibition of Insider Trading) Regulations, 2015.

11. Actions taken by SEBI or Stock Exchange(s), if any:

No action(s) has been taken against the listed entity/ its

promoters/ directors/ subsidiaries either by SEBI or by Stock
Exchanges (including under the Standard Operating
Procedures issued by SEBI through various circulars) under
SEBI Regulations and circulars/ guidelines issued thereunder
except as provided under separate paragraph herein (**).

12. Additional Non-compliances, if any:

No additional non-compliance observed for any SEBI

regulation/ circular/guidance note etc.

Note:
1. Provide the list of all the observations in the report for the previous financial year along with
the actions taken by the listed entity on those observations.
2. Add the list of all observations in the reports pertaining to the periods prior to the previous
financial year in case the entity has not taken sufficient steps to address the concerns raised/
observations. E.g. In the report for the financial year ended 31st March, 2023, the PCS shall
provide a list of:
 all the observations in the report for the year ended 31st March, 2022 along with the actions
taken by the listed entity on those observations.

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 the observations in the reports pertaining to the year ended 31st March,2022 and earlier, in
case the entity has not taken sufficient steps to address the concerns raised/ observations in
those reports.)

Assumptions & Limitation of scope and Review:

1. Compliance of the applicable laws and ensuring the authenticity of documents and information
furnished, are the responsibilities of the management of the listed entity.
2. Our responsibility is to report based upon our examination of relevant documents and
information. This is neither an audit nor an expression of opinion.
3. We have not verified the correctness and appropriateness of financial Records and Books of
Accounts of the listed entity.
4. This Report is solely for the intended purpose of compliance in terms of Regulation 24A (2)
of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and is neither
an assurance as to the future viability of the listed entity nor of the efficacy or effectiveness
with which the management has conducted the affairs of the listed entity.

Place:
Signature: Name of the Practicing Company Secretary
Date: ACS/ FCS No.:
CP No. :
UDIN : ….
PR No. : ….

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 14 – INTERNAL AUDIT & PERFORMANCE AUDIT

1. INTRODUCTION
Historically, internal auditing was confined to ensure that, the accounting and allied records
have been properly maintained, the assets of the organization have been properly safeguarded
and that the policies and procedures laid down by the management have been complied with.
Post liberalization of economy, the growth and expansion made it increasingly difficult for
organizations to maintain control and operational efficiency. The economic conditions further
expanded organizations’ responsibilities for scheduling, managing with limited materials and
labourers, complying with government regulations, and an increased emphasis on cost efficiency
It was difficult for management to observe all the operating areas or be in touch with everybody.
This requires companies to appointed auditing personnel for report on affairs of the company,
which are known as ‘Internal Auditors’.

The operations of the Companies which have huge and sophisticated business structure and
have decentralization of their business activities among the various functional heads and division
or wherein the top management is remotely concerned with the day-to-day activities of the
concern. Now a day, the role of internal auditing has a great significance in the performance
of the company.

With the changes in the economic conditions, now the scope of internal auditing is not confined
to financial transactions it is extended up to the minute activities of the company, which may
or may not be the cost centre but have an impact on the efficiency of the company.

2. DEFINITION OF INTERNAL AUDIT

As defined by the Institute of Internal Auditors (IIA)
Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. It helps an organization accomplish its objectives
by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control and governance processes.

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 Independence is established by the organizational and reporting structure. Objectivity is achieved
by an appropriate mind-set.
The internal audit activity evaluates risk exposures relating to the organization’s governance,
operations and information systems, in relation to:
1. Effectiveness and efficiency of operations;
2. Reliability and integrity of financial and operational information;
3. Safeguarding of assets;
4. Compliance with laws, regulations, and contracts.

i. Based on the results of the risk assessment, the internal auditors evaluate the adequacy and
effectiveness of how risks are identified and managed in the above areas.
ii. They also assess other aspects such as ethics and values within the organization, performance
management, communication of risk and control information within the organization in order to
facilitate a good governance process.
iii. The objectivity, skills, and knowledge of competent internal auditors can significantly add value
to an organization’s internal control, risk management, and governance processes. Similarly an
effective internal audit activity can provide assurance to other stakeholders such as regulators,
employees, providers of finance, and shareholders.

Nature of Internal Audit:

i. A Management tool: Internal Audit serves as a management tool conducted by either the
organization's employees or an external professional firm. Its purpose is to assess the
effectiveness of internal checks and controls within the organization. The reporting authority
is generally board of directors and audit committee.
ii. A continuous Exercise: Internal Audit is a continuous and systematic process of examining
and reporting the operations and records of a concern by its employees or external agencies
specially assigned for this purpose. It is, in essence, auditing for the management and its scope
may vary depending upon the nature and size of the concern.
iii. A Control System: It is a control system concerned with examination and appraisal of other
control mechanisms.

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iv. A Risk Management Tool: Internal audit involves facilitating the development of a risk
management process, ensuring it meets key objectives, and evaluating the process. It plays a
similar role in creating and evaluating the business continuity planning process, as well as the
information security and privacy system.

CASE STUDY
HDFC Bank’s Risk Management Framework: Robust and stress-tested framework
Our robust Risk Management framework and the independence of our risk management function
set us apart as a responsible banker. It enables the execution of our strategic priorities without
taking on undue financial and non-financial risks. Our risk policies and processes and their
effective implementation through technology and governance enabled us to endure and even
grow in these highly uncertain and disruptive times. Stress testing is one of the key risk
management tools we use to mitigate and manage the existing as well as emerging risks

3. INTERNAL AUDIT UNDER THE COMPANIES ACT, 2013

i. The concept of the internal audit has been recognized as a statutory exercise under Section
138 of the Companies Act, 2013, and has been made mandatory.
ii. As per Rule 13 of Companies (Accounts) Rule, 2014, the following class of companies shall be
required to appoint an internal auditor which may be either an individual or a partnership firm
or a body corporate, namely:

Limit of Internal Audit

Listed company Unlisted Public Company Every Pvt Co.

Internal Audit is PSC-50 cr Rupees T/O- 200 Cr
T/O- 200 cr Rupees O/S Loans &
mandatory for all listed
O/S Loans & Borrowings- 100 cr Borrowings- 100 cr
companies
O/S Deposits- 25 cr

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 ABC Pvt. Ltd. having Rs. 90 lacs paid-up capital, Rs. 5 crores reserves
and turnover of last three consecutive financial years, immediately
preceding the financial year under audit, being Rs. 50 crores, Rs. 175
crores and Rs. 300 crores, but does not have any internal audit
system. In view of the management, the internal audit system is not
mandatory. Comment?

Solution:
Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013,
read with rule 13 of Companies (Audit and Auditors) Rules, 2014, every private company shall
be required to appoint an internal auditor or a firm of internal auditors, having-
a. turnover of two hundred crore rupees or more during the preceding financial year; or
b. outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year.
Conclusion: In the instant case, ABC Pvt. Ltd. is having a turnover of Rs. 300 crores during
the preceding financial year which is more than two hundred crore rupees. Hence, the company
has the mandatorily statutory requirement to appoint an Internal Auditor and mandatorily
conduct an internal audit.
Will the Partnership firm / Proprietary firm mandatorily required
appointing an Internal Auditor?

Solution:
No, the Partnership firm / Proprietary firm is not mandatorily required to appoint an Internal
Auditor. However, voluntary the Partnership firm / Proprietary firm can appoint an internal
auditor of the organization.

The Management of XYZ Pvt. Ltd appointed Luthra and Co.

(Chartered Accounting Firm) as an internal auditor of the
company who is also a statutory auditor of the XYZ Pvt. Ltd. Is
the appointment of Luthra and Co. (Chartered Accounting Firm)
as an Internal Auditor of XYZ Pvt. Ltd. is valid?

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Solution:
As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in the practice or not), or such other professional as may be
decided by the Board to conduct an internal audit of the functions and activities of the
company. The internal auditor may or may not be an employee of the company. However,
Statutory Auditor shall not be appointed as internal auditor of the Company.
Therefore, the appointment of Luthra and Co. (Chartered Accounting Firm) as an internal
auditor of XYZ Pvt. Ltd. is not valid as Luthra and Co. is also a statutory auditor of XYZ Pvt.
Ltd

The audit committee of the company or the board shall, in consultation with the internal
auditor, formulate the scope, functioning, periodicity and methodology for conducting the
internal audit.
The Companies Act, 2013 does not prescribes any specific time frame for conducting internal
audit but it is considered a good practice to conduct the audit on a quarterly basis so that the
compliances are monitored properly and there are no frauds or deviations in the company.

Penal Provisions for default/non-compliance

As per section 450 of the Companies Act, 2013, if a company or any officer of a company or
any other person contravenes any of the provisions of this Act or the rules made thereunder,
for which no penalty or punishment is provided elsewhere in this Act, the company and every
officer of the company who is in default or such other person shall be liable to a penalty of
ten thousand rupees, and in case of continuing contravention, with a further penalty of one
thousand rupees for each day after the first during which the contravention continues, subject
to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of
an officer who is in default. Is there any penalty for non-compliance with respect to
appointment of internal auditor?

Solution:
Yes, If a company or any other officer of the company, contravenes the provisions of this
section, then the company or any officer of the company who is in default is liable for
punishment with a penalty of up to Rs.10,000. In case of continuation of default in complying

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 with the above section further fine of Rs.1,000 per day will be imposed subject to a maximum
of Rs. 2,00,000 in case of a company and Rs. 50,000 in case of an officer who is in default or
any other person.

CASE STUDY
M/s. Indu Nissan Oxo Chemical Industries Limited,
1. The Ministry of Corporate Affairs has ordered to inquiry of the subject company under section
206 of the Companies Act 2013. During the course of an inquiry, it was observed that the
company is the eligible company to appoint an internal auditor and the company failed to
appoint an internal auditor which is the mandatory requirement under section 138 of the
Companies Act 2013.
2. ROC issued a show cause notice to the company and its directors. The company replied that
the company has been shut down since 1999 and it had been a sick unit since the year 2002.
3. he company was also registered with Board for Industrial and Financial Reconstruction (BIFR)
under the Sick Industrial Companies (Special Provisions) Act 1985.
4. The ROC issued Personal hearing notice to give a reasonable opportunity of being heard to the
company and its directors.
5. On the scheduled date of the hearing neither the company nor KMP had appeared for the
hearing and also not submitted any reply / letter, in spite of further reminder / written notice
issued to the company / its director.
6. Hence, the Registrar of Companies / Adjudicating Officer proceeded on the matter in the
absence of a reply of the company / non- appearance of any of the company officials even
after providing the sufficient opportunity to the Company / director.
7. the Registrar of Companies/ Adjudicating Officer came to the conclusion that the company and
its director committed the default of section 138 by not appointing an internal auditor for a
period of seven years and therefore, it is concluded that the company and its director in default
were liable for penalty under section 454 of the Companies Act 2013 for default under section
138 of the Companies Act 2013.
8. Since, none of the representatives of the company were oresent for personal hearing despite
constant reminders, Registrar of Companies / Adjudicating Officer went ahead on this matter

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 ex-parte and passed the adjudicating order as per the provisions of Section 454 (3) of the
Companies Act 2013.
9. The Registrar of Companies / Adjudicating Officer imposed penalty on the company and its
directors amounting to Rs. 1.4 lacs

ROLE OF COMPANY SECRETARY AS AN INTERNAL AUDITOR

A Company Secretary as an Internal Auditor allocated in the act, is expected to:
i. Ensure proper following of accounting standards and conventions by the company.
ii. Ensure audit of the company’s financial statements and books of accounts.
iii. Ensure management of compliance timely and properly and true representation of management
funding and financial risk in business.
iv. Ensure safely keeping of records of meetings held in the company.
v. Provide required advisory on finance usage and corporate litigation.
vi. Ensure proper management of capital, debt and tax planning.
vii. Prepare cost structures and representing efficiency indicators of the business.
viii. Design audit methodologies and reporting criteria.

4. APPOINTMENT OF INTERNAL AUDITOR

i. Section 179 of Companies Act, 2013 read with Rule 8 (4) of the Companies (Meeting of the
Board and its Power), Rules 2014 provide that the appointment of the internal auditors shall
be done only through a resolutions passed by the board of directors at the meetings of the
board.
ii. The resolution for appointment of the Internal Auditor shall be filed with the Registrar of
Companies within 30 days from the passing of the said resolution pursuant to the provisions
of Section 117 & 179 of the Companies Act, 2013.
iii. Thus, the appointment of internal auditor can be made only at the meeting of the board and
whenever an internal auditor is appointed in a company, the resolution should be filed with the
concerned Registrar of Companies vide e-Form MGT-14 within 30 days from the date of passing
of the said resolution.

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iv. In case of Private Companies, an exemption has been granted from filing of e-Form MGT-14,
for resolution passed in pursuance of sub-section (3) of section 179 of the Companies Act
2013.

Certain best practices adopted by companies in terms of Internal Audit (2022):

i. Bharti Airtel Limited: The Company has 100% Independent Audit Committee. The Company
has a robust Internal Assurance Group (IAG) led by Chief Internal Auditor supported by
reputed independent firms.
ii. Cipla Limited: Independent Assurance Report on the non-financial/ sustainability performance.
The audit committee reviews and approves the non-audit services availed from the Statutory
Auditor and confirmed that such services did not affect the independence of the auditor in
any manner.
iii. UNO Minda Limited: The company rotates Internal Auditors at regular intervals
iv. ONGC Videsh Limited: Statutory Auditors and Internal Auditors are invited for their remarks
and observations at the quarterly audit committee meetings.
v. Tata Chemicals Limited: The company conducts internal audit through an independent
external agency on a continuous basis

Terms of reference
The overall scope of internal audit should be formalized in terms of reference which is referred
to as an audit manual, and approved by the board, normally through the audit committee.
These should then be communicated to the functional heads within the organisation. Internal
audit’s terms of reference or manual should provide clarity about its:
1. Strategy and Objectives
2. Roles and Responsibilities within the organisation
3. Scope of Work
4. Accountability of the Audit Committee
5. Reporting lines for line management purposes
6. Accessibility to the board and the audit committee
7. Unfettered access to all information, people and records across the organisation

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 Internal Auditor’s Skills
i. Internal auditors should develop and maintain a healthy level of professional skepticism and
objectivity to assist in evaluating information and making judgments.
ii. Internal auditors should possess exceptional verbal and written communication skills.
iii. They should be proficient in negotiating and reasoning with a variety of departments and
groups over which internal audit may have no formal authority.
iv. Personal integrity, professional due diligence and curiosity are important traits for individuals
tasked with conducting internal audit work.

General Skills Specific Skills

a. Technical Standards a. Planning Audit
b. Positive attitude and Engagements
Interpersonal Skills b. Team building
c. IT Skills c. Managing Audit
d. Interviewing Skills Engagements
e. Audit Documentation d. Making Professional
Skills Presentations
f. Reporting Skills e. Knowledge management
g. skills

f.
General Skills
i. Technical Standards: The internal auditor should have adequate knowledge of the applicable
Indian Accounting Standards and also in-depth knowledge on how to apply them in practice.
ii. Positive Attitude and Interpersonal Skills: The internal auditor should possess positive and
objective attitude, free of any prejudice and should posses good interpersonal and communication
skills.
iii. IT Skills: With the growing use of technology in business operations, internal auditors need to
be familiar with IT. They should understand how technology is used in the organization and be
skilled in using IT tools for effective internal audits.
v. Interviewing Skills: Interviewing is the process of obtaining information through verbal
interaction with clients. It involves detailed questioning on various processes and procedures to
ascertain whether the client’s organization complies with the established standard operating

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 procedure and practices and whether there is favorable or adverse variance from the standards,
and in case of adverse variance what measures have been initiated by the management to
ensure prevention of such adverse variances in future.
vi. Audit Documentation Skills: Audit documentation is the process of compiling and filing of the
findings of audit. It includes gathering necessary documents as evidence to support audit
findings, organizing the analysis and supporting documents logically, and compiling information
for structured presentation.
vii. Reporting Skills: The audit report is the outcome of any audit task. Hence, it's crucial to write
the report objectively, addressing process gaps appropriately. Each observation should present
the facts about the issue, its impact, the cause, and suggestions for corrective actions and
improvements.

Specific Skills
These skills would be required at senior levels and will assist the senior internal audit personnel
in discharging the supervisory and management role efficiently and effectively.
i. Planning Audit Engagements: This involves the ability to plan audit engagements on the basis
of a comprehensive risk assessment prior to commencement of audit. The individual has to be
experienced in the conduct of a brainstorming discussion on risk assessment and should have
the necessary experience and capability to identify the significant issues that might come up
during the audit.
ii. Team Building: This involves collecting people and coordinating amongst them to ensure that
they work as a unified team. It involves identification of team leaders, delegation of authority,
motivating the team and communicating to them the results expected.
iii. Managing Audit Engagements: This involves administration of the audit assignment, including
the task of meeting auditees, understanding their expectations, communicating the engagement
plan to them, selecting the right team, etc.
iv. Making Professional Presentations: An experienced internal auditor should be able to make
effective presentations to the Audit Committee. This would involve selecting and presenting
the major issues that warrant senior management attention in a clear and unambiguous manner.

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v. Knowledge Management Skills: An internal auditor has sufficient information or obtains
information about the external environment of the company, example, the industry, the
regulators, the customers, etc.
The internal auditor needs to have skills to effectively manage the knowledge, for example,
deciding on issues such as:
i. collating the knowledge.
ii. how and where to apply the knowledge.
iii. assessing which team member needs what type and quantum of knowledge.
iv. assessing when the knowledge has become obsolete and needs updating.
v. establishing the relationships between various pieces of knowledge and assessing how the same
affects the internal audit.
vi. deciding on manner and channels of flow of information. vii. Benchmarking Skills

Besides the above skills, an Internal Auditor should also possess following skills:
1. Analytical/Critical thinking skills
2. Data mining and Analysis Skills
3. Good Business Acumen and the ability to understand different business needs
4. He should have the ability to trace out facts and figures
5. Should be methodical and tactful while dealing with people and processes
6. Should be a hard worker, always cautious, vigilant and inquisitive
7. Should be courageous, assertive and determined with the ability to take independent decisions
8. Should lead by being punctual, reliable and updated with the latest knowledge and skill set.

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 5. OBJECTIVES OF INTERNAL AUDIT

Reviewing the system of

Verifying the Accuracy Detection of Errors and
internal check and
of Accounts Frauds
internal controls

Adherence to Accounting Verifying the Company Reviewing the

Standard Assests and Liabilites Managerial Functions

The main objective of the internal audit process is to provide an assurance on the organisation’s
risk management, internal control environment and governance framework through review and
appraisal of:
(a) Operational control framework including fundamental and basic systems in all areas of the
business.
(b) The adequacy of risk identification, assessment and mitigation in the organisation. This shall
include fraud risks.
(c) Extent, adequacy, relevance of, and compliance with existing policy, plans and procedure
documents within the organisation.
(d) The extent of compliance with relevant statutory requirements.
(e) Status of implementation of internal / external audit recommendations.
(f) Evaluating internal control
Internal control is broadly defined as a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the
achievement of the following core objectives for which all businesses strive:
 Effectiveness and efficiency of operations;
 Reliability of financial and management reporting;
 Compliance with laws and regulations;
 Accomplishment of established goals for operations;
 Safeguarding of assets;

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(g) Determines the risk area of the organisation;
(h) Establishes the risk management framework;
(i) Identifies potential threats and assesses risks;
(j) Decides on response to risks like implementation of control;
(k) Monitors and coordinates the risk management processes and the outcomes;
(l) Provides assurance on the effectiveness of risk management processes;

6. SCOPE OF INTERNAL AUDIT

Internal Auditor evaluate the adequacy and effectiveness of organization’s system of internal
control and the quality of actual performance’
According to the Institute of Internal Auditors, internal audit involves the following areas of
operations, which can be discussed as follows:

1. Review of Internal Control Systems and Procedures

a. The internal auditor should determine whether the internal control system is in consonance
with the organizational structure. As far as possible, control should be in built in the operating
functions, if they are cost effective.
b. Each control should be reviewed and analysed in terms of its costs and benefits. Additionally,
it's important to verify if internal controls were consistently utilized during the intended reliance
period. If there's a breakdown in controls for a specific part of the intended reliance, that area
requires special attention

2. Reliability and Integrity of Financial and Operating Information

a. The internal auditor should review the information systems to evaluate the reliability and
integrity of financial and operating information given to management and to external agencies
such as governmental bodies, trade organisations and labour unions.
b. He should examine the accuracy and reliability of financial and operational records.
c. He should review the frequency and timeliness of the reports keeping in view the statutory
time limits in the case of reports to government agencies.
d. He should examine whether the information mentioned in the report is meaningful to the user
which should be evaluated with reference to their costs.

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e. The internal auditor should examine whether the reporting is by exception i.e. the reports
highlight the significant and distinctive features.
f. Internal Auditors should review the reliability and integrity of financial and operating
information and the means used to identify, measure, classify and report such information.

3. Economical and Efficient Use of Resources

a. The internal auditor should check whether proper operating standards and norms have been
established for measuring economical and efficient use of resources. They should be detailed
enough to be identifiable with specific operating responsibilities and should be capable of being
used by operating personnel for monitoring and evaluating their performance.
b. The internal auditor should review the methods of establishing the operating standards and
norms. He should carefully examine the assumptions made while setting the standards to
ensure that they are appropriate and necessary.
c. The variances should be examined to evaluate whether or not the standards and norms are
practical and should examine whether analysis of variances is communicated to those concerned
in time. It should be examined that while communicating the variances serious matters are
highlighted.
d. Internal auditor also examined if there are any underutilised resources or understaffing and
overstaffing. Such instances may consist of under-utilized machines, unoccupied storage space,
huge cash or bank balances, idle man power etc.
e. While commenting on staffing, the internal auditor should pay special attention to non-
productive work being performed. This would require an enquiry into the job descriptions of
employees combined with an intelligent observation of the work being done.
f. Finally the internal auditor should review all procedures with reference to their costs and
benefits. One of the factors resulting in inefficiency is that in many cases procedures become
hindrance to operations.

