Secretarial Audit Under Section 204: Who Needs It, What the Board Must Answer, and What Non-Compliance Costs

The financial audit tests the numbers. The secretarial audit tests the company's conduct: whether it kept to the Act, the rules and other applicable laws in its meetings, filings and records. Section 204 of the Companies Act, 2013 requires bigger companies to annex a report from a practising company secretary to the Board's report. It also obliges the company to help that professional, and the Board to answer every remark in full. Section 205 sets out what the company secretary does through the year. Read together, they turn secretarial hygiene from good practice into a statutory duty.

This is a compliance explainer for companies. The secretarial audit itself is an attestation given by a company secretary in practice, not by a chartered accountant, and nothing here substitutes for that professional's work.

Who must have a secretarial audit

Section 204(1) reads: "Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board's report made in terms of sub-section (3) of section 134, a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed" (s.204(1), Companies Act 2013).

There are two triggers. The first is listing. The second is membership of a class of company that the rules prescribe. Three points follow from the text.

The report is annexed to the Board's report under section 134(3). It travels with the Board's report, so it reaches the members.
The author is "a company secretary in practice" (an independent practising professional). An employee company secretary, or a professional from another discipline, does not satisfy the section.
The form of the report is whatever the rules prescribe.

The prescribed classes are set in the Appointment and Remuneration of Managerial Personnel Rules, 2014, which have been amended over the years. This article does not state the current size thresholds, because the point must be checked against the rule as it stands today before you conclude that a company is in or out of scope. If your company is unlisted, check the current text of rule 9 of those rules, with its amendments, against your latest paid-up capital, turnover and borrowing figures. If you cannot tell whether you are in scope, a company secretary in practice or a CA can confirm it from the current rules.

Why placement matters

Because the secretarial audit report is annexed to the Board's report, every member who receives the Board's report sees it. An internal compliance memo can be handled quietly. A remark annexed to a document that goes to the general meeting cannot.

The company's duty: all assistance and facilities

Section 204(2) says: "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" (s.204(2), Companies Act 2013).

"All assistance and facilities" is a wide phrase. In practice it points to:

minute books of the Board and its committees, and of general meetings;
statutory registers;
filed forms with their challans or acknowledgements;
evidence of how Board processes were run (notices, agenda papers, attendance records); and
access to the officers who ran those processes.

A company that hands over last year's registers but holds back current-year minutes has not given "all assistance". The section says "secretarial and related records", so records held by others on the company's behalf, such as a registrar and share transfer agent, a lender's counsel or a bank, should be treated as within the company's responsibility to fetch. The company secretary in practice audits the company's records; the company has to produce them.

A practical suggestion, not a statutory requirement: start collating records when the financial audit begins. The same officers serve both auditors, and the last week before the Board meets to approve its report is the worst time to find a missing register.

The Board's duty: explain every remark in full

Section 204(3) says: "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 under sub-section (1)" (s.204(3), Companies Act 2013).

Three features of that sentence matter.

The trigger is wide. It covers "any qualification or observation or other remarks". A mild observation therefore needs an answer too, not only a formal qualification.
The standard is "in full". A one-line "noted for future compliance" does not explain a remark. The answer should say what happened, why, and what has been done about it.
The venue is fixed. The explanation goes in the Board's report under section 134(3), not in a side letter.

Section 134(3) supports this from the other side. Among the contents of the Board's report, clause (f) requires "explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—(i) by the auditor in his report; and (ii) by the company secretary in practice in his secretarial audit report" (s.134(3)(f), Companies Act 2013). So the remark sits in the annexure, the Board's answer sits in the body of the report, and the member reads both together.

A suggested working method, again practice and not law: ask the company secretary in practice to review the draft explanations before the Board approves the report. The professional who made the remark is best placed to say whether the answer actually responds to it. A remark that repeats year after year with the same explanation tells members that the first explanation changed nothing.