4. Compliance with Laws, Policies, Plans, Procedures, and Regulations

a. It is essential that the various functional segments of an enterprise comply with the relevant
policies, plans, procedures, laws and regulations so that the operations are carried out in
coordinated manner.

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b. Internal Auditor should review the systems established to ensure compliance with those policies,
plans and procedures, law and regulations which could have a significant impact on operations
and should determine whether the organization is in compliance thereof
c. The internal auditor should examine whether the management has a system by which its
policies, plans and procedures are communicated to all concerned.
d. He should also examine the system of periodical review of existing policies particularly when
there is a change in the method and nature of operations of the enterprise
e. By combining the results of his review of the adequacy of the systems with the result of his
compliance tests, the internal auditor should be able to evaluate the effectiveness of the
former.

5. Review of Organizational Structure

a. The internal auditor should conduct an appraisal of the organisation structure to ascertain
whether it is in harmony with the objectives of the enterprise and whether the assignment of
responsibilities is in consonance.
b. It is also important to review whether responsibility and authority are in harmony with the
grouping pattern.
c. The internal auditor should examine the organisation chart to find out whether the structure
is simple and economical and that no function enjoys an undue dominance over the others.
d. He should see whether the lines of authority and responsibility are clearly defined and
communicated to all the organisational levels.
e. There should be a proper balance between the span of control of different executives at
different levels. He should examine whether there is a unity of command i.e., whether each
person reports only to one superior. Where dual responsibilities cannot be avoided, the primary
one should be specified and the specific responsibility to each senior fixed.
f. He should examine whether there is a sufficient flexibility in the day to day working of the
organisation and that initiative is not being stifled by a strict adherence to rules.

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6. Accomplishment of Established Goals for Operations
a. The internal auditor should review the overall objectives of the enterprise to evaluate whether
they are clearly stated and are attainable. The translation of such overall objectives into specific
objectives for each department and programme should be reviewed.
b. The internal auditor should examine whether to the extent possible, objectives are expressed in
precise quantifiable terms (both monetary and non-monetary) to facilitate detailed planning
and execution
c. There should also be sufficient flexibility in the plans to permit such improvements in their
implementation, as would benefit the enterprises as a whole.
d. The internal auditor should examine whether departmental plans are supported by top
management. The departmental plan summaries should be sent to concerned managers. These
should be discussed and communicated at meetings at which all managers participate.
e. Internal Auditor should review operations and programmes to ascertain whether results are
consistent with established objectives and goals and whether the operations or programmes are
being carried out as planned.

7. Review of Custodianship and Safeguarding of Assets

a. The Internal Auditor should verify the existence of the assets and also review the control
system to ensure that all assets are accounted fully.
b. He should review the means used for safeguarding assets against losses e.g. fire, improper or
negligent activity, theft and illegal acts etc.
c. He should review the control systems for intangible assets e.g. the procedures relating to credit
control.
d. He should also review the adequacy of the insurance cover for the various risks involved.

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 7. INTERNAL AUDIT CORE PRINCIPLES

Demonstrates integrity.

Demonstrates competence and due professional care.

3 Independent and objective exercise.

4 Aligns with the strategies, objectives, and risks of the organisation.

Is appropriately positioned and adequately resourced.

Demonstrates quality and continuous improvement.

Communicates effectively.

Provides risk-based assurance.

Insightful, proactive, and future-focused.

Promotes organisational improvement.

CASE STUDY- The story of internal controls and Netflix

i. This case emphasizes the need for a robust compliance program. The Committee of Sponsoring
Organizations (COSO) of the Treadway Commission identifies internal controls’ five integral
components: the control environment, risk assessment, control activity, information and
communication, and monitoring activities. Performing periodic evaluations of the program, a
subset of the monitoring component, is critical to ascertain if internal controls are present,
designed appropriately and functioning properly and effectively

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ii. Like most companies, Netflix maintains a Code of Ethics; Code of Conduct; and a Gifts, Travel
and Entertainment policy that addresses and prohibits employee conflicts of interest and
requires the disclosure of actual or apparent conflicts of interest.
iii. Although these policies are essential, it is equally important to build a culture that emphasizes
ethical behavior, operationalizes procedures and monitors compliance with the program. Often,
the failure to monitor provides employees with the opportunity to engage in misconduct and
exposes the company to unnecessary risk and potential liability.
iv. From 2011 until 2014, Kail was Netflix’s VP in charge of IT operations. He approved contracts
to purchase IT products and services from smaller outside vendors and authorized the
corresponding payments as part of his role. However, he selected the IT contracts according to
the kickbacks he would receive rather than on their merit.
v. As the evidence at trial demonstrated, Netflix’s internal control failures allowed Kail to employ
a “pay-to-play” scheme. As part of his scheme, he approved millions of dollars in contracts
for goods and services, and in exchange, he received over $500,000 and stock options from nine
tech companies.
vi. Kail’s actions impacted Netflix’s operations and compliance objectives, hurt the company’s
shareholders and tarnished Netflix’s reputation.
vii. On December 14, 2021, Mr. Michael Kail, was sentenced to 30 months after his conviction for
fraud and money laundering

RECOMMENDED CONTROLS TO PREVENT AND DETECT FRAUD AND EDUCATE TO IMPROVE

THE ORGANIZATION’S FRAUD AWARENESS
1. Segregation of duties:
Ensure that no single person has control over multiple aspects of a process or transaction. For
example, the person who approves a purchase should not be the same person who pays for it.
Maker, Checker and Approver is an excellent tool to prevent errors and frauds.
2. Rotation of duties: Ensure that there is periodical rotation of duties for key positions, else
huge fraud can be perpetrated by one employee and will not be noticed. Punjab National Bank
fraud also happened due to absence of mandatory job rotation or transfer of few employees of
the branch.

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3. Mandatory vacation: Having a HR policy for giving mandatory vacation to key employees helps
the employees to come fresh after vacation and also prevents employees from hiding their
tracks of crime.
4. Treat employees well: If employees are treated well by recognising their work and giving
appropriate rewards, they feel motivated rather than being underpaid or being ignored for
promotion.
5. Regular audits: Conduct regular internal audits especially at remote locations where there are
significant projects being executed or manufacturing facilities are run to identify potential fraud
and ensure compliance with internal controls.
6. Background checks: Conduct thorough background checks on employees, especially those in
positions of trust or responsibility.
7. Whistleblower hotline: Implement a confidential hotline for employees to report suspicious
activity without fear of retaliation.
8. Use of technology: Implement fraud detection software and use data analytics to identify
patterns of suspicious activity.
9. Fraud awareness training: Provide periodical training to all employees on the types of fraud
that can occur, how to identify it, and how to report it. Also ensure that adequate documents
are kept in HR as evidence to prove that the employee participated in the training and
understood it. This will help on a later date if the fraudulent employee feigns ignorance.
10. Code of conduct: Establish a code of conduct that clearly defines ethical behavior and
expectations for employees.
11. Management oversight and Tone at the top: Ensure that management regularly reviews and
approves transactions and financial statements. Ensure that independent directors are really
independent.
12. Reinforce accountability: Hold employees accountable for their actions and ensure that
consequences are enforced when necessary.
13. Document retention: Establish policies for the retention and destruction of records to ensure
that important documents are not lost or destroyed.

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 8. INDEPENDENCE OF INTERNAL AUDITOR
i. Independence is the freedom of internal auditor to carry out the responsibilities without being
biased
ii. Objectivity allows internal auditors to perform engagements in such a manner that no quality
compromises are made. Objectivity requires that judgment of internal auditors should not be
influenced by others.
iii. Achieving independence and objectivity in work is one of the critical preconditions that internal
auditors need to meet to serve the purpose. Independence means ensuring the possibility of
objective performance of internal auditor’s duties, and is linked to the organizational positioning
of internal audit in the company, reporting relationships with boards of directors, audit
committee, or other governing bodies separated from the management, authority for the
evaluation of information, reports, and the like.
iv. Under the statutory provisions of Companies Act, 2013, internal auditor may or may not be an
employee of the company, but he evaluates the functioning of the management at different
levels. Therefore, to be efficient and effective, the internal auditor must have adequate
independence.
v. It may be noted that by its very nature, the internal audit function cannot be expected to
have the same degree of independence as is essential when the external auditor expresses his
opinion on the financial information. To ensure his independence he is made responsible directly
to the board of directors through audit committee. Such a channel of communication provides
an independent mode whereby an internal auditor can communicate and share his views on
the scope of internal audit, findings, etc.
vi. If internal auditor is made subordinate to lower level management, his independence will be
effected which will affect his functioning and effectiveness.
vii. The following factors impairing the independence of internal auditors:
i. Business relationship: involves common commercial or financial interest between the auditor
and client. This shall create self-interest or advocacy threats towards audit independence.
Therefore, the business relationship shall be restricted as much as possible.
Example (Not Important for Exam): The wife of auditor is the supplier of the client. The
auditor here has indirectly created business relationship between him and the client.

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 ii. Employment with audit client: Any kind of employment relationship with the Auditee Client
gives the impression that the audit is not performed independently. Such relationships create
self-review threats, familiarity threats, and intimidation threats.
iii. Prior work with audit client: The senior personnel may have had prior work experience with
the audit client. But if the clients had a good relationship it will create a familiarity threat
and self-interest threat which will impact the audit independence and objectivity.
iv. Gift and hospitality: The auditors should not accept any gifts (or kind) from the auditee as
such gift and hospitality ought to create familiarity and self-interest threats.
v. Family and personal relationships: There may exist family and personal relationships between
member of audit team and audit client. This creates self-interest and familiarity threats
towards audit independence.
vi. Non-audit services to audit clients: Offering non audit services to audit clients creates self-
review threats to auditor’s independence inherent in the model of business of audit firms.

CASE STUDY: Toshiba-Internal Audit Failure

i. In July 2015, Toshiba Corp president Mr. Hisao resigned after investigations found that the
company inflated earnings by $1.2 billion during the period 2009-2014. The company Toshiba
was one of the early adopters of corporate governance reforms initiated in Japan.
ii. The investment committee observed:
a. The fault in internal audit in Toshiba was that it focused on consultation service rather than
assurance service.
b. In Toshiba, the audit committee was neither capable nor independent. Internal Audit can
function independently only if audit committee is capable, independent and effective, and
internal auditor reports to the audit committee. The three external members of audit committee
had no knowledge of finance and accounting. The ex-CFO, who was the CFO during the
timeframe when accounting irregularities occurred, was the only whole time member of the
audit committee.
c. A corporate culture existed in Toshiba whereby employees could not act contrary to the intent
of their superiors. In such a culture an upright internal auditor cannot survive, particularly if
he is not independent of the management.

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 9. INTERNAL AUDIT TECHNIQUES
i. Review of Operating Environment
For carrying out the audit effectively, it is necessary for an internal auditor to understand how
the company operates by referring to departmental employees, external auditors report, and risk
specialists. A firm’s operating environment describes management’s ethical qualities, leadership
style and business practices.

ii. Review Controls

An auditor applies generally accepted auditing standards (GAAS) to detect mechanisms,
procedures, tools and methodologies that build controls. An internal auditor refers to previous
year works to determine company’s departmental and inquire from segment employees who
perform such controls on a regular basis

iii. Test Controls

 An internal auditor tests a business organization’s controls, policies and guidelines to ensure
that such controls are adequately designed and are operating effectively.
 Controls are mechanisms and methodologies a corporation’s management puts into place to
prevent losses due to error, fraud, theft or breaks in technology systems.

iv. Account Details

 An internal auditor performs tests of account details to ensure that financial statements of a
business entity are not “materially misstated.”
 An auditor tests the account details and account balances if a firm’s controls and processes
are not adequate or not functioning properly.

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10. INTERNAL AUDIT PROCESS: STEP WISE APPROACH

Establish and communicate the scope and objectives for the audit to appropriate
management.

Develop an understanding of the business area under review. This includes objectives,
Step 2 measurements and key transaction types. This involves review of documents and interviews.
Flow charts and narratives may be created if necessary.

Describe the key risks facing the business activities within the scope of the audit.
Step 3

Identify control procedures used to ensure each key risk and transaction type is properly
Step 4 controlled and monitored.

Develop and execute a risk-based sampling and testing approach to determine whether the
Step 5 most important controls are operating as intended.

Report issues and challenges identified and negotiate action plans and solutions with
Step 6 management to address the problems.

Follow-up on reported findings at appropriate intervals. Internal audit departments maintain

a follow-up database for this purpose.

11. EVALUATION OF INTERNAL AUDIT FUNCTION BY AN AUDITOR

The internal audit function greatly assist the Secretarial auditor in determining the extent to
which he can place reliance upon the work of the internal auditor.
The important aspects to be considered in this context are:
i. Organisational Status - Whether internal audit is undertaken by an outside agency or by an
internal audit department within the entity itself. The internal auditor reports to the
management, in an ideal situation he reports to the highest level of management and is free
of any other operating responsibility. Any constraints or restrictions placed upon his work by

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 management should be carefully evaluated. In particular, the internal auditor should be free to
communicate fully with the external auditor.
ii. Scope of Audit Function - The external auditor should ascertain the nature and depth of
coverage of the assignment which the internal auditor discharges for management. He should
also ascertain to what extent the management considers, and where appropriate acts upon
internal audit recommendations.
iii. Technical Competence - The external auditor should ascertain that internal audit work is
performed by persons having adequate technical training and proficiency. This may be
accomplished by reviewing the experience and professional qualifications of the persons
undertaking the internal audit work.
iv. Due Professional Care - The external auditor should ascertain whether internal audit work
appears to be properly planned, supervised, reviewed and documented. An example of the exercise
of due professional care by the internal auditor is the existence of adequate audit manuals,
audit programmes and working papers.
v. Monitoring of internal control: The internal audit function may be assigned specific
responsibility for reviewing controls, monitoring their operation and recommending improvements
thereto.
vi. Examination of financial and operating information: The internal audit function may be
assigned to review the means used to identify, measure, classify and report financial and
operating information, and to make specific inquiry into individual items, including detailed
testing of transactions, balances and procedures.
vii. Review of operating activities: The internal audit function may be assigned to review the
economy, efficiency and effectiveness of operating activities, including non- financial activities
of an entity.
viii. Review of compliance with laws and regulations: The internal audit function may be assigned
to review compliance with laws, regulations and other external requirements, and with
management policies and directives and other internal requirements.
ix. Risk management: The internal audit function may assist the organization by identifying and
evaluating significant exposures to risk and contributing to the improvement of risk management
and control systems.

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 x. Governance: The internal audit function may assess the governance process in its
accomplishment of objectives on ethics and values, performance management and
accountability, communicating risk and control information to appropriate areas of the
organization and effectiveness of communication among those charged with governance,
external and internal auditors, and management.

REPORT WRITING – COMMUNICATING ENGAGEMENT RESULTS

The essential part of internal audit is the dissemination of the results of internal audit and
reporting the findings to management as it reports the noncompliance and highlights the
aspects which need to be improved.

Objectives of Reporting
The objective of reporting results is to highlight the effectiveness of internal controls and risk
management processes to enhance governance in line with the Internal Audit Charter.
The objectives of issuing Internal Audit Reports on significant internal audit assignments are
to:
(a) Share with the auditee, details of all significant findings based on audit procedures undertaken
(b) Allow management to understand the issues and take corrective actions
(c) Leads to improved performance and control framework
(d) The follow-up process monitors the progress of agreed upon management action plans and
reports this progress to senior management and the audit committee.

An Internal Audit report is basically a four step process comprising of:

i. What is Wrong?
Disclosure of findings and processes involved in arriving at such finding.
ii. Why it is Wrong?
Description of the findings-the root cause analysis.
iii. How to correct it?
Recommendations and Suggestions.
iv. What will be done?
Auditee’s views and comments.

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 12. ROLE OF INTERNAL AUDIT IN ORGANIZATION CONTROL MECHANISM
1. Internal Control
As per Section 134 of the Companies Act, 2013, the term “Internal Financial Controls” means
the policies and procedures adopted by the company for ensuring, orderly and efficient conduct
of business, including adherence to company’s policies, safeguarding of its assets, prevention
and detection of frauds and errors, accuracy and completeness of the accounting records, and
timely preparation of reliable financial information.
Objectives
(i) To ensure that the transactions are executed in accordance with management’s general or
specific authorization;
(ii) To make sure that all the transactions are promptly recorded in the correct amount in the
appropriate accounts and in the accounting period in which executed, so as to permit preparation
of financial information within a framework of recognized accounting policies and practices and
relevant statutory requirements, if any, and to maintain accountability for assets;
(iii) To ensure assets are safeguarded from unauthorised access, use or disposition; and
(iv) To make sure that appropriate action is taken with regard to any differences between the
recorded assets are compared with the existing assets at reasonable intervals.

EXAMINE THE EFFECTIVENESS AND EFFICIENCY OF INTERNAL CONTROLS

i. Evaluating the design of a control involves considering whether the control, individually or in
combination with other controls, is capable of effectively preventing, or detecting and correcting,
material misstatements.
ii. Implementation of a control means that the control exists and that the entity is using it.
iii. An entity’s system of internal control contains manual elements and often contains automated
elements. The use of manual or automated elements in internal control also affects the manner
in which transactions are initiated, recorded, processed, and reported. An entity’s mix of manual
and automated elements in internal control varies with the nature and complexity of the
entity’s use of information technology.

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 CASE STUDY -WorldCom Scam, USA
Background:
In 1983, Bernard Ebbers and 3 other investors formed Long Distance Discount Services, Inc.
based in Jackson, Mississippi and in 1985, Ebbers was named chief executive officer. The
company acquired over 60 telecommunications firms and in 1995, it changed its name to
WorldCom. The company became a public company as a corporation in 1989 as a result of a
merger with Advantage Companies Inc. The company name was changed to LDDS WorldCom
in 1995. The company grew rapidly in the 1990s, after completing several mergers and
acquisitions.

Accounting Manipulation:
i. Ebbers, CFO Scott Sullivan, Controller David Myers and general accounting director Buford
“Buddy” Yates used fraudulent accounting methods to disguise WorldCom’s decreasing earnings
in order to maintain the company’s stock price by capitalizing expenses, it exaggerated profits.
ii. In 1999, revenue growth slowed and the stock price began falling.
iii. In 2000, WorldCom began classifying operating expenses as long-term capital investments.
Hiding these expenses in this way gave them another $3.85 billion.
iv. Broadly financial statement fraud was accomplished primarily in two ways:
a. Booking “line costs” (interconnection expenses with other telecommunication companies) as
capital expenditures on the balance sheet instead of expenses.
b. Inflating revenues with bogus accounting entries from “corporate unallocated revenue accounts

Role of Internal Auditors as a Whistleblower

i. Tips were sent to Internal Auditor about the manipulation.
ii. Cynthia Cooper, WorldCom’s vice president - internal audit, instructed her internal audit team
to audit all capital expenditures.
iii. Internal audit team found $500 million computer expenses having been entered in the books
without any documents. There was also another $2 billion in questionable entries.
iv. WorldCom’s audit committee was asked for documents supporting capital expenditures, it could
not produce them.

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 v. Senior vice president and controller admitted to the internal auditors that they weren’t following
accounting standards and admitted to inflating its profits by $3.8 billion over the previous five
quarters.
vi. When internal audit team informed about what happened, both the company’s current auditor,
KPMG, and its former auditor, Andersen, agreed that accounting entries were not in accordance
with Generally Accepted Accounting Principles (GAAP)
vii. After review by the company’s audit committee, WorldCom’s board accepted the resignation of
senior vice president and controller.
viii. A little over a month after the internal audit began, WorldCom filed for bankruptcy.

Internal Control Mechanism

ii. It is important to constitute and maintain an audit committee that shall provide assistance to
the board of directors in fulfilling their oversight responsibility to the shareholders relating to:
a. The integrity of the financial statements and the financial reporting process and principles;
b. Internal controls;
c. The qualifications, independence, remuneration, and performance of the independent auditors;
d. Staffing, focus, scope, performance, and effectiveness of the internal audit function;
e. Risk management; and
f. Compliance with legal, regulatory, and corporate governance requirements.

iii. The board defines clearly the roles and responsibilities of the audit committee. Management
however, has primary responsibility for financial statements and reporting process, internal
controls, legal and regulatory compliance and risk management.
iv. The internal auditor should examine and contribute to the ongoing effectiveness of the internal
control system through evaluation and recommendations. However, the internal auditor is not
vested with management’s primary responsibility for designing, implementing, maintaining and
documenting internal control.
v. The internal auditor should focus towards improving the internal control structure and promoting
better corporate governance. The role of the internal auditor encompasses:
 Evaluation of the efficiency and effectiveness of controls
 Recommending new controls where needed or discontinuing unnecessary controls

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  Using control frameworks
 Developing Control self-assessment

Companies Act 2013 provides that

i. Every Audit Committee shall act in accordance with the terms of reference specified in writing
by the Board which shall, include evaluation of internal financial controls and risk management
systems.
ii. The Audit Committee may call for the comments of the auditors about internal control systems,
the scope of audit, including the observations of the auditors and review of financial statement
before their submission to the Board and may also discuss any related issues with the internal
and statutory auditors and the management of the company.
iii. Section 134(5) requires directors to state their responsibility on internal financial controls in
case of listed companies and auditors are required to report on the adequacy and operating
effectiveness of such controls in case of all companies.

SEBI ( Listing Obligations and Disclosure Requirements ) Regulations, 2015, specifies:

i. Ensuring the integrity of the listed entity’s accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place, in
particular, systems for risk management, financial and operational control, and compliance with
the law.
ii. Regulation 18 of Audit Committee:
Role of the audit committee and the information to be reviewed by the audit committee shall
be as specified in Part C of Schedule II including
a. evaluation of internal financial controls and risk management systems;
b. reviewing, with the management, performance of statutory and internal auditors, adequacy of
the internal control systems
iii. Compliance Certificate by Chief Executive Officer and Chief Financial Officer to state:
Responsibility for establishing and maintaining internal controls for financial reporting and that
they have evaluated the effectiveness of internal control systems pertaining to financial
reporting

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 2. Risk management
i. Risk management minimises the probable loss through the effective and efficient management.
It evaluates risks in terms of probability of occurrence and its impact.
ii. Internal auditor monitors and evaluates the effectiveness of the organization’s Risk
management processes. Risk management relating to an organization objective, and
identification, analysis, and response to those risks that could potentially impact its ability to
realize its objectives.
iii. Generally, the risks fall under strategic, operational, financial reporting, and legal/regulatory
categories. Management performs risk assessment activities as part of the ordinary course of
business in each of these categories. Examples include: strategic planning, marketing planning,
capital planning, budgeting, hedging, incentive payout structure, and credit/lending practices.
The finance department access the risk relating to account preparation, financial reporting and
disclosures, corporate legal adviser often prepares comprehensive assessments of the current
and potential litigation a company faces. Internal auditors may evaluate each of these activities,
or focus on the processes used by management to report and monitor the risks identified. For
example, internal auditors can advise management regarding the reporting of forward-looking
operating measures to the board, to help identify emerging risks.

3. Corporate Governance
i. Internal auditing activity as it relates to corporate governance is generally informal,
accomplished primarily through participation in meetings and discussions with members of the
board of directors.
ii. The internal auditor is often considered one of the “four pillars” of corporate governance, the
other pillars being the board of directors, management, and the external auditor.
iii. A primary focus area of internal auditing as it relates to corporate governance is helping the
audit committee of the board of directors (or equivalent) perform its responsibilities effectively.
This may include reporting critical internal control problems, informing the committee privately
on the capabilities of key managers, suggesting questions or topics for the audit committee’s
meeting agendas, and coordinating carefully with the external auditor and management to
ensure the committee receives effective information.

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A. SATYAM SCAM
BACKGROUND
 Satyam Computer Services Limited was founded in 1987 in Hyderabad, by Ramalinga Raju. Raju
served as Chairman, his brother, B. Rama Raju, served as the Managing Director and Chief
Executive Officer. It specialised in outsourcing IT and business process services.
 The company was listed on stock exchanges around the world, including the New York Stock
Exchange and the Bombay Stock Exchange.
 On 16 December 2008, the Satyam board made the decision to invest $1.6 billion in Maytas
Properties and Infrastructure without the agreement of their shareholders. Later it came to
light that this was a last ditch attempt to fill the fictitious assets of Satyam with real ones
acquired through Maytas. This move was highly criticised by investors and led to the downfall
in company’s stock on the New York Stock Exchange. As a result, the board of Satyam reversed
the decision.
 Due to Audit Failure, Satyam Scam went on for number of years involving manipulation of
Balance Sheet and Financial Statements.

Accounting Manipulation
 Revenues, operating profits, interest liabilities and bank balances were grossly inflated to show
the company in good health.
 Every attempt made to eliminate the gap failed.
 On 7th January 2009, the chairman of Satyam, Raju resigned, confessing that he had
manipulated the accounts in several forms.
 Raju made shocking disclosure to the Board of Directors of Satyam that the financial statement
contained
 Inflated Cash and Bank Balance of Rs.50.4 Billion.
 Non-existent accrued interest of Rs.3.76 Billion.
 An understated liability of Rs.12.30 Billion on account of funds arranged by Raju.
 An overstated Debtors position of Rs.4.90 Billion
 Satyam overstated its income nearly every quarter over the course of several years in order to
meet analyst expectations. Fake invoices and bills were created using software applications
such as ‘Ontime’

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 He falsified the bank accounts to inflate the balance sheet with balances that did not exist.
 Raju created 6000 fake salary accounts and took the money from these accounts after it had
been deposited. The cash so raised was used by Maytas (reverse name of Satyam) to purchase
several acres of land across Andhra Pradesh to ride on a booming realty market.

Role of Internal and External Auditors

 Internal audit system in Satyam was ineffective as they did not discover that true financial
information of the company has been hidden.
 Satyam had claimed $1.04 billion on its balance sheet in non-interest bearing deposits
 Pricewaterhouse (Pw) completely relied on the fixed deposit receipts and bank statements
provided by the Chairman’s office, without confirming the bank deposit independently.
 Pw failed to fulfill its role as an auditor as they should have noticed this large amount of bank
balance and carried out further verification and substantive testing
 PwC audit fees increased by 5.7 times over a period of four years (from 2004 to 2008). These
inflated audit fees suggests that auditors may have been bribed in order to keep the fraud
from being discovered and to allow Satyam to continue their accounting irregularities.

VERDICT
 On 9 April 2015, Raju and nine others were found guilty of collaborating to inflate the company’s
revenue, falsifying accounts and income tax returns, and fabricating invoices, among other
findings, and sentenced to seven years imprisonment by Hyderabad court.
 Tech Mahindra, the information technology (IT) arm of Mahindra and Mahindra Ltd (M&M),
completed merger process with Satyam Computer Services, creating the fifth-largest IT
company based in India, four years after acquiring the Hyderabad-based firm.

B. OLYMPUS CORPORATION FRAUD, JAPAN

BACKGROUND
 Olympus was established on 12th October 1919. It initially specialized in microscope and
thermometer businesses.
 In 1949, the name was changed again to Olympus Optical Co., Ltd. in an attempt to enhance
its corporate image

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 In 2003, the company made a fresh start as Olympus Corporation. In Greek mythology, Mt.
Olympus is the home of the twelve supreme gods and goddesses. Olympus was named after
this mountain to reflect its strong aspiration to create high quality, world famous products.
Tsuyoshi Kikukawa was the board chairman and CEO.
ACCOUNTING MANIPULATION
 British-born Michael Woodford was an Olympus veteran of 30 years, and previously executive
managing director of Olympus Medical Systems Europa. As European Director in 2008, Woodford
had noticed the “strange goings-on at the company” such as the Gyrus acquisition, which
should have been within his scope but was instead handled from Tokyo. Woodford had set out
to resign over the matter but stayed with Olympus after being reassured on the acquisition
and being promoted to oversee Olympus’ European businesses and appointed to the main
Olympus board.
 FACTA a Japanese monthly news magazine features economic information for readers and
provides investigative reports. In August 2011 issue said that Olympus had acquired from 2006
to 2008 three small companies, Altis, Humalabo, News Chef, for US$773 million and all
three companies continued to post losses.
 Olympus had issued more than $600 million in preference shares “directly to AXAM Investment
Limited, a company registered in the Cayman Islands, which is described as ‘the portfolio
manager for AXES Investment Limited LLC.’ Woodford wanted to know why Olympus had paid
AXAM so much money to apparently “advise” Olympus on the acquisition of Gyrus. KPMG
report, stated that Olympus hadn’t accounted for the shares given to AXAM, and “in our
opinion proper accounting records have not been maintained.
 Olympus defended itself against allegations of impropriety when Woodford confronted Tsuyoshi
Kikukawa, chairman of the Olympus board. Kikukawa called a special board meeting in October
at company headquarters in Tokyo. The meeting began at 9:07. Kikukawa fired Woodford and
didn’t allow him to respond. The meeting ended at 9:15 a.m.

CEO BLOWING THE WHISTLE ON HIS OWN COMPANY

 As a CEO, Woodford commissioned PricewaterhouseCoopers (PwC) to investigate the
relationship and transactions with AXES/AXAM surrounding the acquisition of Gyrus.

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  The PwC report stated that there appears to be potential misstatements made in Gyrus’ 2009
audited accounts and potential unlawful financial assistance provide by Gyrus to Olympus in
relation to the transaction.
 After reaching London, Woodford then delivered the six letters and the replies together with
the PwC report to the Britain’s Serious Fraud Office, the FBI, the U.S. Department of Justice;
the Japan Securities, Exchange and Surveillance Commission; the Tokyo Metropolitan Police;
and the Tokyo Prosecutors Office. Stating Olympus needs a complete and utter forensics
accounting.
 On 26 October, 2011 Kikukawa was replaced by Shuichi Takayama as chairman, president, and
CEO.
 On 8 November 2011, the company admitted that the company’s accounting practice was
“inappropriate” and that concealment of more than 117.7 billion yen ($1.5 billion) money had
been used to cover losses on investments dating to the 1990s.
 The company blamed the inappropriate accounting on former president Tsuyoshi Kikukawa,
auditor Hideo Yamada and executive vice-president Hisashi Mori
VERDICT
 In July 2013, Kikukawa and Mori were both sentenced to 3 years in prison, 5 years suspended.
 The auditor who had been party to the fraud was sentenced to 2.5 years in prison, 4 years
suspended.
 Olympus was fined 700 million yen ($7 million USD).
In April 2014, six banks filed a civil suit against Olympus over the fraud, seeking an additional
28 billion yen in damages.

13. APPRAISAL OF MANAGEMENT DECISIONS

i. The management for the company owns the responsibility for establishing and maintaining a
system of internal controls within an organization.
ii. Management is charged with this responsibility on behalf of the organization’s stakeholders
and is held accountable for this responsibility by an oversight body (e.g. board of directors,
audit committee, elected representatives).
iii. The objective assessment of internal controls and risk management processes by the internal
audit activity provides management, the oversight body, and external stakeholders with

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 independent assurance that the organization’s risks have been appropriately mitigated. Because,
internal auditors are experts in understanding organizational risks and internal controls available
to mitigate these risks, they assist management in understanding these topics and provide
recommendations for improvements.
iv. Internal audit has become an important management tool for the following reasons:
1. Internal auditing is a specialized service to look into the standards of efficiency of business
operation.
2. Internal auditing can evaluate various problems independently in terms of overall management
control and suggest improvement.
3. Internal audit’s independent appraisal and review can ensure the reliability and promptness of
MIS and the management reporting on the basis of which the top management can take firm
decisions.
4. Internal audit system makes sure the internal control system including accounting control
system in an organization is effective.
5. Internal audit ensures the adequacy, reliability and accuracy of financial and operational data
by conducting appraisal and review from an independent angle.
6. Internal audit is an integral part of “management by system”.
7. Internal audit can break through the power ego and personality factors and possible conflicts
of interest within the organization.
8. It ensures compliance of accounting procedures and accounting policies.
9. Internal auditor can be of valuable assistance to management in acquiring new business, in
promoting new products and in launching new projects for expansion or diversification of
business.

The main objective of appraisal of management decision is to see how decisions are taken by
the management:
 Whether the decisions are taken after following the decision-making process.
 Whether such decisions meeting the organisation objectives.
 Whether such decisions are documented in a fair manner.

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 Steps in appraisal of management decision.
In appraisal of management decision the following step should be considered by the auditor:
1. Whether the management decision are well defined or not.
2. Whether the Objectives and desired output has been set out clearly and relate explicitly with
the policy or strategy adopted by the company to help in post event evaluation of the
management decisions. Ideally the objectives of the every management decision should be
specific, measurable, agreed, realistic and time-dependent.
3. While taking decision, whether the management has considered the effect of the associated
risk; time availability; scale and location; scope for alternative arrangements with other public
bodies; degree of involvement of regulators and civic bodies; capacity of the market to deliver
the required output; alternative asset uses; use of new or established technology; and
environmental issues.
4. In case of the major investment decision, whether the various possible options were considered.
5. Whether such potential options are analyzed reviewed in terms of value, costs, benefits, risk
and uncertainties of options.
6. Whether the options are selected after due analysis and a consensus decision is taken after a
manager has analyzed all the alternatives,
7. Whether the selected alternative implemented efficiently.
8. Ongoing review of management decision control and evaluation system actions need to be
monitored.

14. PERFORMANCE ASSESSMENT

i. The first step in conducting assessment of the Internal Audit function involves reviewing the
management’s expectations and achievements. This may also include remediation measures for
better results, if necessary, and should be reported to the board/audit committee.
ii. Performance measurement ensures high standards for audit strategy, execution, and reporting.
iii. It helps organizations align their audit strategy with the overall business strategy, thereby
linking the audit’s performance to the organization’s mission and objective. This ensures that
concerned stakeholder audit needs are fulfilled.
iv. Key benchmarks of performance assessment are mentioned below:
 Effectiveness of audit in covering key areas;

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  Feedback of audit findings during audit;
 Duration and timeliness of the audit;
 Accuracy of audit findings;
 Value of the audit recommendation;
 Value added by the internal audit function.

Keeping Track of Performance

i. Internal Auditors should understand the business environment, its changes, and how people
contribute to creating value. In today’s scenario management of the organization want auditors
to clearly understand the nuances of business. This is necessary not only to assess the business
operations but also to stimulate a healthy relationship.
ii. Another essential point is to integrate the Internal Audit function with corporate governance.
The Internal Audit function in an organization should become an integral part of governance
with focus to provide independent advice to management on the organization’s ability to meet
its governance obligations.
iii. The success of the audit program relies not only on technical expertise but also on accuracy.
Transparency in auditing and the measurement system is crucial for building trust which is a
key factor for success.
iv. Finally, the Internal Audit function needs to focus on improving business performance by being
fully integrated into the business and adding value by supporting strategic business objective.
With such a vital role to play in corporate governance and business performance, it is critical
for the Internal Audit team to maintain oversight of the traditional requirements, and, at the
same time, evolve with the demands of the role. The auditors would need to align people,
process, and systems with the overall organizational objective, allowing the executive
management to confidently answer the critical questions that investors are asking today.

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 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 15 – PEER REVIEW AND QUALITY REVIEW

1. INTRODUCTION
The Institute of Company Secretaries of India (ICSI) is the only recognized professional body
in India to develop and regulate the profession of Company Secretaries in India. It is a premier
national professional body set up under an act of Parliament, the Company Secretaries Act,
1980. ICSI has been contributing to the initiatives of Government of India that have potential
to excel the social-economic growth of India. ICSI functions under the jurisdiction of the
Ministry of Corporate Affairs, Government of India.

The Institute of Company Secretaries of India (ICSI) conducts various examinations and also
prescribes standards for adherence by its members.

The concept of whole-time practice, which gained its initial recognition in 1988, got further
momentum after the enactment of the Companies (Amendment) Act, 2000 which required
Compliance Certificate to be issued by Practicing Company Secretary for certain class of
companies. Members in practice are also being recognised for issuing certificates under various
laws in India. The Companies Act, 2013, also introduced concept of Secretarial Audit to specified
class of companies, which shows confidence of the Regulators on the Profession of Company
Secretaries in India.

The performance of any professional can only be judged and enhanced to that level of excellence
only by evaluation by a competent professional. The Council of the Institute of Company
Secretaries of India (ICSI), therefore, in its 202nd meeting held on 25th and 26th August,
2011 decided to introduce Peer Review for Practicing Company Secretaries to periodically review
the Practice Units and evaluate the quality, systems process, procedures and practices, so that
excellence in their performance can be monitored and maintained.

ICSI Guideline No. 1 of 2011 – Guidelines for Peer Review of Attestation Services by Practicing
Company Secretaries notified in the official Gazette of India dated October 18, 2011 and made
effective from October 1, 2011. These Guidelines were revised by the Council in its 229th
Meeting held on March 19-20, 2015; 254th (Adj.) meeting held on 1st September, 2018 and
in 287th (Special) Meeting held on 26-27 August, 2022.

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 2. PEER REVIEW
Peer Review is a process used for examining the work performed by one’s equals (peers) and
to understand the systems, practices and procedures followed by the Practice Unit and to give
suggestions, if any, for further improvement.
Professional peer review mainly focuses on the performance of professionals, with a view to
improving quality, upholding standards, or providing certification. Professional Peer Review
activity is widespread in the field of accounting, law, engineering (e.g., software peer review,
technical peer review, etc.)

3. PROFESSIONAL PEER REVIEW

Professional Peer Review focuses on the performance of professionals, with a view to improving
quality, upholding standards, or providing certification. Professional Peer Review activity is
widespread in the field of accounting, law, engineering (e.g., software peer review, technical
peer review, etc.), aviation, and even forest fire management.

4. PEER REVIEW FOR COMPANY SECRETARIES

i. Peer Review mainly considers examination of the systems and approach of a Practice Unit (PU)
by another member of the Institute with the objective of identifying the areas, where the
member may require guidance in improving the quality of his performance and adherence to
the requirements of various technical standards.
ii. A Peer Review examines whether a Practice Unit has adequate policies and procedures (including
documentation systems) in place to comply with the ICSI Auditing Standards, Guidance Notes,
Manuals, References and advisories issued by the ICSI and other legal requirements for
maintaining the quality of the Services/ work they perform
iii. The primary objective of peer review is promotion of continuing quality improvement in an
atmosphere of openness and mutual trust that contributes to enhancing transparency and
comparability.

5. OBJECTIVES OF PEER REVIEW

The main objectives of Peer Review are to ensure that while rendering Professional Services,
the members of the Institute of Company Secretaries of India (ICSI) in practice:

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i. Confirmation of compliance
ii. Corrective actions
iii. Enhancement of quality of professional services
iv. Enhanced credibility
v. Trust of Clients

The main objective of Peer Review is to ensure that in carrying out their Services, the PCS has
complied with the ICSI Guidance on Office Administration and Systems in the office of PCS,
ICSI Auditing Standards, Guidance Notes, Manuals, References and advisories issued by the
Institute and has in place proper systems (including documentation systems) for maintaining
the quality of professional assignments undertaken by it.

6. BENEFITS OF PEER REVIEW

There are significant benefits which a Practice Unit will obtain in undergoing a Peer Review.
These may be summarised below:
1. A successful Peer Review will provide comfort to the Practice Unit that it has adhered to
various statutory, documentary and other regulatory requirements.
2. If deficiencies are noticed and corrective measures suggested, the Practice Unit will have an
opportunity to correct the deficiencies and thereby enhance professional competence.
3. If a Peer Review Certificate is issued to the Practice Unit it enhances credibility of the Practice
Unit in the eyes of the general public.
4. Since a Chinese Wall exists between the Peer Review Process and the Disciplinary Proceedings,
the Practice Unit will benefit from Peer Review without any apprehension of any disciplinary
proceedings being initiated against for any deficiencies noticed on its part.
5. Clients of the P.U. will benefit from knowing that their Practice Unit is periodically reviewed
by the ICSI.
6. Furthermore, the benefits of getting Peer Reviewed Units can be seen by Guidelines issued by
Council of the Institute from time to time.
7. To ensure the quality of services rendered by members of the Institute to their clients and to
the society as a whole, the Council has decided that only Peer Reviewed Practice Units shall
be permitted to undertake the following assignments:

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(a) Secretarial Audit Report under section 204(1) of the Companies Act, 2013 /Regulation 24 A(1)
of the Securities & Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulation, 2015.
(b) Annual Secretarial Compliance Report under Regulation 24A (2) of the Securities & Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulation, 2015.
(c) Certification of Annual Return.
(d) Compliance Certificate under the Securities & Exchange Board of India (Listing Obligations
and Disclosure Requirements) Regulation, 2015.
(e) Certification under Regulation 40(9) of Securities & Exchange Board of India (Listing
Obligations and Disclosure Requirements) Regulation, 2015.
(f) Quarterly Certificate for Reconciliation of Share Capital under Regulation 76 of Securities &
Exchange Board of India (Depository Participants) Regulation, 2018. The effective date of
applicability for the above services for listed companies is 1st April,2022 and for all companies
whether listed or otherwise it is 1st April, 2023.
(g) Internal Audit of Operations of the Depository Participants w.e.f. 1st April, 2020.
(h) Diligence Report for Banks in case of Consortium Lending/ Multiple Banking Arrangements
w.e.f 1st July, 2020.
(i) Due Diligence and Certification under the Securities and Exchange Board of India (Delisting of
Equity Shares) Regulation,2021 w.e.f. 10th June, 2021.

Further the Council has decided that the PCS shall mandatorily mention the Peer Review
Certificate number while signing / certifying the above documents in the following format:

For XYZ & Associates

Company Secretaries

Name ....................................

FCS/ACS ...............................

Date: CP ........................................

Place: PR 1231/2023

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 7. AUTHORITY TO ADMINISTRATE PEER REVIEW
i. The Council of the Institute of Company Secretaries of India is constituted under the Company
Secretaries Act, 1980, for discharging the functions assigned to the Institute under the Act.
ii. Section 15(1) of the Act provides that “The Institute shall function under the overall control,
guidance and supervision of the Council and the duty of carrying out the provisions of the Act
shall be vested in the Council”, and enumerates various other duties of the Council.
iii. With a view to regulate the profession of Company Secretaries, the Council has issued guidelines
for Peer Review of Attestation and Audit Services by Company Secretaries in Practice.
iv. The guidelines serve as a mechanism intended to further enhance the quality of professional
work of Company Secretaries in Practice (PCS) over a period of time.

The Guidelines on Peer Review are issued in relation to conduct of Peer Review of members
rendering services:
a. Establish a suitable mechanism to ensure the quality of professional services and guide members
as deemed appropriate by the Council.
b. Provide guidance in relation to the statutory powers and obligations with respect to the parties
involved in Peer Review
c. Prescribe the scope of Peer Review and the procedures to be adopted during the process of
Peer Review; and
d. Establish the expected conduct of members during a peer review.

8. SCOPE OF PEER REVIEW

At present the following Attestation and Audit Services are covered under the purview of Peer
Review:
i. Certification of Annual Return in Form MGT-8
ii. Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013 read
with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules,
2014;
iii. Issuance of Secretarial Audit Report to material unlisted subsidiaries of listed entities (whose
equity shares are listed) in terms of Regulation 24A of SEBI (LODR) Regulations, 2015;

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 iv. Issuance of Annual Secretarial Compliance Report to Listed entities (whose equity shares are
listed)
v. Certification under SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015,
that none of the directors on the board of the company have been debarred or disqualified
from being appointed or continuing as directors of companies by the Board/ Ministry of
Corporate Affairs or any such statutory authority.
vi. Certification under Regulation 40(9) of SEBI (Listing Obligations & Disclosure Requirements)
Regulations, 2015, certifying that all certificates have been issued within thirty days of the
date of lodgement for transfer;
vii. Conduct of Internal Audit of Operations of the Depository Participants registered with [National
Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL)] under
the Bye Laws issued by NSDL and CDSL;
viii. Certification under Regulation 76 of SEBI (Depositories and Participants) Regulations,2018 for
Reconciliation of Share Capital Audit;
ix. Acting as Compliance Auditor under third party certification/Audit Scheme (Amendment), 2016
in the State of Haryana;
x. Diligence reporting for Banks in case of multiple banking/consortium lending arrangements in
terms of the circular issued by RBI;
xi. Conduct of Internal Audit of the stock brokers/sub brokers
xii. Compliance Certificate regarding compliance of conditions of Corporate Governance;
xiii. Signing of Annual Return in Form MGT-7;
xiv. Due Diligence Report under Regulation 10 (3) of the SEBI (Delisting of Equity Shares)
Regulations, 2021;
xv. Certificate relating to shares held by inactive shareholders;
xvi. Compliance Certificate under Regulation 10(b), 13, 26, 27, 36 of SEBI (Share Based Employee
Benefits and Sweat Equity) Regulations, 2021;
xvii. Scrutiniser’s report pursuant to Section 108 of the Companies Act, 2013 read with Rule
20(4)(ix) and Rule 20(4)(xii) of Companies (Management and Administration) Rules, 2014;
xviii. All other Reports, Returns and Certificates in respect of which generation of UDIN is mandatory
in terms of the ICSI Unique Document Identification Number (UDIN) Guidelines, 2019.