What non-compliance costs

Section 204(4) provides: "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 two lakh rupees" (s.204(4), Companies Act 2013).

Notice the three directions in which it runs:

the company;
every officer of the company who is in default; and
the company secretary in practice, if that professional is in default.

The section states one figure. It does not scale the penalty by the size of the company. The text does not say what happens if the default continues, so do not assume any extra daily charge; read the section as it stands and take advice on how it would be applied to your facts. The point to take away is that the exposure falls on the signing professional as well as on the people who withheld records or failed to answer the report.

What the company secretary does all year: section 205

Section 205(1) says the functions of the company secretary shall include "(a) to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company; (b) to ensure that the company complies with the applicable secretarial standards; (c) to discharge such other duties as may be prescribed" (s.205(1), Companies Act 2013).

The Explanation defines the standards: "secretarial standards" means standards "issued by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980) and approved by the Central Government" (Explanation to s.205(1)).

Clause (a) makes the company secretary the Board's reporting channel on compliance with the Act, the rules, and "other laws applicable to the company". Clause (b) fixes the secretarial standards as the yardstick against which the company's meetings and records are expected to be kept. A secretarial auditor reviewing the year will, in substance, be testing the company's records against that yardstick.

Section 205(2) adds a caution: "The provisions contained in section 204 and section 205 shall not affect the duties and functions of the Board of Directors, chairperson of the company, managing director or whole-time director under this Act, or any other law for the time being in force" (s.205(2), Companies Act 2013). Having a company secretary, or a secretarial audit, does not move the directors' own compliance responsibility. It remains where it was.

A readiness checklist

Confirm scope early. Decide at the start of the financial year, not at the general meeting, whether the company is listed or falls in a prescribed class under the current rules.
Engage a company secretary in practice with a letter that covers "the secretarial and related records", so that retrieval from outside holders starts early.
Close last year's remarks with evidence of the controls promised, so that the same remark does not return.
Compile the records: minute books, registers, forms filed and proof of filing, and evidence of Board processes.
Draft the explanations "in full" for every qualification, observation or remark before the Board meets to approve the Board's report under section 134(3).
Keep the Board's own checks running. Under section 205(2), the secretarial audit does not replace them.

What to do now

Next step: Check whether your company is listed or falls in a prescribed class for section 204(1) under the current Appointment and Remuneration of Managerial Personnel Rules, 2014. If it does, appoint a company secretary in practice and begin assembling records (s.204(1) and s.204(2), Companies Act 2013).
Deadline: Section 204 states no calendar date of its own. The secretarial audit report is annexed to the Board's report under section 134(3), and the Board's explanation must appear in that report, so the work has to be finished before the Board approves its report (s.204(1) and s.204(3), Companies Act 2013).
Consequence of default: a penalty of two lakh rupees on the company, on every officer in default, and on the company secretary in practice if in default (s.204(4), Companies Act 2013).

Have a CA review your facts before you act or file.

FAQ

Which companies need a secretarial audit?
Under section 204(1), every listed company and a company belonging to such other class of companies as may be prescribed. The report is annexed to the Board's report and is given by a company secretary in practice. Check the current prescribed classes before concluding that your company is outside the requirement.

What must the company give the secretarial auditor?
"All assistance and facilities" for auditing "the secretarial and related records of the company" (s.204(2), Companies Act 2013). The duty is stated without qualification.

How must the Board respond to secretarial audit remarks?
It "shall explain in full any qualification or observation or other remarks" in its report under section 134(3) (s.204(3), Companies Act 2013).

What is the penalty for contravening section 204?
A penalty of two lakh rupees on the company, on every officer of the company who is in default, and on the company secretary in practice if in default (s.204(4), Companies Act 2013).

Does appointing a company secretary relieve the directors?
No. Sections 204 and 205 "shall not affect the duties and functions of the Board of Directors, chairperson of the company, managing director or whole-time director" (s.205(2), Companies Act 2013).

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