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9. POWERS OF THE PEER REVIEW BOARD
“Council of the Institute of Companies Secretaries of India has issued guidelines on Peer
Review, which lays down the framework for conduct of Peer Reviews by setting up the Peer
Review Board.”
The duties of the Board shall include:
i. To call for information from Practice Units in such form, as it deems fit.
ii. To maintain a panel of Peer Reviewers.
iii. To define the terms of appointment of the Reviewers.
iv. To send a Panel of at least 5(five) Peer Reviewers (from the panel maintained in terms of
these Guidelines) to the Practice Unit and allow them to choose any one Reviewer from the
panel so forwarded and if the Practice Unit is unable to choose any one Reviewer, to send
another Panel of 5 Peer Reviewers.

Thoda Extra gyaaannnn……… Swaaad Anusaaar

If the PU does not choose any one name from the panel of 5 or 10
Peer Reviewers (as the case may be), then the Practice Unit may
make a specific request to the Board to provide names of Reviewers
from outside the State / Region where the Practice Unit has its place
of business, in which case the PU shall, in addition to the payment
of fees to the Reviewer, bear extra costs that would be incurred for
travelling, stay and other expenses.
.

Thoda Extra gyaaannnn……… Swaaad Anusaaar

In case no peer reviewers are available in the city or in close

proximity to the PU, the PU may choose any reviewer from out of the
panel maintained by the Committee, in which case the PU shall be
liable to pay the travelling, stay and other expenses to the Peer
Reviewer in addition to the Peer Review fee

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 v. To examine the aspects of basis of selection of records pertaining to the services in terms of
the appropriate regulatory requirements.
vi. To arrange for such training programs for Reviewers and orientation programmes for practice
unit as may be deemed appropriate.
vii. To prescribe the system, practice and procedure to be observed in relation to Peer Review; and
viii. On considering the Report of a Reviewer, to do any or all of the following:
ix. to issue recommendations to the Practice Unit;
x. to order a further Peer Review to be carried out.
xi. After considering the report of the Reviewer and compliance of recommendations by the Practice
Unit, wherever deemed appropriate by the Committee, to issue Peer Review Certificate either
in physical or digital mode.
xii. To guide the members on best practices on Peer Review including issuance of advisories to the
Peer Reviewer and the Practice Unit.
xiii. Such other action(s) as may be necessary for the fulfilment of these Guidelines.

Where deemed appropriate, the Board shall have the powers to make recommendations to the
Council on:
i. Measures for improvement of quality of professional services by members.
ii. Guidance to be provided to the members for further improvement in quality of Attestation and
Audit Services.

10. GUIDELINES FOR MANDATORY PEER REVIEW FOR CERTIFICATION AND AUDIT SERVICES
The Council has issued Guidelines for Mandatory Peer Review for certification and Audit Services
as under:
a. Secretarial Audit Report under section 204(1) of the Companies Act, 2013 /Regulation 24 A(1)
of the Securities & Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulation, 2015.
b. Annual Secretarial Compliance Report under Regulation 24A (2) of the Securities & Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulation, 2015.
c. Certification of Annual Return in terms of Section 92(2) of the Companies Act, 2013.

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 d. Compliance Certificate under Schedule V, Clause E of the Securities & Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulation, 2015.
e. Certification under Regulation 40(9) of Securities & Exchange Board of India (Listing
Obligations and Disclosure Requirements) Regulation, 2015.
f. Quarterly Certificate for Reconciliation of Share Capital under Regulation 76 of Securities &
Exchange Board of India (Depository Participants) Regulation, 2018. The effective date of
applicability for the above services for listed companies is 1st April,2022 and for all companies
whether listed or otherwise it is 1st April, 2023.
g. Internal Audit of Operations of the Depository Participants w.e.f. 1st April, 2020.
h. Diligence Report for Banks in case of Consortium Lending/ Multiple Banking Arrangements
w.e.f 1st July, 2020.
i. Due Diligence and Certification under the Securities and Exchange Board of India (Delisting of
Equity Shares) Regulation,2021 w.e.f. 10th June, 2021.

11. AUTHORITY OF THE GUIDELINES ON PEER REVIEW

The guidelines on Peer Review shall apply to all or any of the following cases:
(a) Whenever Peer Review is mandated on the Instructions of Government/ Regulators / Statutory
Bodies;
(b) Whenever Peer Review is requested voluntarily by the Practice Unit;
(c) Whenever Peer Review is conducted on the basis of random selection;
(d) Upon the recommendation of the Committee of Discipline or Disciplinary Committee of ICSI /
Quality Review Board / Council of ICSI.

12. QUALIFICATIONS FOR A PEER REVIEWER

To be empanelled as Peer Reviewer, an individual shall–
(a) be a member with at least 10 years of post-qualification experience as Company Secretary and
out of the 10 years of post-qualification experience, should have been in practice for a continuous
period of not less than five years at the time of empanelment;
(b) be currently holding Certificate of Practice as issued by the Institute;
(c) have undergone the Training Programme for Peer Reviewers and qualified the Certification
Programme for Peer Reviewers organized by the Institute;

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 A member shall not have: -
(a) disciplinary action / proceedings pending against him during the past 3 years;
(b) been found guilty of professional or other misconduct by the Committee of Discipline /
Disciplinary Committee, at any time, as the case may be;
(c) been convicted by a Competent Court whether within or outside India, of an offence involving
moral turpitude and punishable with imprisonment.

The Board may examine the quality of the report and shall have powers to remove the Reviewer
from the panel of Peer Reviewers, in case the quality of the review/report fails to match the
desired standards.

13. EMPANELMENT OF PEER REVIEWERS

The Board has prescribed a format for inviting applications from members fulfilling the criteria
and willing to be empanelled as Reviewers.
The application form seeks to collate information on professional experience, educational
qualifications, practice areas, etc. which would enable the Board to assess the core competence
of the applicant for empanelment as Reviewer.
When a Peer Review is required to be conducted, the Board would endeavour to match the
relevant experience and standing of the Reviewer with the profile of Practice Unit which is
being reviewed.

14. THE REVIEWER’S APPROACH FOR PEER REVIEW

(a) The approach of the Reviewer should be courteous, professional and helpful throughout the
review process.
(b) He should be appreciative of good practices while suggesting areas of improvement.
(c) He should adopt a collaborative approach with the Practice Unit during the review process and
should ensure minimum disruption to the Practice Unit during the peer review.
(d) He should be able to provide practical and insightful comments in a discussion mode as a Peer
during the review process.
(e) He should try and give value addition to Practice Unit and not merely adopt a tick box approach.

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15. PRE-REQUISITES FOR REVIEWER
The nature and complexities of Peer Review requires the exercise of professional judgment. The
reviewer should: -
(a) Be well acquainted with the technical aspects of the Attestation and Audit Services.
(b) Know the provisions of Code of Conduct of ICSI.
(c) Have studied various cases decided on Code of Conduct of ICSI.
(d) Get himself/herself acquainted with decisions of various courts on ‘cases relating to deficiency
in service’.
(e) Be aware of relevant provisions of Company Secretaries Act 1980, Company Secretaries
Regulations, 1982, Consumer Protection Act, Evidence Act, Indian Penal Code, etc.
(f) Have studied the ICSI Auditing Standards, Guidance Notes, Manuals, Referencers, Notifications,
Guidelines and advisories issued by Council of ICSI from time to time.
(g) Be aware of evolving standards and best practices in the field.
(h) Be good at drafting, written and spoken English.
(i) Display professional and courteous behaviour while on peer review visit.
(j) Understand his limitations.
(k) Be clear about what is outside the scope of Peer Review.

16. PEER REVIEW PROCESS

Once a practice unit is selected for review, its engagement records pertaining to the immediately
preceding financial year shall be subject to review.
The Review shall focus on:
i. Compliance with ICSI Guidance on Office Administration and Systems in the Office of PCS,
ICSI Auditing Standards, Guidance Notes, Manuals, References and advisories issued by the
Institute;
ii. Quality of Reporting;
iii. Office systems and procedures; and
iv. Training Programs for staff (including trainees), including appropriate infrastructure.

Engagement records of immediately preceding financial year shall be subject to peer

review

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17. TRAINING AND DEVELOPMENT OF REVIEWERS
i. To ensure that the objective of Peer Review is attained in letter and spirit, adequate training
facilities (either offline or online or both) shall be provided, from time to time, to the Reviewers
and also to other persons who assist the Board in the manner considered appropriate by the
Board.
ii. Reviewer shall be expected to be fully familiar with all procedures, ICSI Guidance on Office
Administration and Systems in the Office of PCS, ICSI Auditing Standards, Guidance Notes,
Manuals, Referencers and advisories issued by the Institute, guidelines and other decisions as
may be issued by the Board from time to time.
iii. A Reviewer may be required to assess his/her capability to perform Peer Review exercise. He/she
should also consider carefully the number and availability of trained staff in deciding whether
he/ she would be in a position to perform Peer Review of a Practice Unit.

To equip the Reviewers with the required inputs for Peer Review, the Institute undertakes
Training Programmes for Reviewers on regular basis. Institute has also developed a Training
Module to guide the Reviewers.

18. VALIDITY OF REVIEWERS EMPANELMENT

The Peer Review Empanelment is valid for five years from the date of approval. After this
period, Reviewers need to undergo the Peer Reviewer Training Programme again and qualify the
Certification Programme provided by the Institute.

19. STATEMENT OF CONFIDENTIALITY

i. The process of Peer Review requires high level of integrity on the part of the Peer Reviewer
and Qualified Assistant(s) who may assist Reviewer during the Review.
ii. Before accepting to undertake Peer Review assignment, the Reviewer and Qualified Assistant(s)
are required to sign the Statement of Confidentiality and shall send the same to the Peer
Review Board.

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 iii. Strict confidentiality provisions shall apply to all those involved in the Peer Review process,
namely, Reviewers, Qualified Assistant(s), members of the Board, the Council, or any person
who assists any of these parties. Those persons subject to the secrecy provision:
1. Shall at all times after their appointment preserve and aid in preserving secrecy with regard to
any matter coming to their knowledge in the performance or in assisting in the performance
of any function, directly or indirectly related to the process and conduct of Peer Review;
2. Shall not at any time communicate any such matter to any other person; and
3. Shall not at any time permit any other person to have any access to any record, document or
any other material, if any, which is in their possession or under their control by virtue of their
being or having been so appointed or their having performed or having assisted any other person
in the performance of such a function.

Non-compliance with the secrecy provisions in the above clause shall amount to professional
misconduct as defined under Section 22 of the Company Secretaries Act, 1980.

20. METHODOLOGY TO BE FOLLOWED BY REVIEWER

(a) Offsite Review
This involves carefully reviewing the information provided by the PU in the Questionnaire. Based
on this, the auditor forms their own observations regarding areas where improvement is possible.
Additionally, they make notes on other aspects that should be discussed in a personal meeting
with the PU.

(b) Onsite Review

Verify information provided by the PU, conduct test checks for attestation assignments, interact
with PU staff and trainees as part of peer review, and request records for clients to ensure
proper systems and procedures are followed.

21. COMPLIANCE WITH PEER REVIEW GUIDELINES

i. Practice Units are required to comply with the provisions of these Guidelines as those who fail
to comply will be required to undergo appropriate review of their quality controls by the Board.

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 ii. Practice Units failing to comply with these Guidelines shall also be liable for disciplinary action
as provided under the Company Secretaries Act, 1980.
iii. Both the Peer Reviewers as well as the Practice Units shall adhere to the timelines for Peer
Review as mandated by the Board from time to time.
22. OBLIGATIONS OF THE PRACTICE UNIT
The Obligations of the Practice Unit include the following:
i. The Practice Units are supposed to practice under the name duly approved and allotted by the
ICSI as per the name approval Guidelines as amended from time to time.
ii. The Practice Unit under review shall provide access to any record or document as may be asked
by the Reviewer.
If a Reviewer believes that any person possesses or controls a record or document containing
relevant information to the Peer Review, they may:
a. Produce or provide access to any record or document specified by the Reviewer, or any record
of a specified class, which is believed to be relevant to the Peer Review. This should be done
within a reasonable timeframe as required by the Reviewer.
b. If requested by the Reviewer, provide explanations or additional details regarding anything
produced in compliance with the mentioned requirement, as specified by the Reviewer; and
c. Provide to the Reviewer all assistance in connection with Peer Review which he is expected to
provide.

iii. Where any information or matter relevant to a Practice Unit is not recorded legible form, the
Practice Unit shall provide and present to the Reviewer a reproduction of any such information
or matter, or of the relevant part in a legible form, with a suitable translation in English if
the matter is in any other language, and such translation is requested for by the Reviewer.
iv. In case the Practice Unit has more than one office, the Practice Unit shall ensure that the
Reviewer is given access to all documents relevant to review no matter in which office of the
Practice Unit, these documents may be available in.
v. A Practice Unit must permit the Reviewer to inspect, examine, or take necessary information
from records or documents. However, to maintain client confidentiality, the Reviewer should
not request client names or make copies or extracts from client files or records acquired during
the peer review for their working papers.

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 For the purpose of this clause a person means an individual / Sole Proprietor / Partner of a
partnership firm / designated partner of a LLP to which the particular review relates or any
person employed by or whose services are engaged by such unit.

23. VALIDITY OF PEER REVIEW CERTIFICATE

i. The validity of the Peer Review Certificate shall be five years from the date of issue.
ii. The Board may suo motu or otherwise at the request of the Practice Unit, initiate the Peer
Review process even before the expiry of the validity of the Peer Review Certificate.
iii. In case the PU is reviewed within two years of its formation, the validity of the Peer Review
Certificate shall be for two years.

24. REVIEW FRAMEWORK

Essentially, a Peer Review entails a review of engagement records and related financial / other
statements to ascertain whether the Practice Unit is adhering to ICSI Auditing Standards,
Guidance Notes, Manuals, Referencers and advisories issued by the Institute.
Where a Practice Unit is not following any of the ICSI Auditing Standards, Guidance Notes,
Manuals, Referencers and advisories issued by the Institute, in certain situations, suggestions
and recommendations for improvement may be made, and possibly followed by a further review,
in keeping with the primary thrust of Peer Review.

25. REPORTING
i. At the end of an on-site review, the Reviewer shall, before making his report to the Board,
communicate a preliminary report to the Practice Unit, in case the Reviewer observes any
deficiency in the systems and procedures of the Practice Unit.
ii. The Reviewer shall report on the areas where systems and procedures had been found to be
deficient or where he has noticed noncompliance with reference to any other matter.

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iii. In arriving at this conclusion, the Reviewer shall be expected to examine the materiality of the
non-compliance or deficiency, the number of occasions when such non-compliance was noticed
and its overall impact on the quality of professional service rendered by the Practice Unit.

What are the basic components of a Reviewer’s Report?

Solution:
The basic components of a Reviewer’s Report are:
a. Scope of Peer Review
b. Reference to the quality control standards
c. A statement indicating that the quality control is the responsibility of the reviewed firm
d. Limitations if any on the review conducted
e. A reference to the preliminary report;

Can a Reviewer give qualifications in his Review Report?

Solution:
Under following situations, a reviewer can qualify the report:
a. Non-compliance with quality control policies and procedures
b. Any deficiency found in quality control procedures
c. Non-adherence to ICSI Auditing Standards, Guidance Notes, Manuals, Referencers and advisories
issued by the Institute
d. No internal control systems prevail in the PU
e. Current and permanent files were not maintained as per standards laid down
f. Adequate training programmes were not organized for the staff

26. QUESTIONNAIRE FOR PRACTICE UNIT

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 i. The Peer Review process requires each Practice Unit (PU) to provide some basic information
about the PU to the Reviewer in the questionnaire specifically designed by the Committee for
the purpose.
ii. The questionnaire would enable the Reviewer to make a fair assessment as to the key control
areas prevalent in the Practice Unit and the degree of reliance that can be placed on the
internal control mechanism and records maintained by the Practice Unit.
iii. Non-existence of any of the internal control measures as elucidated in the questionnaire does
not necessarily mean that the Practice Unit has failed in any aspect related to quality of
services.
iv. All the responses to the questionnaire would be kept strictly confidential by the Reviewer and
his team and no information contained therein would be shared with any third party.
v. The Reviewer places a great deal of reliance on the responses provided by the Practice Unit in
the questionnaire while designing his / her review plan. Care should therefore be taken by the
Practice Unit while answering the question.

27. COST OF PEER REVIEW

The cost of Peer Review, payable to the Reviewer, shall be borne by the Practice Unit.
The cost of Peer Review shall be paid by the Practice Unit within 30 days from the date of
receipt of Invoice from the Peer Reviewer.
28. REVIEW PROCESS

1. Preparation
A practice unit will be notified in writing about an impending peer review and will be sent a
Questionnaire for completion. the PU is required to send the duly filled in Questionnaire to the
Committee.

Return of completed Questionnaire - The practice unit shall have to complete and return the
Questionnaire to the Secretariat within 7 days of the receipt. The information will be used for
the planning of the review.

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 i. The Board will send a Panel of at least 5 (five) Peer Reviewers (from the panel maintained
in terms of these Guidelines) to the Practice Unit and allow the Practice Unit to choose any
one Reviewer from the panel so forwarded and if the Practice Unit is unable to choose any one
Reviewer from the panel so sent, to send another Panel of 5 Peer Reviewers.
ii. If the PU does not choose any one name from the panel of 5 or 10 Peer Reviewers (as the
case may be), then the Practice Unit may make a specific request to the Board to provide
names of Reviewers from outside the State / Region where the Practice Unit has its place of
business, in which case the PU shall, in addition to the payment of fees to the Reviewer, bear
extra costs that would be incurred for travelling, stay and other expenses.

How much will it cost PU to get Peer Reviewed?

PU shall pay to the Peer Reviewer, a fee of Rs. 10,000/- or an amount as may be prescribed by
the Peer Review Board from time to time. In case Reviewer has to conduct second review, the
same rate would apply to the second review also.

To whom shall the fee for Peer Review be paid?

The cost of Peer Review shall be paid by the PU directly to the Reviewer within 30 days from the
receipt of Invoice raised by the Peer Reviewer by crossed account payee cheque/Demand
Draft/NEFT/RTGS/IMPS or any other electronic mode.

2. Planning
On acceptance of the Peer Review by the selected Reviewer, the Practice Unit will be notified.
The Reviewer may also require the Practice Unit to provide other information as he considers
necessary to facilitate the selection of a sample of services engagements, which is
representative of the Practice Unit’s client portfolio, for review.

Sample of Attestation services Engagements

(a) From the complete Services, client list, an initial sample will be selected by the Reviewer.

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(b) The Peer Reviewer shall choose not less than 10% of the actual attestation assignments
undertaken by the PU under each category or five assignments under each category, whichever
is more.
(c) In case the sample size is smaller than this, the reasons therefor shall be specifically stated
in the Peer Review Report.
(d) Practice Units will be notified of the selection in writing preferably 2 (two) weeks in advance,
requesting the relevant records of the selected Attestation and Audit Services, to be made
available for review.
(e) At the execution stage, the initial sample may be reduced to a smaller actual sample for review.
 Confirmation of visit
i. Determine on-site review dates in consultation with the Practice Unit.
ii. Allow flexibility to accommodate busy periods for Practice Units.
iii. Mutually agree on on-site review dates to ensure completion within 21 days of the Peer
Reviewer's appointment by the Committee.

3. Execution
(a) On site review Peer review visits will be conducted at the practice unit’s head office or other
officially noted/ recorded place of office.
(b) The complete on-site review of a practice unit may take one or two full days depending upon
the size of the practice unit and scope of the peer review. This is based on the assumption
that the practice unit concerned has made all the necessary information and documentation
available to the reviewer for his review. However, in any case this on-site review should not
extend beyond three working days.
(c) Initial meeting:
i. An initial meeting will be held between the reviewer and the sole proprietor/ partner(s) of the
practice unit designated to deal with the review (designated partner).
ii. The primary purpose of this meeting is to discuss the agenda of the peer visit and confirm the
accuracy of the responses given in the Questionnaire.
iii. The reviewer should have a full understanding of the system and be able to form a preliminary
evaluation of its adequacy at the conclusion of the meeting.

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iv. During the meeting, a decision can also be taken on the evaluation method and the person(s)
in the office of the PU to be interviewed and who will be able to assist the Reviewer in
completing the Peer Review Process during his/her visit.

(d) Compliance Review-General Controls

i. The reviewer may carry out a compliance review of the General Controls and evaluate the degree
of reliance to be placed upon them because this directly affects the attestation services
engagements to be reviewed.
ii. The following five key controls will be considered as General Controls:
b. Independence
c. Maintenance of Professional Skills and standards
d. Outside Consultation
e. Staff Supervision and Development
f. Office Administration
Practice units are expected to address each of the five key control areas.

iii. In each key control area there shall be supplementary questions and matters to consider. These
are intended to ensure that the controls that are expected to be maintained, are installed and
operated within practice units.
iv. All questions in the questionnaire may not necessarily be relevant to particular types of practice
units because of its size, nature and type of its practice. However, practice units should still
assess their internal control systems to ascertain whether they address the objectives under
the five key control areas.
v. The Reviewer should evaluate these general controls to understand the functioning of the office
of the Practice Unit.

4. Selection of attestation services engagements to be reviewed

i. The number of attestation services engagements to be reviewed depends upon:
a. The number of practicing members involved in attestation services engagements in the practice
unit;
b. The degree of reliance placed, if any, on general quality controls; and

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 c. The total number of attestation services engagements undertaken by the practice units for the
period under review.
ii. Engagements to be reviewed should form a well-rounded sample from different types of
companies. If the reviewer finds that the initial sample doesn't adequately represent the practice
unit's attestation services client portfolio, they can choose additional engagements either from
the initial sample or the complete list of attestation services clients.
iii. The Reviewer should not undertake Peer Review of attestation engagements which have been
the subject matter of disciplinary proceedings nor should the Practice Unit influence the
Reviewer to select such engagements for Peer Review.

5. Review of records
The reviewer may adopt a compliance approach or substantive approach or a combination of
both in the review of attestation services engagement records.

(a) Compliance approach - services engagements

 The compliance approach is to assess whether proper control procedures have been established
by the practice unit to ensure that attestation services are being performed in accordance with
Auditing Standards, Guidance Notes, Manuals, References and advisories issued by the Institute.
 If the size of the Practice Unit is small or medium (a matter left to the judgement of the
Reviewer), the Compliance Approach may not be appropriate. In such a case, the Reviewer may
choose the Substantive Approach for conduct of Review.

(b) Substantive approach - Attestation services Engagements

If the reviewer decides not to rely on the practice unit's general controls or believes that the
compliance standard is unsatisfactory, a substantive approach will be used. This involves
reviewing attestation working papers to ensure that the work aligns with the Technical
Standards.

6. Reporting
i. Preliminary Report of Reviewer

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 The Reviewer shall report on the areas where systems and procedures had been found to be
deficient or where non-compliance with reference to any other matter was noticed in a
preliminary report to the practice unit
The Practice Unit shall make submissions or representations, in writing to the Reviewer,
concerning the preliminary report within 7 (seven) days from the date of receipt of preliminary
report from the Reviewer.

ii. Final Report of Reviewer

(a) The Reviewer will submit a Final Report to the Board with a copy to the Practice Unit (the
Reviewer’s Report), incorporating the findings. The Final Report will be examined/inspected by
the Board in terms of the degree of compliance with the ICSI Guidance on Office Administration
and Systems in the Office of PCS, ICSI Auditing Standards, Guidance Notes, Manuals,
Referencers and advisories issued by the Institute by the reviewed Practice Unit.
(b) The model forms of such Final Reports shall be communicated to the Reviewer by the Board.
(c) The Board may, if deems fit, issue Peer Review Certificate to the Practice Unit. OR
(d) The Board, having regard to the Report and any submissions or representations attached to it,
may:
 make recommendations to the Practice Unit concerned regarding the application by it of ICSI
Guidance on Office Administration and Systems in the Office of PCS, ICSI Auditing Standards,
Guidance Notes, Manuals, Referencers and advisories issued by the Institute;
 if it is of the opinion that:
 In case the review is related to a firm, any one or more or all of the partners in the firm may
have failed to observe, ICSI Guidance on Office Administration and Systems in the Office of
PCS, ICSI Auditing Standards, Guidance Notes, Manuals, Referencers and advisories issued by
the Institute;
 In case the review is related to a member practicing on his own account, the member may
have failed to observe, maintain or apply, as the case may be, ICSI Guidance on Office
Administration and Systems in the Office of PCS, ICSI Auditing Standards, Guidance Notes,
Manuals, Referencers and advisories issued by the Institute; then, the Board may;
– Issue instructions to the Reviewer to carry out, within such period as may be specified in the
instructions (which period shall not commence earlier than six months after the date on which

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 the instruction is issued), a further Peer Review as regards the Practice Unit to which the
report relates; and
– Specify in the instruction, the matters as regards to which the review is to be carried out;

(d) The Board will make recommendations to the Practice Unit where:
1. based on the report of the Reviewer, it appears that the Practice Unit has satisfied all key
control objectives, which the Board has determined and/or prescribed in respect of maintenance
of/ adherence to Technical Standards but where further improvements could be made to internal
quality control systems; and
2. based on the report of the reviewer, it appears that the Practice Unit has satisfied the major
key control objectives but some weaknesses exist in other areas. The Practice Unit is expected
to consider the recommendations for rectifying the weaknesses thus identified and informed
by the Board and take all necessary actions to ensure that all key control areas are addressed.

(e) A follow up review will be required where the Practice Unit has not satisfied the Committee
that all the key control objectives have been maintained. In such cases the Board will also
make recommendations, which it expects the practice unit to implement in order to ensure the
maintenance of professional standards. The implementation of these recommendations will be
examined during the follow up review.

29. OFFICE SYSTEM AND PROCESS

The peer review is expected to examine the office systems and procedures with regard to
compliance Professional services. The reviewer shall verify whether the practice unit has
adequate office systems and procedures in place. However, the extent and scale of these
systems may vary from one practice unit to another, depending upon the size and scale of
practice of the practice unit.
The reviewer shall particularly examine the following aspects, besides forming his own judgment
during the review:
1. Whether the practice unit has a document management system which should ideally include
the filing system, record storage and retrieval system (whether in hard copy or soft copy),

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2. Whether allocation of attestation assignments among the staff/trainees are commensurate with
the capability of the staff, whether the assignments are properly carried out and the attestation
services are verified by the proprietor or partner of the practice unit or a qualified assistant in
the office of the practice unit before authentication.

What does Qualified Assistant mean?

Solution:
Qualified Assistant means a person assisting the Reviewer for carrying out peer review and
who:
a. is a member of the Institute
b. has not been held guilty of misconduct under the Company Secretaries Act, 1980
c. is a partner or Associate of the Peer Reviewer

Training programs for staff (including apprentices) concerned with attestation functions,
including appropriate infrastructure
Proper training and capacity development of the apprentice staff/trainee(s) and other staff in
the office of the practice unit is very essential to maintain the quality of professional services.
As it may become difficult for company secretaries in Practice/Partner(s) of the PU to attend
all the services rendered by their PU, most practice units generally rely on the trainees for
execution of the professional services. In this context, the peer reviewer may examine whether:
1. The trainees are maintaining a training diary to record the work done every day, the dairy is
being examined by the proprietor/partner/qualified assistant of the practice unit periodically
2. Whether any staff induction process is in place.
3. Whether the staff are periodically encouraged to attend any training program or any other
capacity building programme, including any in-house mechanism for their professional
development.
4. Whether the office of the practice unit is equipped with a library or reference material relating
to professional services.
5. Whether the overall décor/appearance of the office of the practice unit is satisfactory.

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 The list furnished above is only illustrative. The peer reviewer may like to examine any other
matters also. However, in doing so, the peer reviewer shall keep in mind the size of the practice
unit and its scale of operations.

30. REFERRAL OF DISPUTES AND APPEAL

Where a dispute arises over the powers of Reviewers or the process or conclusions reached after
the review or to any other matter related to the review, the Practice Unit, the Reviewer or
both may refer the dispute, in writing, to the Board, within 2 (two) months of occurrence.

Where a dispute is referred, after considering any submissions or representations (which shall
be made in writing) made by the relevant Practice Unit and/or the relevant Reviewer, the
Board:
 Shall decide the dispute within 6 (six) months of the reference and communicate such decision
to each of the parties to the dispute, simultaneously;
 May issue directions relating to the matter in dispute to such Practice Unit or the Reviewer
concerned and require such Unit or Reviewer to comply with them within 30 (thirty) days and
send a report to the Board of the said compliance within 15 (fifteen)days of such compliance;
 Shall convey its decision in these regards to each of the parties within 15 days from the date
of the decision.

Where either of the parties are dissatisfied with the decision of the Board, it may refer the
matter to the Council within 2 (two) months.

31. QUALITY REVIEW BOARD

i. Quality Review Board (QRB) is constituted by Government of India to review and enhance the
quality of the services rendered by the members of the ICSI.
ii. The Board aims to standardize the practices followed by the Company Secretaries and enhance
the quality of the services rendered by the members of ICSI on continuous basis.
iii. The Company Secretaries Act, 1980 provides for the regulation of the profession of Company
Secretaries in India. The Act was amended in the year 2006 and sections 29A to 29D were
inserted making provision for the establishment of Quality Review Board.

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iv. Accordingly, the Government of India, Ministry of Corporate Affairs constituted QRB of the
Institute of Company Secretaries of India for promoting “Quality” considerations in rendering
various professional (both statutory and non-statutory) services by the Members of the
Institute.

32. THE COMPANY SECRETARIES (AMENDMENT) ACT, 2006

The below sections were inserted by the Company Secretaries (Amendment) Act, 2006 in the
Company Secretaries Act, 1980.

Establishment of Quality Review Board (Section 29A)

a. The Central Government shall, constitute a Quality Review Board consisting of a Chairperson
and four other members.
b. The Chairperson and members of the Board shall be appointed from amongst the persons of
eminence having experience in the field of law, economics, business, finance or accountancy.
c. Two members of the Board shall be nominated by the Council and other two members shall
be nominated by the Central Government.

Functions of Board (Section 29B)

The Board shall perform the following functions, namely: —
1. to make recommendations to the Council with regard to the quality of services provided by the
members of the Institute;
2. to review the quality of services provided by the members of the Institute including secretarial
Audit services; and
3. to guide the members of the Institute to improve the quality of services and adherence to the
various statutory and other regulatory requirements.

Procedure of Board (Section 29C)

The Board shall meet at such time and place and follow in its meetings such procedure as
may be specified.

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 Terms and conditions of service of Chairperson and members of Board and its expenditure
(Section 29D)
1. The terms and conditions of service of the Chairperson and the members of the Board, and
their allowances shall be such as may be specified.
2. The expenditure of the Board shall be borne by the Council.

33. QUALITY MANAGEMENT SYSTEM

Quality Assurance (QA) and Quality Control (QC) both terms are the integral part of the
quality management systems. Effective Quality Management Systems (QMS) contribute
enormously to the success of a Practicing Unit, whereas when it is poorly understood, the QMS
are likely to be weak and ineffective in ensuring the timely delivery and incompetent in
satisfying the customer’s requirements.

34. QUALITY ASSUARNCE

Quality Assurance is focused on planning, documenting and agreeing on a set of guidelines that
are necessary to assure quality which are issued by the various regulators on time to time. For
Example instruction kit of various e-forms where the purpose of the Instruction kit is to provide
guidance on the requirement of the form and to have correct record in place. Normally the QA
guideline provides Do’s and Don’ts, instructions, verification methodology, possible errors and
defect along with the remedial action required for the same.
The quality assurance could also be considered as a tool of risk mitigation.

35. QUALITY CONTROL- DETECTION AND IMPROVEMENT

Quality Control can be referred as the examination of Output, Review of the work and
assignment already taken place, on the various parameter like time involved, number of
resubmissions, deficiency, cost, manpower, expertise engaged etc.

Guide to Conduct Quality Review

The Quality Review is focused towards evaluation and review of quality of services rendered by
members and adherence to various statutory and other regulatory requirements.

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 It involves assessment of the work of the member while rendering professional services so as
to enable QRB to assess:
(a) compliance with statutory and regulatory requirements;
(b) the quality control framework adopted by the member; and
(c) the quality of reporting

Appointment of Quality Reviewers

The Quality Reviewers are being appointed by the QRB on the basis of their experience in
terms of seniority and the relevant work exposure.

I. An individual desiring to be empanelled, shall:

(a) Be a Fellow member of ICSI; and
(b) Possess at least fifteen (15) years of post-membership experience as Company Secretary in
Practice or employment in the Secretarial Department of a Company or as a combination of
practice and employment in the Secretarial Department of a Company; and
(c) Be currently in practice of the profession of company secretaries. ‘or’

II. An individual desiring to be empanelled shall:

(a) Be empanelled as Peer Reviewer in terms of the Guidelines for Peer Review of Attestation and
Audit Services by Company Secretary in Practice and has completed minimum 5 assignments
of Peer Review.
The member shall not have been found guilty under the Company Secretaries Act, 1980 or
regulations made thereunder by Board of Discipline / Disciplinary Committee during the previous
5 years.

Manner of Selecting Practice Units for Quality Review

The Board is empowered to decide the Practice Unit(s) to be reviewed. The selection of a
Practice Unit for review is based on objective criteria as may be determined by the QRB.

Communication with Practice Unit under Review (PU)

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 i. On selection of a Practice Unit (PU) for review, intimation is sent regarding its selection with
request to provide basic information related to the services rendered and other details.
ii. Once the basic information is received from PU, the Quality Reviewer (QR) is assigned and
the basic information of the PU is shared with the Reviewer.
iii. The Reviewer should send a communication to the PU specifying aspects such as:
a. Date of commencement of the review;
b. Expected date of completion of review;
c. Documents required for review;
d. Identification and contact details of the Reviewer;
e. Composition of the review Team, if any; and
f. Any other detail as may be required for the purpose of review.

iv. It is also advisable that for a smooth conduct of the review, the Reviewer and the PU reach
an understanding on the following matters:
 Details and duration of visit at the Office of PU so as to ensure minimum disruption to the
PU. Main contact person/s in the PU for Reviewer’s requirements relating to the review.
 Normal lead time required for production of documents, resolution of queries, etc.
 Logistical arrangements, as available within the PU, for conduct of review.
 Any other support/coordination required by Reviewer from PU and vice versa.
 The frequency and timing of communications related to issues or findings noted by the
Reviewer.

Submission of Report
i. The Reviewer is required to submit a preliminary report within three weeks from the date of
assignment to the Practice Unit on the review of the quality of audit and attestation services
rendered by the Practice Unit.
ii. Any observation indicating a non-compliance with the applicable technical standard(s) should
be included in the preliminary report for seeking views / comments of PU thereon.
iii. The Board may, upon request, extend the time limit for submission of preliminary review report.

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iv. The Reviewer, based upon consideration of the responses received from Practice Unit on the
preliminary report, shall issue the final report to the Board on the basis of his findings on the
quality of services rendered by PU.

Consideration of the Reports of the Quality Review Board

The Quality Review Reports as submitted by Reviewer are considered by the Board. The Board
on receiving final report from Reviewer may take any of the following actions:
 Consider and take on record of the report received;
 Issue instructions to the Practice Unit, wherever it is required;
 Ask for more clarifications from the Reviewer / Practice unit, as it may deem fit;
 Make recommendations to the Council with regard to the best practices to be adopted.

36. QUALITY CONTROL IN QUALITY REVIEW

Part – A:
Expectations from Practice Unit: The Regulators are reposing more faith on services of the
professionals like ours. It is the responsibility of we professionals to maintain the recognition
secured from the Regulators. For maintaining and enhancement of the standards of the quality
of services rendered, a Practice Unit is expected to have a system of quality control in place.

1. Leadership Responsibilities
The firm should assign responsibility for each assignment to one of its partners or the team
leader who shall be responsible for overall quality of such assignment.
The proprietor / partner(s) of the PU shall be responsible for quality maintenance and quality
improvement of which recommended features are:
a. Communication of the quality control policies and procedures to all team members / relevant
personnel. The methods for communication, scope and frequency thereof should be established.
b. Establishing a process that encourages personnel to communicate their views or concerns on
quality control matters.

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c. Clearly establishing responsibilities of the proprietor / partner(s) of the PU and other senior
personnel for quality control.
d. Documenting quality control policies and procedures of the firm and its circulation to all relevant
personnel.

2. Ethical requirements
Ethical requirements include:
a. Independence: The PU shall not try to acquire the assignments on the basis of personal
relations with clients. Independence is required for fair dealing with the clients; otherwise the
quality of services may be threatened.
b. Familiarity Threat: A familiarity threat arises when, by virtue of a close or long-term
relationship with a client, its directors, officers or employees, the PU or person on an
engagement team may become too casual and sympathetic to the client’s interests,
compromising the quality of service and independence of the PU.
c. Integrity: While carrying out the assignments, firm should ascertain the integrity aspects of
the client. It is associated with soundness or moral principles and character in dealings with
others.
d. Objectivity: The test of objectivity shall be whether the professional assignments were carried
out in an impartial and fair manner without fear, favour or prejudice. The PU should base his
assessment and opinion purely on facts, evidences, sound analysis and judgment.
e. Professional competence and due care: The PU shall have enough Professional competence to
deal with the assignments. The PU shall ensure possession of appropriate qualifications,
experience, ability of the personnel to whom responsibilities of an assignment is given.
f. Confidentiality: Confidentiality is the spirit of any profession and as a Company Secretary;
complete confidentiality of information obtained during assignment is the basic requirement.
g. Professional conduct: Company Secretaries are looked upon as trustworthy guardians, caring
for interest of all stakeholders, guides to corporate world in secretarial leadership. The
professional conduct of the PU must also be illustrative.
h. Technical standards: The PU should be fully conversant with various pronouncements by the
regulatory bodies and should keep updated with the technical standards which may be
prescribed from time to time and applicable to the PU.

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 Human Resources: In case of a professional firm, human resource is the prime asset responsible
for success or failure of the firm. The constitution of the team and members which make the
team is the major determinant in rendering the quality of professional services and hence, the
recruitment of right person to the right place is the pre-requisite to deliver quality services to
the clients.
Performance Evaluation
– Performance Evaluation is necessary for developing and maintaining competence and
commitment to deliver quality services.
– The PU shall make personnel aware of its expectations regarding performance
– The PU shall have an established mechanism for evaluation of performance of its personnel.

Monitoring
– Monitoring refers to a process which is an ongoing exercise for evaluation of PU’s quality control
systems which also includes periodic inspection of completed assignments on sample basis to
provide the PU with reasonable assurance that its quality control systems are operating
effectively.
– A PU shall monitor its personnel, performance procedures, system for reporting and soon as an
ongoing exercise.

Part – B : Responsibility of the Quality Reviewer (QR)

A quality review is an engagement that needs to be carried out in a manner that ensures that
the work performed by the Quality Reviewer and the review team meet the professional
standards established by ICSI. Any shortcomings in the quality of the Review process would
defeat the very purpose of the process of the quality review established by the Quality Review
Board. It is, therefore, of utmost importance that ensuring quality in an assignment given by
the Board, remains priority for a Quality Reviewer. The quality of a Review is directly affected
by factors such as:
 Knowledge and experience of the Quality Reviewer and his team

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 Time devotion
 Composition of the Review team
 Understanding of the objective and scope of work
 Monitoring, direction and supervision of the Review team In fact, maintaining the quality in a
Review as also the final report of the Review, is and remains the responsibility of the Quality
Reviewer.

Planning the Quality Review

A well planned review engagement ensures that a review is performed in an effective manner.
It involves establishing the overall strategy for the review and developing the review plan. A
well planned review helps the reviewer to, interalia:
 Devote appropriate attention to important areas of review;
 Identify and resolve problems on timely basis;
 Facilitate direction and supervision of the team members and their work.
The nature and extent of the planning required for a review will vary according to the size of
the PU, nature and complexity of the quality control system in PU and the engagements under
review, the experience and competence of the review team and any changes that may occur
subsequently in the circumstances of the review.

The initial planning activities relating to the review would include:

 Performing procedures regarding the acceptance of the review assignment;
 Evaluating compliance with independence requirements;
 Establishing an understanding of the terms of the assignment.

The Reviewer should establish an overall review strategy that would set the scope, timing and
direction of the Quality Reviewer, and guide the development of plan to conduct the quality
review. In establishing the overall review strategy, the Reviewer needs to consider the following:
 Characteristics of the review assignment that would determine the scope of the review, viz.,
evaluation of design and implementation of systems and evaluation of compliances;
 Reporting objectives of the review, to plan the timing of the review and the nature of the
communication required with the PU;

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 Factors that, in the Reviewer’s judgment, are significant in directing the review team’s efforts;
and
 Ascertain the nature, timing and extent of resources necessary to perform the review
assignment.
Since quality review is essentially an “on-site” engagement, it is important that the on-site
visit to the PU is also properly planned
This planning would include:
 Preparing the checklists of the activities during review process.
 Preparing a list of documents that would be required from PU for quality review.
 Coordinating with the PU as to the timing of the visit and the authorised coordinating person/s
at PU so as to ensure minimum disruption to the PU.

CONDUCTING THE QUALITY REVIEW

The Reviewer is required to examine the procedures and implementation thereof in the Practice
Unit being reviewed, for ensuring:
1. Compliance with ICSI Guidance on Office Administration and Systems in the Office of PCS,
ICSI Auditing Standards, Guidance Notes, Manuals, Referencers and advisories issued by the
Institute; and
2. Implementation of a system of controls with reference to the applicable standards.

Based on the procedures performed during the review, the Reviewer also concludes to the effect
that nothing has come to the notice of the Reviewer’s attention that causes the Reviewer to
believe that the PU has not complied with the applicable ICSI Guidelines, other laws and
regulations.
A quality review of the services rendered by the PU in terms of the ‘Terms of Reference for
Quality Reviewers’ issued by the QRB and as amended from time to time (“the Procedures”)
involves interviewing, making enquiries and performing such other procedures to examine
whether the PU has complied with the ICSI Guidelines relating to the services rendered, the

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 professional and other standards as issued by the Institute of Company Secretaries of India
(ICSI) and considered relevant laws and regulations.

Obtaining an Understanding of the Engagement

In order to achieve the objectives of the review, the Quality Reviewer, should, prior to
commencement of on-site review:
(a) go through the questionnaire as submitted by Practice Unit in respect of which review has
been initiated for the period under review and ask for further information, which could enhance
understanding of the systems and procedures followed by PU; and
(b) obtain the relevant knowledge in which the Practice Unit has rendered services, including the
applicable laws and regulations, during the period to which the audit and attestation
engagement relates.

PU’s Responses to the Quality Review Questionnaire

i. QRB has developed Quality Review Questionnaire for use by Quality Reviewer.
ii. The Questionnaire work as an aid for the Quality Reviewer and contain questions relevant for
determining compliance with the requirements of the ICSI Guidelines and the system and
procedures followed by PU.
iii. PUs are also required to submit their responses to each of the questions given in the Quality
Review Questionnaire.
iv. Prior to commencement of on-site review, Quality Reviewer must obtain the responses from
PU for each of the question.

Obtaining an Understanding of the Practice Unit

Prior to the commencement of the review, it is important for the Reviewer to obtain an
understanding of the PU. This involves obtaining an understanding of the aspects including:
(a) Size of the practice;
(b) Legal form (CP holder/sole proprietorship/partnership/LLP);
(c) Service verticals within the PU;

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(d) Geographical spread of PU;
(e) Governance structure in the PU, with respective roles and responsibilities of the partners and
other staff;
(f) Policies and procedures designed and implemented by PU to ensure compliance;
(g) The methodology being used by the PU.
While Reviewer can obtain the understanding of the PU either on site or prior to commencement
of the review, it is recommended that the relevant inquiries in this regard are made prior to
the commencement of the on-site review. While preparing the quality review documentation,
the Reviewer, therefore, may have regard to the aspects such as:
a) reference to the source of the general and internal control;
b) if procedures were implemented, then a walk through, if any, performed to determine
implementation;
c) in respect of the concerned assignment, a reference to the relevant working papers;
d) matters examined; and
e) conclusions reached (duly supported with the basis of conclusion).

Evaluating the Findings of Quality Review

The Reviewer is responsible to evaluate whether the evidence obtained during the review is
sufficient to support the report to be issued pursuant to the review engagement.
The review may indicate
a. deficiencies in the policies and procedures instituted by the PU; or
b. the procedures performed by the PU were not designed or performed appropriately to provide it
with sufficient appropriate evidence that the PU has compiled with the applicable technical
standards; or
c. deficiencies in the procedures performed by PU to ensure that the services rendered by the PU
were appropriate in the circumstances.

As and when the Reviewer has collated the findings which are required to be evaluated, they
should communicate those findings to the PU and allow reasonable time to respond to the
queries. It is essential for the review team to consider the information and explanations made
available by the PU in response to the findings.

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 The presence of one or more of the following events would indicate possibility of existence of
a material deficiency in policies/ procedures:
(a) Identification of non-compliances, whether or not material, on the part of the senior
management of PU;
(b) Non-compliances with the established policies/procedures in previous periods;
(c) Identification by the review team of a material noncompliance in the current period in the
circumstances that indicate the non- compliance would not have been detected by the PU’s
systems of control; and
(d) Ineffective oversight by the senior management of the PU’s external reporting on compliances
with all or some elements of the systems of control. It may be noted that the above is only
an inclusive list of such events.

Documenting a Finding
The Reviewer should give attention to the manner in which a finding is documented. The
Reviewer should ensure that each of the documented finding has the following characteristics:
(a) All relevant facts and background information necessary to understand the finding or the issue
being raised by the Quality Reviewer are present;
(b) Requirements of the ICSI Guidelines or other relevant laws/regulations that have not been
complied with;
(c) Factors mitigating the effect of the finding, if any;
(d) Explanations/responses provided by the PU; and
(e) Conclusions reached by the Quality Reviewer.

It has been observed that sometimes there is an inconsistency between the findings reported
by the Quality Reviewer and the responses given by the PU on the engagement documentation
available with the PU. In order to avoid any such situation, the Reviewer and the PU should
discuss all the issues, make note of all the documentation and working papers available with
the PU and also minute the discussion which may be signed by both the Reviewer and the PU.

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 REPORTING
i. The Reviewer, after completion of the review, is required to submit a preliminary report to the
PU, on the review of the quality of professional services rendered by the PU, within three weeks
from the date of assignment.
ii. Any observation indicating a non-compliance with the technical standard(s), should also be
included in the preliminary report for seeking final views/comments of PU thereon.
iii. The Reviewer, based upon his consideration of the responses received from the PU, shall submit
a final report to the QRB within a period of three months from the date of assignment by
the Quality Review Board.

A clean final report indicates that the Reviewer is of the view that the affairs are being
conducted in a manner that ensures the quality of services rendered. However, a Reviewer may
qualify the report due to one or more of the following in respect of the particular engagement:-
 non-compliance with ICSI Guidance on Office Administration and Systems in the Office of
PCS, ICSI Auditing Standards, Guidance Notes, Manuals, Referencers and advisories issued by
the Institute;
 non-compliance with relevant laws and regulations;
 quality control system design deficiency;
 non-compliance with policies and procedures; or
 non-existence of adequate training and capacity building programmes for self and staff.

Cost of the Quality Review

i. The Quality Review Board shall pay to the Quality Reviewer a fee of Rs. 25,000/- per quality
review subject to submission of satisfactory Quality Review Report.
ii. The Quality Reviewer shall bear the cost of local transport, food, communications, printing, cost
of submission of report etc.- for Quality Review Assignments within or under the radius of 50
Kms. of the city of residence of Reviewer
iii. In case the Quality Review Assignment is beyond 50 Kms. of the city of residence of Reviewer,
the Quality Reviewer shall be reimbursed over and above the fee of Rs.25,000/-, cost of to and
fro travel to the station nearest to the Practice Unit subjected to Quality Review from the

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place of his residence, accommodation and other expenses in accordance with the travel policy
approved by the Board.

1. Mr. X has reviewed M/s. ABC & Co. having three partners Mr. A, Mr. B and Mr. C.
Neither Mr. A, Mr. B nor Mr. C will be able to do review of Mr. X. same is the case with
Sole Proprietor / members practicing in Individual capacity.
2. If the client of M/s XYZ ask Board to get the Practice Unit Peer Reviewed and then in
this case cost of Peer Review shall be borne by the client .
3. Mr. R (Peer Reviewer) received a Peer Review Assignment then in this case he can also
refuse to accept / perform the Peer Review assignment after giving a valid reason to the
Board. The refusal of assignments can be made on the following grounds: – Conflict of
Interest between the Reviewer and PU – Ill Health – Other work or pre-occupations –
Reviewer feels that he cannot act independently in that Firm/or with Reviewee due to
past connections or so.
4. Mr. Q (Peer Reviewer) received a Peer Review Assignment in this case he shall be allowed
to take assistance from any one Qualified Assistant. The Qualified Assistant should be
member of the Institute and has undergone adequate training in the manner considered
appropriate by the Board in terms of clause 15.1 of the Guidelines.
5. Mr. X has reviewed M/s. ABC & Co. having three partners Mr. A, Mr. B and Mr. C . Mr.
X shall be bound by Confidentiality Agreement with the Peer Review Board. If the
CS Muskan Gupta misuses
Reviewer | YES ACADEMY (Best academy
the information 8888
for CS) by
disclosed PU,235
he 235 15.39
may be subject to disciplinary
action by the Institute
 SUMMARISED VERSION (MIND MAP)

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CS Muskan Gupta | YES ACADEMY (Best academy for CS) 8888 235 235 1.2
 CHAPTER 16 – DUE DILIGENCE

1. OVERVIEW AND INTRODUCTION: DUE DILIGENCE

a) Due diligence refers to investigation into the affairs of an entity prior to its acquisition,
restructuring, fund raising or other similar transaction.
b) Companies, before entering into any business relationship, conduct background checks on
clients, customers, suppliers, etc. This is done to ensure that the parties involved have provided
the necessary information for the transaction and to thoroughly understand a business's
capabilities and past performance.
c) It is process of gathering information about the target company, its business and the
environment in which it operates.
d) “Due diligence” is an analysis and risk assessment of an impending business transaction.
e) It is the careful and methodological investigation of a business to ensure that information is
accurate, and there is no information that may later affect the outcome of the transaction.
f) A Due diligence is an interactive process that includes:
a. Inquiring financial and operational data
b. Analysing financial and operational data
c. Interpreting financial and operating data
d. Assessment of risks and opportunities

g) The due diligence covers the activities relating to pre-transaction, during the transaction and
post transaction exercise with all relevant aspects of the past, present, and predictable future
of the any business.
h) In any transaction, the seller does investigation of a buyer to ensure that the buyer has
adequate resources to complete the transaction, as well as other business aspect covering the
technical and human resource, cultural, taxation etc. which would affect the company after
entering into the transaction.

CASE STUDY-Amazon Due Diligence

Amazon began due diligence to buy MX Player In March 2023, [Link] Inc. made advanced
talks to acquire MX Player, the video streaming platform owned by Times Internet. Amazon
owns the subscription streaming service Prime Video and an ad-supported MiniTV service in
India. Amazon launched the free MiniTV service in May 2021 within the Amazon shopping app

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 for phone users. In 2018, Bennett Coleman & Co Ltd (BCCL)-owned Times Internet, acquired
MX Player for `1,000 crore (around $140 million at that time) to mark its entry into video
streaming. The US e-commerce giant has hired one of the Big Four accounting firms to carry
out due diligence of MX Player exclusively, and the process is expected to take 30-40 days. As
per the anticipations of experts, a deal could happen within two months if all goes well. Earlier,
Times Internet was asking for over $100 million for MX Player, while Amazon’s internal team
valued it at around `500 crore ($60 million). The deal is likely to be in the range of `600-900
crore.

2. KEY POINTS DESCRIBING DUE DILIGENCE

 It is not limited to accounting analysis but has a business oriented approach;
 It analysis the information on the basis of the actual facts;
 Considers the industry of the target company;
 Examines the business affairs having a significant impact on the prospects of the business;
 Explores significant business practices and business models;
 Examination of relevant aspects of the past, present and near future of the business;
 Assesses the advantages and risks associated with a particular transaction.

3. NEED FOR DUE DILIGENCE

The objective of due diligence may be to:
i. Identify the significant matters
ii. Discover Threats and Weakness
iii. Collect material information
iv. Developing shareholder’s confidence
v. Ensures security in a particular transaction
vi. Good investment decision

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 SWOT
ANALYSIS

i. Generally, the SWOT analysis of any business carried out as a part of due diligence to reveal
the strengths and weaknesses of not only the financials but also intangibles.
ii. To perform effectively, the potential buyer needs to be clear about the goals and motives for
acquiring the target company, as well as the value the buyer is attempting to create with the
purchase.
iii. A thorough due diligence helps to reveal any of the negatives, but the process of due diligence
rarely goes smoothly because of one major stumbling block and that is availability of
information.
iv. The target company is rarely eager to reveal to the other party that it is up for sale and wants
to keep this information confidential from its competitors, customers and employees. So getting
any information from these sources can be tricky, depending upon what the potential buyer
wants to gain from the transaction.
v. The buyer who aims to get new market of customers with the transaction wants to make sure
that the target company has a good relationship with existing customers. But, during due
diligence, the target company does not want any contact with its existing customers for fear
that customers might leave because of the impending sale.
vi. Because of the confidential nature of transactions, not all the information that is necessary
to make a good decision can be revealed. This is why services of experts are hired in due
diligence before beginning the process so the buyer receives reliable guidance.
vii. Once a purchase price is agreed upon, the prospective buyer usually enters into a conditional
agreement with a due diligence clause with the target business, in which the buyer has a
limited period to conduct due diligence.
viii. During this time, the potential buyer requests full access to all relevant materials in the target
business, customer, vendor, financial and other information in order to conduct a thorough
investigation. To ensure buyer does not use this information for their benefit, a confidentiality
agreement is signed to protect the target businesses’ interests.

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 ix. If the information found is not acceptable to the potential buyer, there might be re-negotiation
of the initial terms.
x. Again after due diligence, the goal is to either reaffirm the purchase price or renegotiate,
depending on what was discovered under Due diligence. But the ultimate goal is to make a
rational decision based on the facts.

Transactions that require proper due diligence:

i. Joint Enterprise Collaborations
ii. Partnerships
iii. Mergers and Acquisitions
iv. Strategic Alliance
v. Business Coalition
vi. Outsourcing Agreement
vii. Technology or Product Licensing
viii. Joint venture through Technical or Financial Collaboration
ix. Venture Capital Investment
x. Public Issue etc.
xi.
CASE STUDY- PhonePe’s due diligence on ZestMoney
In April 2023 the Walmart-backed PhonePe has called off its deal with Zest Money over due
diligence concerns. The due diligence that PhonePe carried for nearly six months while evaluating
the muchanticipated acquisition of ZestMoney did not meet its bar. ZestMoney facilitates
Buy Now Pay Later (BNPL) loans by disbursing the purchase amount from the lending partner
directly to the merchant, allowing the customer to repay the lender in installments. PhonePe
initiated talks to acquire ZestMoney to bolster its digital lending forays.

CASE STUDY- Hindustan Motors, European partner complete due diligence for EV project
In October 2022, Hindustan Motors Ltd and its European partner have completed due diligence
for the proposed electric two-wheeler project. The Joint Venture (JV) is likely to launch the
electric vehicles in the next financial year at Hindustan Motors’ Uttarpara plant in West Bengal.
According to the company’s statement, after the formation of JV, around six months are

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 required to start a pilot run. The structure of the JV is being finalised, including the proportion
of equity to be held by the partners.

4. NEED FOR DUE DILIGENCE

a. To confirm that the business is what as it appears;
b. To create a trust between two unrelated parties;
c. To access the risks and opportunities of a proposed transaction;
d. To reduce the risk of post transaction;
e. To investigate into the affairs of business as a prudent business person;
f. To confirm all material facts related to the business;
g. Representation & warranties for indemnification;
h. h Negotiation price concessions;
i. To verify that the transaction complies with investment or acquisition criteria;
j. To investigate & evaluate a business opportunity;
k. To determine compliance with relevant laws and disclose any regulatory restrictions on the
proposed transaction;
l. To evaluate the condition of the physical plant and equipment; as well as other tangible and
intangible assets;
m. To ascertain the appropriate purchase price and the method of payment;
n. To determine details that may be relevant to the drafting of the acquisition agreement.
o. To discover liabilities or risks that may be deal-breakers;
p. To analyze any potential antitrust issues that may prohibit the proposed M&A;
q. To evaluate the legal and financial risks of the transaction.

5. SCOPE OF DUE DILIGENCE

i. Scope of due diligence is transaction based and is depending on the needs of the people who
are involved in the potential investments, in addressing key uncovered issues, areas of concern/
threat and in identifying additional opportunities.
ii. Due diligence would include thorough understanding of all the obligations of the target company:
debts, rights and obligations, pending and potential lawsuits, leases, warranties, all high and

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 impact laden contracts - both inter-corporate and intra-corporate. The investigation or
inspection would cover below mentioned aspects:
a. To determine tax structure and its implications;
b. To assist in determining the final value of financial investment;
c. To determine overvalued assets or under recorded liabilities, hidden assets or liabilities;
d. Ensuring the all applicable law compliances;
e. Ascertaining the penalties in case of non- compliances of statutory laws applicable to the
company;
f. Assessing the quality of management and identification of key employees of the Target
Company;
g. To assess the commercial and technical feasibility;
h. To assess the resource availability of the business;
i. To synergise between the organisations (In case acquirer company and target company);
j. Litigation and assessment of feasibility of pursuing litigation;
k. Financial statements;
l. Assets - real and intellectual property, brand value etc.;
m. Unpaid tax liens and/or judgments;
n. Past business failures and consequential debt;
o. Exaggerated credentials/Fraudulent claims;
p. Misrepresentations or character issues;
q. Cross-border issues - double taxation, foreign exchange fluctuation, sovereign risk, investment
climate, cultural aspects.
r. Reputation, goodwill and other intangible assets.

CASE STUDY-Silicon Valley

i. Silicon Valley has gained a reputation for being home to numerous “unicorn” companies, startups
valued at over $1 billion. While these companies may appear to be the future of tech innovation,
they often have inflated valuations that are not supported by their financial performance. This
is partly due to a lack of due diligence from investors who are eager to get in on the ground
floor of the next big thing.

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ii. Despite the importance of Due Diligence, many investors in Silicon Valley have been criticized
for neglecting due diligence in their eagerness to invest in the next “unicorn” startup. Through
this case the importance of due diligence is re-iterated. Proper due diligence can help investors
make informed decisions and avoid costly mistakes, leading to more sustainable growth and
long-term success.

6. ADVANTAGES OF DUE DILIGENCE

a. It analyses who administers, owns and run the organisation.
b. It examines the company and the market in a contrast way to assess the volatility of the
market.
c. It researches about the competitors of the target company existing in the market.
d. It reviews the financial statements of the company such calculating debt equity ratio, etc.
e. It examines the rise or fall in revenue/profits of the company.

CASE STUDY - Zee Entertainment – Sony India Merger

i. Zee Entertainment Enterprises Limited (ZEEL) and Sony Pictures Networks India (SPNI), two
of India’s biggest media conglomerates, have taken the first steps towards a multibillion-dollar
merger. The Zee board of directors approved the merger between the two companies. The
agreement has the potential to make the newly created company one of the country’s largest
and most sought after.
ii. Sony Pictures Entertainment would invest $1.575 billion in the newly consolidated firm as part
of the acquisition.
iii. On September 22nd, Zee’s board of directors gave in-principle permission for the execution of
a non-binding term sheet with SPNI. In addition, the two parties will sign a non-compete
agreement.
iv. With the Zee-Sony merger, viewers of the Sony network in India will gain access to over
260,000 hours of Zee television content and also its film library with rights to more than
4,800 movie titles across languages.
v. On the cost front, the merged entity will have an advantage. In terms of content offering,
Sony is strong in General Entertainment and Sports and Zee has an edge in regional content.

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vi. With this merger Zee has gained access to Sony’s 10 sports channels

7. BENEFITS OF DUE DILIGENCE

i. Administration & ownership: Analysing who runs the organisation
ii. Capitalisation: Contrastive Analysis of market and company
iii. Competitive environment: Researching about the competitors in market
iv. Reviewing Financial Statements: Interpretation of debt and equity ratios
v. Revenue and Profits
vi. Ascertaining the growth of the company

8. FACTORS TO BE KEPT IN MIND WHILE CONDUCTING DUE DILIGENCE

1. Objectives and purpose
A key step in any due diligence exercise is to develop an understanding of the purpose for the
transaction because the entire aim of due diligence is to provide the party proposing the
transaction with sufficient information to make a reasoned decision as to whether or not to
complete the transaction as proposed.
The following factors may be kept in mind in this regard:
(i) Be clear about your expectations in terms of revenues, profits and the probability of the target
company to provide you the same.
(ii) Consider whether you have resources to make the business succeed and whether you are willing
to put in all the hard work, which is required for any new venture.
(iii) Consider whether the business gives you the opportunity to put your skills and experience to
good use.
(iv) Learn as much as you can about the industry you are interested in from media reports, journals
and people in the industry.

2. Planning the schedule

Once it is decided for a particular business, make sure of the following things:
a. Steps to be followed in due diligence process
b. Areas to be checked
c. Aspects to be checked in each area

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d. Information and other material to be requested from the seller

3. Negotiation for time

Sometime sellers might rush the process but when the seller gives a short review period,
negotiations can be made for adequate time to have a complete review on crucial financial and
legal aspects.

4. Risk Minimisation
All the information should be double checked- financials, tax returns, patents, copyrights and
customer base to ensure that the company does not face a lawsuit or criminal investigation.
Since, due diligence exercise deals with the overall business, it is important to consider aspects
such as:
 background of promoters
 performance of senior management
 team organizational strategy
 business plans
 risk management system
 technological advancement
 infrastructure adequacy
 optimum utilization of available resources.

5. Information from external sources

The company’s customers and vendors can be quite informative. It may be found from them
whether the target company falls in their most favored clients list. Any flaws that the audit
uncovers help to re-negotiate down the sale price.

6. Limit the report with only material facts

While preparing the report it is advisable to be precise and only the information that has a
material impact on the target company is required to be included.

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 7. Structure of information
Once the due diligence process is over, while preparing the report, information has to be
structured in an organized manner in order to have a better correlation on related matters.

Challenges in conducting due diligence

A professional may face many challenges while conducting due diligence, few examples of which
are following:
i) Non-availability of the information or incomplete information: For eg. Non availability of
evidence related to compliances. While dealing with difficulty, he can try to find the alternate
source of getting the information.
ii) Lack of time: Many a times a professional cannot check all the information due to paucity of
time. A professional may confine the scope of checking in this scenario.
iii) Non-cooperation by the employees: It is possible that few of the employees may start
noncooperating as this may lead to focus on their mistakes. Reporting to the concerned
authority may be a good solution in this scenario.

9. PROCESS AND STAGES OF DUE DILIGENCE

A due diligence process can be divided into three stages i.e.
(i) Pre Diligence,
(ii) Diligence, and
(iii) Post Diligence

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  Execution of Non-Disclosure Agreement

PRE
 Identifying issues

 Submission of Due Diligence Report- Summarised or Detailed as the

 Execution of Shareholders Agreement

DILIGENCE



POST  Negotiating SHareholders Agreement

1. STEP 1: Pre diligence

A pre diligence is primarily the activity of management of paper, files and people.
i. Signing the Letter of Intent (LOI):
The first and foremost step for the management of the target company, is that the investor
is to sign a Letter of Intent (LOI) or a term sheet which underlines the various terms on
which the proposed deal is going to be concluded. It includes:
Scope
 Areas to be covered;
 Manner of maintenance and collection of data;
 Final work product-
– Due Diligence Report
– Only Executive Summary
– Comprehensive Bible with Executive Summary, detailed report on all segments, data sheets
 Timelines - Time within which the exercise is to be complete.

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 ii. Execution of the Non-Disclosure Agreement (NDA)/ Engagement letter:
After the receipt of the LOI the investors sign an NDA with the various agencies who is going
to conduct the due diligence, be it finance, accounting, legal or a secretarial diligence.
iii. Receipt of documents from the company and review of the same with the checklist of
documents already supplied to the company:
The company would usually receive a checklist from the agency conducting the diligence. The
checklist is invariably exhaustive in nature, and therefore, the company may either collate and
compile the documents in-house or outsource this to an external agency.
iv. Identifying the issues:
The next step is to identify the issues existing therein that may be relevant.
v. Organising the papers required for a diligence:
The next is to organise all the paper, documents and information requiste for conducting due
diligence.
vi. Creating a data room:
While the data is being collated care should be taken to ensure that there are no loose ends
that may probably arise.

Key points to be considered in regard to data room:

Some of the important things that one should take cognizance of from the corporate viewpoint
are the following:
 Do not delay deadlines (leads to suspicion).
 Mark each module of the checklist provided separately.
 In case some issues are not applicable spell it out as “Not Applicable”.
 In case some issues cannot be resolved immediately, admit it.
 Put a single point contact to oversee the process of diligence.
 Keep a register, to track people coming in and going out.
 An overview on the placement of files.
 Introduction to the point person.

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 During the diligence, care should be taken to adhere to certain hospitality issues, like:
1. Be warm and receptive to the professionals who are conducting diligence.
2. Enquire on the Due Diligence team.
3. In case of any corrections - admit and rectify.

Getting Ready Components of the Deliberative Overview

(a) Transaction Structure i.e. concerned parties, whether structured as share or asset purchase, tax
considerations, restrictive covenants, etc.;
(b) Transaction Funding i.e. how is funding contemplated and preliminary consideration of any
significant issues in respect thereof;
(c) Regulatory Issues such as restriction on foreign holding, subsidiaries, approvals, competition law
issues and foreign exchange considerations;
(d) International Aspects including the question of engaging overseas professional advisers;
Timelines i.e. determination of time schedules for various stages of the contemplated
Transaction;
(e) Confidentiality Agreements i.e. whether Target seeks powers to restrict the release of certain
information or data and review of covenants in relation thereto (Particularly in a listed
company);
(f) Exclusivity or Lock-In Arrangements as per negotiations between the parties;
(g) Data Room Guidelines regarding the due diligence process on Target entity;
(h) Overall Due Diligence Strategy and consideration of the due diligence checklist as is usually
circulated prior thereto; and
(i) Specialized Issues such as industry-segment and relevant sector-specific issues including any
specialized legislative requirements and such other details.

2. STEP 2: Diligence Report

After the diligence is conducted, the professionals submit a report which in common parlance
which is called as Due Diligence report which would typically consist of the following three
sections: –

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 a. Executive Summary: This draws to the attention of the Acquirer, any items of concern or
otherwise requiring attention and could usually start with the most critical points or deal
breakers.
b. Main Body: This would ideally follow the order and headings of the terms of reference or the
checklist.
c. Appendices: This section includes data sheets and/or documentation which are relevant to a
critical issue.

OUTCOMES OF DUE DILIGENCE REPORTS

 Deal Breakers: In their report, the findings can be very glaring and may expose various non-
compliances that may arise - any criminal proceedings or known liabilities.
 Deal Diluters: The findings arising out a diligence may contain violations which may have an
impact in the form of quantifiable penalties and in turn may result in diminishing the value
of company.
 Deal Cautioners: It covers those findings in a diligence which may not impact the financials,
but there exist certain non-compliances which though rectifiable, require the investor to tread
a cautious path.
 Deal Makers: are those reports wherein the diligence team have not been able to come across
any violations, leading them to submit what is called a ‘clean report’.

3. Post Diligence
Post diligence result in rectification of non-compliances found during the course of due diligence.

10. TECHNIQUES OF DUE DILIGENCE AND RISK ASSESSMENT

Due diligence and risk assessment and control represent separate and distinct processes that
take place prior to the commencement and throughout the duration of a commercial agreement
respectively. The Due diligence and risk assessment and control processes are central to good
business practice. These processes are particularly important in taking leadership in the market
and charge premium rate services. Where services are delivered to clients through Associates,
which can, on occasion, include many different parties, the professional should prior to

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 contracting with such party write down the expectation from such party in the process of due
diligence.

All parties in the Due diligence team should be confident that the established team is for good
positive business and industry-wide growth. Such processes are built on the following
cornerstones:

Analyse the Pre analysis of

Know your client
objective
case

Responding to Actions to control Full check of the

incidents risks documents

Evaluation of the objective of the plan: The first step is to determine the main objective of
the project which helps in ascertaining the exact information required that align with
organisation’s strategy.

Know your client - All businesses have risks, and these can vary significantly dependent on
the nature of the company and the services being operated. It is important to know your client
so you can properly identify the risks involved and assess how to manage them. This is not to
limit or prevent commercial relationships forming but to ensure they are properly managed
whether an issue ultimately arises or not.

Examination of Financials of the organisation: It examines the financial records of the

organisation that helps in assessing the financial performance, asset health and stability of
the organisation. Some of the Items inspected here include:
 Balance sheets and income statements
 Inventory schedules
 Future forecasts and projections
 Revenue, profit, and growth trends

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 Stock history and options
 Short and long-term debts
 Tax forms and documents
 Valuation multiples and ratios in comparison to competitors and industry benchmarks.

Inspection of documents: The next step is to review all the documents/information records
made available to get a better understanding of the organisation and it help to determine the
growth and value of the business of the organisation.

Actions taken to control any risk: once risks are identified, industry members must make a
proper assessment of the issues that would arise if incidents occur and take proportionate steps
to minimise the likelihood of such issues resulting in consumer harm. Good process planning
and/or staff training may have a positive impact on a company’s ability to respond effectively
when incidents do occur.

The formulation of an action plan could be based on the following:

 To periodically test and/or monitor certain ‘risks’ that would normally be associated to a
particular service category (e.g. for a subscription service, it may be prudent to test the clarity
of promotions, whether reminder messages have been sent, with delivery confirmation noted,
and that ‘STOP’ commands have been properly processed);
 The frequency of such testing should reflect the risk posed by both the client and the service
type. For example, a client with no breach history, or where none of the directors are linked
to other companies with breaches, and low- risk service types (such as football score updates),
would require far less monitoring than a client with an extensive breach history that provides
a high- risk category of service (e.g. a subscription-based lottery alerts system with a joining
fee);
 ‘Mystery shopper’ testing could be used as and when appropriate;
 Internal mechanisms to enable ‘whistle-blowing’ by staff, where appropriate;
 Putting in place internal checks that correlate with unusual patterns of activity which may
indicate consumer harm (e.g. spikes in traffic and/or consumer complaints made directly to
the provider about one specific service);

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  Having a procedure to alter and address instances of non-compliant behaviour; Monitoring of
the client’s service to ensure that any directions given by the Phone-paid Services Authority
have been complied with;
 Producing a compliance file, comprising of a written record of the assessment, the subsequent
action plan and evidence of any monitoring and/or testing required by the plan having taken
place. This record does not necessarily need to be lengthy (although this will depend on the
client and the actions taken under the plan) but should be made available to the Phone-paid
Services Authority upon request.

Responding to incidents - even where a business makes significant effort to comply with
regulations and legal requirements, they may not be immune to problems arising. Providers
ought to be prepared to respond calmly and proactively to incidents, working closely with the
regulator and other parties in the value chain to identify, mitigate and correct any fallout,
providing support to consumers. Breaches ought to be identified and acknowledged quickly when
they arise so that they can be remedied and services are therefore delivered to a high standard
to consumers.

11. TYPES OF DUE DILIGENCE

LEGAL DUE DILIGENCE

i. A legal due diligence covers the legal aspects of a business transaction, liabilities of the target
company and other related issues.
ii. Legal due diligence covers intra-corporate and intercorporate transactions.
iii. It includes preparation of regulatory checklists, meeting with personnel, independent check with
regulatory authorities etc and verification of following document.
a. Copy of Memorandum and Articles of Association;
b. Minutes of Board Meeting for the last three years;
c. Minutes of all meetings or actions of shareholders;
d. Copy of share certificates issued to Key Management Personnel;
e. Copy of all guarantees to which company is a party;
f. All material contracts;

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g. Copies of all loan agreements, bank financing agreements, line of credit to which company is
a party;
h. Status of the order, awards issued by the various regulators and courts;
i. Status of Pending litigations;
j. Organisational chart;
k. Returns filed with ROC;
l. Search/status report if any;
m. Details of branches and subsidiaries;
n. Registrations documents under various laws;
o. Documents/reports filed with stock exchanges;
p. Related party transactions;
q. Contracts and loans with directors;
r. Borrowings and investment of the company;
s. Matters like IPO, FPO, Prospectus, etc. in compliance with SEBI regulations;
t. Maintenance of statutory registers, minute books, etc.;
u. Public deposits;
v. Distribution of dividend.

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 TRANSACTIONS COVERED UNDER LEGAL DUE DILIGENCE

Initial Public Offer/

Private Equity Joint Ventures
FPOs/ QIPs

Mergers & Corporate Corporate Governance

Related Matters

Commercial General Compliance

Leveraged Buy Outs
Requirement

12. SCOPE OF LEGAL DUE DILIGENCE

Legal Due Diligence assesses the regulatory compliances applicable to the company under various
laws such as:
 Company Law
 Income Tax Law
 Labour Law
 RERA Act S
 EBI Act, their rules and regulations
 Insurance Act
 RBI Act
 FEMA Act
 Intellectual Property Law etc.

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 DUE DILIGENCE FOR MERGER & AMALGAMATION
i. The due diligence provides an assurance in taking decisions considering the factors which may
be a potential deal-killers/shapers and provide assurances that the acquisition is the right
decision at the right price.
ii. Due diligence also provides management an insight, holistic view of the target company that
helps in the easy integration of the target’s people and business.
iii. Due diligence in mergers not only requires the assessment of the financial, legal, and regulatory
exposures but also requires insights into the target company’s structure, operations, culture,
human resources, supplier and customer relationships, competitive positioning and future outlook.

Due Diligence Process in the M&A Strategy

Stages For Buyer For Seller

Preparation Stage  M&A strategy formulation  Structure a business plan

 Preparation of list of potential  Preparation of list of

Targets potential buyers
 Appoint external advisor for  Appoint external advisor
evaluation of targets  Shortlist buyers
 Short list targets

 Create due diligence team

Pre Diligence  Approach targets  Approach buyers

 Negotiation of initial terms  Negotiate initial terms

 Execute non-disclosure agreement  Execution of non

 Compliation of list of data required disclosure agreement

 Creation of data room

Due Diligence  Inspection of data room  Assistance in data room

 Analysis of private documents  Setting deadlines for offer

 Evaluation of risk and return

 Structure the terms and conditions

Negotiations  Make final offer  Compile final offers

 Negotiate and agree on terms  Select best offer

 Negotiations

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 Post Diligence  Post merger integration and cultural  Termination of data room and
adjustments ownership exchange

DUE DILIGENCE FOR TAKEOVERS

i. Takeover of companies whose securities are listed on one or more recognized stock exchanges
in India is regulated by the provisions of the Listing Agreements with various stock exchanges
and the Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011.
ii. The compliances under the regulations include event based/continual disclosures, open offer
requirements including public announcement, escrow account, obligations of acquirer/target
company/merchant banker, undertaking/ authorization, offer price etc.
iii. Taking over a company brings inevitable risk, some of which can cause great detriment to the
company. Due diligence allows the company to avoid a tragic end after being taken over.
iv. The Takeover Due diligence is generally conducted in different domains; Financial, Legal,
Taxation, social life, environment, etc.
v. The Takeover Due diligence covers the history of the company, past performance, the present,
and the future of a company.
vi. Takeover due diligence is useful in allowing the buyer to confirm his or her decision of the sale,
or in negotiating the conditions of the sale.
vii. Takeover due diligence is important for an organisation as it gives an overall view of target
enterprise, according to which the buyer will be able to analyze the potential of the target
company while understanding the risks related in taking it over.
viii. This due diligence will be performed once an agreement is signed or after the letter of intent.
It will allow verification of the elements being negotiated between the parties, producing an
accurate reflection of the current state of the target company.

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 CASE STUDY
In the case of Nirma Industries and Anr. v. Securities Exchange Board of India, Nirma Industries
sought withdrawal of an open offer under Regulation 27(d) of the Takeover Regulations on the
ground that the promoters of the target company had committed a fraud and had embezzled
funds. Nirma Industries applied to SEBI to allow the withdrawal of the open offer. The Supreme
Court however rejected all the contentions of Nirma Industries and held that an investing
company is responsible for its own decision to invest and should carry out appropriate diligence.
The Court stated that Nirma Industries were aware of various litigations, the plea of ignorance
of litigation and dangers of investment was thereby denied

DUE DILIGENCE FOR ISSUE OF SECURITIES

A public company may issue securities to public through prospectus - Public offer by complying
with the provisions of companies Act 2013, Prospectus and Allotment of Securities or through
private placement, Prospectus and Allotment of Securities or through a rights issue or a bonus
issue in accordance with the provisions of the Act and in case of a listed company or a
company which intends to get its securities listed also with the provisions of the Securities
and Exchange Board of India Act, 1992 and the rules and regulations made thereunder, the key
regulation governing the issue of securities and preparation of financial information are:
 The SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009/2018
 The SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015

A private company may issue securities by way of rights issue or bonus issue in accordance
with the provisions of the Act or through private placement.
The scope and comprehensiveness of the Issue of Securities due diligence is important not only
from a legal standpoint to avoid liability but also from a reputational perspective as the
reputation of the company and its promoters and other participants may be significantly
vanished, if on a later date it appears that the company and other participants failed to uncover
and disclose to prospective investors critical issues relating to the issuer or the Securities.
While the specific requirements in connection with issue of securities are different under the
Companies Act, 2013 and SEBI Laws & Regulations made thereunder, any non-compliance in
these regulations are generally impose liability if the offering memorandum or prospectus

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 contains a materially incorrect or misleading statement or omits a material fact, however in
certain conditions the complete issue of securities stand cancelled. The violation of any
applicable liability provisions may result in liability for offering participants, in particular the
issuer and the underwriters. These liability provisions emphasize the need for careful preparation
of all materials to be used in issue of securities offerings, in particular the offering memorandum
or prospectus.

INTELLECTUAL PROPERTY LAW

i. The company which owns Intellectual Property (IPs) use there IPs to monetize their business.
ii. These IPs are something that differentiates their product and service from their competitors.
iii. The main objective of intellectual property due diligence is to ascertain the nature and scope
of target company’s right over the intellectual property to evaluate the validity of the same
and to ensure whether there are no infringement claims.
iv. Few of the items that need to be seen while conducting due diligence is:
a. A schedule and copies of all consulting agreements, agreements regarding inventions, licenses,
or assignments of intellectual property.
b. Schedule of patents and its application.
c. Schedule of copyrights, trademarks and brand names.
d. Pending patents clearance documents.
e. Any pending claims case by or against the company in violation of intellectual property.
f. Details of Indian and international patents with the company.
g. Details of threatened claims if any.

ENVIRONMENT LAW
List of important statutes for environment protection in India:
 The National Green Tribunal Act, 2010
 The Air (Prevention and Control of Pollution) Act, 1981
 The Water (Prevention and Control of Pollution) Act, 1974
 The Environment Protection Act, 1986
 The Wildlife Protection Act, 1972
 The Forest Conservation Act, 1980

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 Public Liability Insurance Act, 1991
 The Biological Diversity Act, 2002.

– Environmental due diligence analyses environmental risks and liabilities associated with an
organisation.
– Environmental due diligence provides the acquirer with a detailed assessment of the historic,
current and potential future environmental risks associated with the target organisation’s sites
and operations.
– It involves risk identification and assessment with respect to:
 Details of environmental permits and licenses.
 Hazardous substances used in the Company’s operations.
 Copies of all correspondence with environment authorities.
 Litigation or investigations if any on environmental issues.
 Contingent environmental liabilities or continuing indemnification obligations, if any.
 Review of the environmental setting and history of the site.
 Assessment of the site conditions.
 Operations and management of sites.
 Confirm legal compliance and pollution checks from regulatory authorities etc.

Things to be reviewed by the management

 List of environmental permits and licenses and validities of the same.
 All correspondence and notices with EPA, state, or local regulatory agencies.
 Whether the company’s disposal methods of various by products are in sync with the regulated
guidelines.
 Whether there are any contingent environmental liabilities or continuing indemnification
obligations.

LABOUR LAWS
List of major labour laws in India:
 Employees Compensation Act, 1923
 Payment of Wages Act, 1936

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  Minimum Wages Act, 1948
 Factories Act, 1948
 Maternity Benefits Act, 1961
 Payment of Bonus Act, 1965
 The Payments of Gratuity Act, 1972
 Employees State Insurance Act, 1948
 Industrial Disputes Act, 1947
 Trade Unions Act, 1926
 The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act,
2013

i. The purpose of a labour due diligence is to identify gaps before an authority audit, any non-
compliances relating to the inappropriate application of labour law regulations and to allow
company to correct errors and deficiencies.
ii. The scope of the labour law due diligence extends to all the labour & employment related
central, state and local laws, rules and regulations applicable to the company.
iii. During the payroll and labour due diligence the auditor should examine and review the following
areas:
 Labour law regulations and agreements;
 Employment contracts, amendments to employment contracts;
 Information, job descriptions;
 Legal declarations/agreements regarding termination of employment;
 Maintenance of records Labour law regulations and agreements;
 Employment contracts, amendments to employment contracts;
 Information, job descriptions;
 Legal declarations/agreements regarding termination of employment;
 Maintenance of records.

COMPETITION LAW
i. Due diligence on competition law aspects is an examination of the actual operations and
practices of an enterprise to determine the extent of its compliance with the competition law

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 and to identify potential risks and liabilities and assess the adherence to and effectiveness of
the company’s competition law compliance policy and training program.
ii. Primary components of Competition Law due diligence are:
a. An examination of selected company documents.
b. Interviews with selected company personnel.
c. Identify specific business activities that potentially could create antitrust exposure for the
company.
d. The results of the due diligence may suggest an enterprise to have an effective competition
law compliance programme.
e. The results of the due diligence may result in variation of deal value, withdrawal of deal and
also make suggestions to structure a compliance program.
f. How to go about the process of due diligence of competition law.

Due diligence of competition law may be made under the following heads:
1. Due diligence of various agreements (both existing and proposed)
2. Due diligence on dominance and its likely abuse if any, (existing)
3. Due diligence on combinations (i.e. effect of proposed Mergers & Acquisition).

Due Diligence of various agreements includes:

a. Agreements relating to production, supply and distribution of goods or services

b. Agreement if any with competitor relating to production, marketing or bidding, price etc.
c. Agreements with customers and distributors.
d. Purchase agreements.
e. Non-compete covenants.
f. Technology transfer/technical know-how agreements.
g. Concession agreements

Due diligence on abuse of dominance, if any includes

a. Examination as to the existence of dominance.
b. Examination of relevant market, whether product or geographical Areas.
c. Cases of abuse if any

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 Due diligence on regulation of combinations

a. Nature of combination
b. Acquisition of share, voting rights, assets or control or merger/amalgamation etc
c. Examination of total value of Assets or Turnover and the valuation methodology.
d. Status of merger notification to be filed with CCI
e. Status of dominance after merger

FEMA DUE DILIGENCE

i. Foreign Exchange Management Act (FEMA) is the legislation which governs the foreign
currency in India.
ii. The main aim of FEMA is to facilitate external trade, balance the payments, promote the
orderly development, and maintain the foreign exchange market in India.
iii. The FEMA Due diligence helps to avoid damaging circumstances and is helpful in ensuring
compliance of Foreign Exchange laws.
iv. The FEMA Due diligence covers all types of cross border transactions - import, export, debt
funding, equity capital infusion, transfer of shares etc.

The following are covered under the FEMA Due diligence:

 Capital Accounts transactions
 Current account transaction
 Currency Transactions
 Regulations Master Directions and Circulars issued by RBI
 FDI Policy, approvals
 Setting up of Business through Liaison office, Branch office, project office, wholly owned
subsidiaries, joint ventures, foreign institutional investors, and foreign venture capital investor,
Non-Resident of India/ person of Indian origin.

FCRA DUE DILIGENCE

a. The FCRA legislation state that an organization cannot receive funding from a foreign source,
unless it is registered under the Foreign Currency (Regulations) Act, 2010 or has obtained
special government approval for a specific project.

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b. The registered NGOs need to comply with various post-registration requirements, as detailed in
the provisions of the Act and its rules of enforcement.
c. NGOs in India are categorized under three legal categories: society, trust, and a limited company.
d. The Income Tax Department (IT Department) and Ministry of Home Affairs regulate
registration and require all NGOs to file annual tax returns and submit audited account
statements to their respective agencies.

e. The most important reporting requirement under the FCRA is the submission of annual returns.
f. All NGOs are required to submit their annual returns to the central government (MHA) within
nine months from the closure of the previous financial year.

OTHER BUSINESS LAWS

The business in India is regulated through various laws and regulations that secures sustainable
development of the business and society as well. Apart from corporate and taxation laws there
are other laws and regulations that keep a check on the business organisation.
 Registrations and approvals from various statutory authorities.
 Compliance under pollution control laws.
 Issues relating to immovable properties, title deeds, etc.
 Compliance under FEMA and Insurance Laws etc.
 Factories Act, 1948.
 Real estate and construction law.
 Labour and employment law.
 International business law.

FINANCIAL DUE DILIGENCE

– Financial Due Diligence checks whether the financials showcased in the Information
Memorandum is correct or not.
– It involves review of the company’s projection and basis of such projections, capital expenditure
plan, schedule of inventory, debtors and creditors, etc.
– It also provides a deep understanding of all the:

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 i. Company’s financials, including but not restricted to audited financial statements for last three
years, recent unaudited financial statements with comparable statements of last year,
ii. review of accounting policies,
iii. review of internal audit procedures, quality and sustainability of earnings and cash flow,
condition and value of assets, potential liabilities, tax implications of deal structures,
iv. examination of information systems to establish the reliability of financial information, internal
control systems etc.

The Financial Due Diligence can further extended to tax due diligence which covers the Diligence
on various taxes the company is required to pay. The tax due diligence comprises an analysis
of:
 tax compliance
 tax contingencies and aggressive positions
 transfer pricing
 identification of risk areas
 tax planning and opportunities.

COMPONENTS OF FINANCIAL DUE DILIGENCE

 Sustainable / normalised earnings
 Sales trends – by segment product geographies diligence Sales trends – by segment, product,
geographies
 Customer / product profitability
 Overheads – fixed vs. variable
 Balance sheet – fixed assets, borrowings, working capital
 Unrecorded liabilities
 Commitments, contingencies
 Accounting policies
 Management BOD control environment Corp Governance
 Relationship between profit and operating cash flows
 Reliance on debt funds and usage of debt
 Debt repayment and potential debt trap

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 Working capital lock up.

FOCUS AREAS OF FINANCIAL DUE DILIGENCE

QUALITY OF EARNINGS, GROSS MARGIN & CASH FLOWS

QUALITY OF ASSETS- WORKING CAPITAL

NET DEBT

POTENTIAL LIABILITIES & COMMITMENTS

SEPARATION/ STRUCTURING/ INTEGRATION ISSUES

RELATED PARTY TRANSACTIONS

Quality of earnings, gross margin & cash flows

 Identification of seasonable sales
 Growth rate in gross margins
 Change in margins with cost variances
 Impact of standalone costs
 Impact of foreign exchange rate fluctuations
 GAAP Applications
 Revenue Recognitions
 Recurring /non-recurring expenses
 Cash flows from operations - stability, timing and certainty
 Capitalisation of assets/ WIP

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 Assets on lease/used but not owned /owned but not used.

Quality of assets - working capital

 Inventory Turnover ratio,
 Current Ratio,
 Debtors outstanding for more than and less than six months
 Cheques issues but not cleared
 Valuation of WIP
 Seasonal impact on working capital

Net Debt
 Transactions on cash/credit basis
 Debt-like items (pension underfunding, severance and other non-operating liabilities)
 Loan Agreements
 Complying with Debt Restructuring schemes.

Potential liabilities & commitments

 Contingent liabilities and off balance sheet items
 Pension and related obligations
 Conservative Policy
 Aggressive Policy
 Off Balance sheet items

Separation/ Structuring/ Integration Issues

 Changes in supply chain management
 MIS and accounting systems
 Standalone considerations (impact of economies of scale, support functions)
 Synergies
 Transition services agreement

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 Related Party Transactions
 Transaction at arm length basis
 Resources and cost sharing with related parties
 Financing arrangements with related parties

BANK DUE DILIGENCE

The Bank conduct due diligence whenever the company intends to borrow the money from the
bank. The main objective of conducting due diligence by the bank are:
a. Verification of details of directors/promoters
b. Statutory and procedural compliances by the company
c. Examining the existing or previous charges created by the company in respect of loans and
their satisfaction.
d. Knowing the defaulting status of the directors, etc.

Period of Reporting Annex.

The Diligence Report shall be made on a half yearly basis.

Right to Access Records and Methodology for Diligence Reporting

i. PCS should have access at all times to the books, papers, minutes books, forms and returns
filed under various statutes, documents and records of the company which he considers essential
for the purposes of Diligence Reporting.
ii. The PCS shall be entitled to require from the officers or agents of the company, such
information and explanations as the PCS may think necessary for the purpose of such Reporting.
iii. However, depending on the facts and circumstances he/she may obtain a letter of
representation from the company in respect of matters where verification by PCS may not be
practicable, for example matters like —
(i) show cause notices received;
(ii) persons and concerns in which directors are interested, etc.

Reporting with Qualification

i. The qualification, reservation or adverse remarks, may be stated by the PCS in bold or in italics.

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 ii. If the PCS is unable to form any opinion with regard to any specific matter, the PCS shall
state clearly the fact that he is unable to form an opinion with regard to that matter and the
reasons thereof.
iii. If the scope of work required to be performed, is restricted on account of limitations imposed
by the company or on account of circumstantial limitations the Report shall indicate such
limitation.
iv. If such limitations are so material as to render the PCS incapable of expressing any opinion,
the PCS should state that:
“in the absence of necessary information and records, he is unable to report compliance(s) or
otherwise by the Company”.
v. PCS shall have due regard to the circulars and/or clarifications issued by the Reserve Bank of
India from time to time. It is recommended that a specific reference of such circulars at the
relevant places in the Report shall be made, wherever possible.

Professional Responsibility and Penalty for False Diligence Report

Company Secretaries must take adequate care while issuing Diligence Report. Any failure or
lapse on the part of a Practising Company Secretary (PCS) in issuing a Diligence Report may
not only attract penalty for false Reporting and disciplinary action for professional or other
misconduct under the provisions of the Company Secretaries Act, 1980 but also make him liable
for any injury caused to any person due to his / her negligence in issuing the Diligence Report.

Disqualifications of Secretary in Whole-Time Practice

With a view to ensure that PCS shows utmost integrity and independence of judgement in the
performance of his/her duties, it is desirable that he/she, should not accept any assignment
for giving Diligence Report to a Bank, if he/ it is-
(a) a body corporate;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;

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(d) a person who is indebted to the company for an amount exceeding one thousand rupees, or
who has given any guarantee or provided any security in connection with the indebtedness of
any third person to the company for an amount exceeding one thousand rupees;
(e) a person holding any security of that company which carries voting rights.

Format of Diligence Report (ANNEXURE 3 TO RBI CIRCULAR)

To
The Manager,
______________ (Name of the Bank)

I/We have examined the registers, records, books and papers of ........................ Limited having
its registered office at ....................... as required to be maintained under the Companies Act,
1956 / 2013 (the Act) and the rules made thereunder, the provisions contained in the
Memorandum and Articles of Association of the Company, the provisions of various statutes,
wherever applicable, as well as the provisions contained in the Listing Agreement/s, if any,
entered into by the Company with the recognized stock exchange/s for the half year ended on
........................

In my/our opinion and to the best of my/our information and according to the examination
carried out by me/ us and explanations furnished to me/us by the Company, its officers and
agents. I/We report that in respect of the aforesaid period:
1. The management of the Company is carried out by the Board of Directors comprising of as
listed in Annexure ......................., and the Board was duly constituted. During the period under
review the following changes that took place in the Board of Directors of the Company are
listed in the Annexure ............, and such changes were carried out in due compliance with the
provisions of the Companies Act, 1956 (Now Companies Act 2013).
2. The shareholding pattern of the company as on ............ was as detailed in Annexure ............
During the period under review the changes that took place in the shareholding pattern of the
Company are detailed in Annexure .............
3. The company has altered the following provisions of

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(i) The Memorandum of Association during the period under review and has complied with the
provisions of the Companies Act, 1956 (Now Companies Act, 2013) for this purpose.
(ii) The Articles of Association during the period under review and has complied with the provisions
of the Companies Act, 1956 (Now Companies Act, 2013) for this purpose.
4. The company has entered into transactions with business entities in which directors of the
company were interested as detailed in Annexure .............
5. The company has advanced loans, given guarantees and provided securities amounting to Rs.
............ to its directors and/or persons or firms or companies in which directors were interested,
and has complied with Section 295 of the Companies Act, 1956. (Now to be in compliance
with Section 185 of Companies Act, 2013).
6. The Company has made loans and investments; or given guarantees or provided securities to
other business entities as detailed in Annexure ............ and has complied with the provisions of
the Companies Act, 1956. (Now to be in compliance with Section 186 of Companies Act, 2013).
7. The amount borrowed by the Company from its directors, members, financial institutions, banks
and others were within the borrowing limits of the Company. Such borrowings were made by
the Company in compliance with applicable laws. The break up of the Company’s domestic
borrowings were as detailed in Annexure ............. (Now to be in compliance with Section 180
of Companies Act, 2013).
8. The Company has not defaulted in the repayment of public deposits, unsecured loans,
debentures, facilities granted by banks, financial institutions and non-banking financial
companies. (Section 73- 76 of Companies Act 2013)
9. The Company has created, modified or satisfied charges on the assets of the company as
detailed in Annexure ............ Investments in wholly owned Subsidiaries and/or Joint Ventures
abroad made by the company are as detailed in Annexure (Now to be in compliance with
Section 77-87 of Companies Act, 2013).
10. Principal value of the forex exposure and Overseas Borrowings of the company as on ............
are as detailed in the Annexure under.
11. The Company has issued and allotted the securities to the persons-entitled thereto and has
also issued letters, coupons, warrants and certificates thereof as applicable to the concerned
persons and also redeemed its preference shares/debentures and bought back its shares within

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 the stipulated time in compliance with the provisions of the Companies Act, 1956 (now to be
in compliance with relevant sections of Companies Act, 2013) and other relevant statutes.
12. The Company has insured all its secured assets. (Now to be in compliance with relevant
provisions of Chapter IV of Companies Act, 2013.)
13. The Company has complied with the terms and conditions, set forth by the lending
bank/financial institutions at the time of availing any facility and also during the currency of
the facility.
14. The Company has declared and paid dividends to its shareholders as per the provisions of the
Companies Act, 1956. (Now to be in compliance with relevant sections of Chapter VIII of
Companies Act, 2013).
15. The Company has insured fully all its assets.
16. The name of the Company and or any of its Directors does not appear in the defaulters’ list
of Reserve Bank of India.
17. The name of the Company and or any of its Directors does not appear in the Specific Approval
List of Export Credit Guarantee Corporation.
18. The Company has paid all its Statutory dues and satisfactory arrangements had been made for
arrears of any such dues.
19. The funds borrowed from banks/financial institutions have been used by the company for the
purpose for which they were borrowed.
20. The Company has complied with the provisions stipulated in Section 372A of the Companies
Act in respect of its Inter Corporate loans and investments. (Now to be in compliance with
Section 186 of Companies Act, 2013).
21. It has been observed from the Reports of the Directors and the Auditors that the Company
has complied with the applicable Accounting Standards issued by the Institute of Chartered
Accountants in India.
22. The Company has credited and paid to the Investor Education and Protection Fund within the
stipulated time, all the unpaid dividends and other amounts required to be so credited.
23. Prosecutions initiated against or show cause notices received by the Company for alleged
defaults/ offences under various statutory provisions and also fines and penalties imposed on
the Company and or any other action initiated against the Company and /or its directors in
such cases are detailed in Annexure .............

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 24. The Company has (being a listed entity) complied with the provisions of the Listing Agreement
(Now to be in compliance with the SEBI (LODR) Regulations, 2015).
25. The Company has deposited within the stipulated time both Employees’ and Employer’s
contribution to Provident Fund with the prescribed authorities.

Signature:
Name of Company Secretary/Firm:
C.P. No.:

Place:
Date:

CERTAIN OTHER TYPES OF DUE DILIGENCE

Ethical Due Diligence
i. Ethical Due Diligence measures ethical character of the company and identify the possibilities
of ethical risks, which involves reputation, governance, ethical values etc.
ii. It helps an organization to decide whether the partner is ethically viable.
iii. Carrying out the assessment of a company’s ethics as part of a due diligence can add
considerably to the depth of insight into the target company. For an ethics assessment to add
this value, it is crucial that it is an accurate and reliable assessment.

Strategic Due Diligence

Strategic due diligence tests the strategic rationale behind a proposed transaction and analyses
whether the deal is commercially viable, whether the targeted value would be realized.
Strategic due diligence focuses on determining how much adequate, realistic, and attainable is
a deal’s value. Strategic due diligence is broader and considers micro and macro-environmental
factors of a business, connecting the legal and financial consideration with a long-term focus.
Essentially strategic due diligence determines the question, “Whether a business plan can hold
up to the market realities?”

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 Operational Due Diligence
i. Operational Due Diligence diagnoses the organization’s historical and current operational
performance, cost structure, map of potential synergies.
ii. It aims at the assessment of the functional operations of the target company, connectivity
between operations, technological upgradation in operational process, financial impact on
operational efficiency etc.
iii. Operation due diligence involves verifying operational matters such as the various facilities,
office layout, sitting capacity etc..
Benefits of Operational Due Diligence:
 It also uncovers aspects on operational weakness, inadequacy of control mechanisms etc.
 It also gives a better picture of the kind of cost the buyer is going to incur in case they plan
to go for expansion.
 It verifies the various facilities owned by the target company and whether all costs are captured
in the financials or not.

Human Resource Due Diligence

Human Resource Due Diligence evaluates the company’s organizational structure, HR practices
and policies, collective agreements, compensation programs, ratios of labour turnover and
demographic analysis of the Company.

Elements of Human Resource Due Diligence

i. List of employees, their positions and salaries.
ii. All employment contracts with non-disclosure, non-solicitation and non-competition agreements
between the company and its employees. In case there are few irregularities regarding the
general contracts, focus must be given.
iii. Analysis of total employees, including current positions, vacancy, due for retirement and serving
notice period.
iv. Analysis of employee problems for alleged wrongful termination, harassment, discrimination and
any legal case pending about the same.
v. Analysis of current salaries, bonuses paid during last three years and years of service.

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 vi. A list and description of all employee health benefits and welfare insurance policies or self-
funded arrangements.
vii. HR policies regarding annual leave, sick leave and other forms of leave.
viii. In case there are labor disputes, requests for arbitration, or grievance procedures currently
pending and its financial impact needs to be seen.
ix. Employee Benefit Schemes and schedule of grants of such scheme.
x. Details of options given/vested under ESOP scheme.
xi. Employee harassment reports if any.
xii. Cultural issues in case of cross border transactions.

CASE STUDY- Microsoft

i. Microsoft was running into serious internal problems with its organizational structure and
human resources. It wasn’t until the new CEO Satya Nadella took charge and started to
undertake some major restructuring for this massive company. At a very high level, we can see
some of the fruits of Nadella’s ideas by looking at Microsoft’s stock price.
ii. After being named CEO in February 2014, Satya Nadella undertook a major restructuring of
the tech giant to eliminate its destructive internal competition.
iii. Microsoft products and platforms would no longer exist as separate groups. Instead, all
employees would start focusing on a limited set of common goals — and bringing them all
together.
iv. In September 2016, Nadella created a new AI and Research Group by merging their original
research group with the Bing, Cortana, and Information Platform teams. This move brought
roughly 5,000 engineers and computer scientists together to focus on artificial innovation across
all Microsoft product lines.

Information Technology Due Diligence

a. Information security due diligence is often undertaken during the information technology
procurement process to ensure that risks are uncovered.
b. The regular review internal information security system helps to identify security gaps, as well
as ensure that the company is acting with an acceptable standard of care
c. It provides with the following benefits:

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 i. A clear understanding of technological capability of the organisation.
ii. Identification and assessment of the risks associated with technology adapted by the
organisation.
iii. Impact of the information technology on the particular business transaction.

The information security due diligence covers the following:

i. Information Security Measure
ii. Data Protection/ sharing policy
iii. Network and System design
iv. Wireless and Remote Access facility
v. Incident management

Essentials of Information Technology Due Diligence

 Analysing IT processes and systems of the organisation
 Determining the current cost and investment in IT
 Assessing the infrastructure of the company establishes IT Security
 Analysing the efficiency of Business systems and softwares

NON DISCLOSURE AGREEMENT

A non-disclosure agreement is defined as a legally enforceable contract that creates a
confidential relationship between a person who holds some kind of trade secret and a person
to whom the secret will be disclosed.

The Confidentiality agreements serve three important functions:

 Protect sensitive information. By signing an NDA, participants promise to not divulge or release
information shared with them by the other people involved. If the information is leaked, the
injured person can claim breach of contract.
 In the case of new product or concept development, a confidentiality agreement can help the
inventor keep patent rights. A properly drafted NDA can help the original creator hold onto the
rights to a product or idea.

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 Confidentiality agreements and NDAs expressly outline what information is private and what’s
fair game.

Content of the Non-Disclosure Agreements

1. Definitions and exclusions of confidential information; Definitions of confidential information
spell out the categories or types of information covered by the agreement. This specific element
serves to establish the rules-or subject/consideration-of the contract without actually releasing
the precise information.
2. Obligations from all involved people or parties; and time periods. Nondisclosure agreements
often exclude some information from protection. It also provides the time periods which provides
that the party receiving the information stays mum for a number of years. This specific
information is usually up for negotiation.

Sample Non-Disclosure agreement is placed below:

XYZ Limited
Non-Disclosure Agreement
This Agreement is entered into effective as of _________ between _________. (the
“Company”) and _________, (“Recipient”). Recipient is acting as an expert advising the
Company in connection with a [_________], and for that purpose, the Company may make
certain Confidential Information (as defined below) available to the Recipient (the “Purpose”).

As a condition to, and in consideration of, the Company’s furnishing of Confidential Information
to the Recipient, the Recipient agrees to the restrictions and undertakings contained in this
Agreement.

IT IS HEREBY AGREED AS FOLLOWS.

1. Definitions
In this Agreement:
1.1 Confidential Information:
a. means any information disclosed by one Party (the “Disclosing Party”) to any other Party
(the “Receiving Party”) or which is otherwise communicated to or comes to the attention of

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 the Receiving Party whether such information is in writing, oral or in any other form or media
and whether such disclosure, communication or coming to the attention of the Receiving Party
occurs prior to or during this Agreement; and
b. includes without limit:
(i) any information which can be obtained by examination, testing or analysis of any hardware,
any component part thereof, software or material samples provided by the Disclosing Party
under the terms of this Agreement;
(ii) all information disclosed by one Party to any of the other Parties relating directly or indirectly
to the Purpose;
(iii) the fact that the Parties are interested in or assessing the Purpose and/or are discussing the
Purpose with each other; and
(iv) the terms of any agreement reached by the Parties or proposed by any of the Parties (whether
or not agreed) in connection with the Purpose;
(v) all knowledge, information or materials (whether provided in hardcopy or electronic or other
form or media) whether of a technical or financial nature or otherwise relating in any manner
to the business affairs of the Disclosing Party (or any parent, subsidiary or associated company
of that party) software, samples, devices, demonstrations, knowhow or other materials of
whatever description, whether subject to or protected by copyright, patent, trademark, registered
or unregistered design.

2. Undertakings
Subject to clause 3 below and in consideration of the disclosure of Confidential Information by
the Disclosing Party, the Receiving Party agrees:-
(i) to keep confidential and not disclose to any third party, copy, reproduce, adapt, divulge, publish
or circulate any part of or the whole of any Confidential Information without the prior written
consent of the Disclosing Party; and
(ii) to restrict access to the Confidential Information disclosed to it under this Agreement to those
of its employees and officers who need to know the same strictly for the Purpose; and
(iii) not to use Confidential Information disclosed to it under this Agreement for any purpose other
than the Purpose; and

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 (iv) not to combine any part of or the whole of the Confidential Information with any other
information; and
(v) not to disclose the whole or any part of the Confidential Information to any third party without
(a) the prior written consent of the Disclosing Party and (b) prior to disclosure to such third
party procuring that the third party is bound by obligations which are no less onerous than
those contained in this Agreement; and
(vi) to procure that each employee and officer to whom Confidential Information is disclosed under
this Agreement is, prior to such disclosure, informed of the terms of this Agreement and agrees
to be bound by them; and
(vii) to procure that the Confidential Information in its possession is stored securely and that
physical access to it is controlled.

3. Exceptions
3.1 The protections and restrictions in this Agreement as to the use and disclosure of Confidential
Information shall not apply to any information which the Receiving Party can show:-
(a) is, at th-e time of disclosure hereunder, already published or otherwise publicly available; or
(b) is, after disclosure hereunder published or becomes available to the public other than by breach
of this Agreement; or
(c) is rightfully in the Receiving Party’s possession with rights to use and disclose, prior to receipt
from the Disclosing Party; or
(d) is rightfully disclosed to the Receiving Party by a third party with rights to use and disclose;
or
(e) is independently developed by or for the Receiving Party without reference or access to
Confidential Information disclosed hereunder.

3.2 The Receiving Party shall not be in breach of Clause 2 if it can demonstrate that any disclosure
of Confidential Information was made solely and to the extent necessary to comply with a
statutory or judicial obligation.

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 4. No title of Use
Nothing contained in this Agreement shall be construed as conferring upon the Receiving Party
any right of use in or title to Confidential Information received by it from the Disclosing Party,
other than as expressly provided.

5. No Obligation to Disclose, No Representations

Nothing in this Agreement shall be construed as?
(i) creating an obligation on any of the Parties to disclose particular information; or
(ii) creating an obligation on the parties to negotiate; or
(iii) as a representation as to the accuracy, completeness, quality or reliability of the
information.

6. Term & Termination

6.1 Subject to clause 3, the obligations contained in clause 2 shall continue to apply for so long
as the Receiving Party has in its possession or has procured that any third party authorized
under this Agreement has in its possession any Confidential Information.
6.2 The Receiving Party shall, on the request of the Disclosing Party, return to the Disclosing Party
(whose property they shall remain) all documents and things containing Confidential
Information, together with all relevant samples and models which it has in its possession
pursuant to this Agreement.

7. Miscellaneous
7.1 No Party shall assign its rights and/or obligations pursuant to this Agreement without the prior
written consent of the other Party.
7.2 No failure or delay by either party in exercising any rights, power or legal remedy available to
it hereunder shall operate as a waiver thereof.
7.3 In the event any one or more of the provisions contained in this Agreement shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had never been set forth

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 herein, and the Agreement shall be carried out as nearly as possible according to its original
terms and intent.
7.4 This Agreement shall be construed and governed in all respects in accordance with the laws of
India and the Parties hereby submit to the jurisdiction of the Indian courts.
7.5 The signing of this Agreement shall not be construed as the forming of an agency, joint
venture, employment or partnership.

Signed for and on behalf “XYZ Limited” Signed for and on behalf “ABC Limited”
By its duly authorized representative By its duly authorized representative
____________________________ _____________________________
(Signature)____________________ (Signature) ____________________
(Name)______________________ (Name)________________________
(Title/position__________________ (Title/position) __________________
(Date) ______________________ (Date) ________________________

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 Muskan is a graduate from ILS Law
College, Pune. She Qualified as a
Company Secretary at the age of 21 with
AIR 15 in Foundation Programme. She has
completed her masters in Constitutional
Laws from Bhartiya Vidyapeeth, Pune.

She has worked with esteemed lawyers

and firms and has always shown great
interest in subjects like Crpc, CPC,
Constitution of India and Corporate
Laws.

She has authored and published research

papers in the field of Intellectual Property
Rights, Cyber Law, Corporate Laws, etc.
She has an inherent passion for teaching
and firmly believes-

CS Muskan Gupta “Keep working hard, until you are insanely

proud of yourself”