Secretarial audit is not a general requirement for every Indian company. The correct test starts with section 204 of the Companies Act, 2013 and then moves to Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. For finance and company-secretarial teams, the practical risk is assuming that only listed or very large public companies are covered. The borrowing test in Rule 9 can also bring another company into scope.
The current statutory framework can be checked on ICSI's official e-book page for section 204 of the Companies Act, 2013 and the corresponding Rule 9 on Secretarial Audit Report.
What does section 204 require?
Section 204 requires every listed company and every company belonging to a prescribed class to annex a secretarial audit report with its Board's report. The report must be given by a company secretary in practice. The section also places a duty on the company to provide the assistance and facilities needed for the audit of secretarial and related records.
The Board cannot simply attach the report and ignore adverse remarks. Section 204 requires the Board's report to explain in full any qualification, observation or other remark made by the practising company secretary in the secretarial audit report. This makes the audit a governance reporting exercise, not merely an internal compliance checklist.
Which companies are covered?
Section 204 covers every listed company directly. Rule 9 then prescribes additional classes of companies that must obtain a secretarial audit report. The applicability routes are:
- Every listed company under section 204.
- Every public company with paid-up share capital of ₹50 crore or more.
- Every public company with turnover of ₹250 crore or more.
- Every company with outstanding loans or borrowings from banks or public financial institutions of ₹100 crore or more.
The last limb is especially important. The capital and turnover tests in Rule 9 refer specifically to public companies, but the borrowing test uses the words every company. A private company should therefore not conclude that secretarial audit is automatically inapplicable merely because it is private; the outstanding borrowing criterion must also be checked.
Which audited reference date should be used for the thresholds?
Rule 9 contains an explanation stating that paid-up share capital, turnover and outstanding loans or borrowings are to be considered as they exist on the last date of the latest audited financial statement. That creates a simple review discipline: use the latest audited financial statements as the reference point, document the relevant figures, and retain the computation supporting the applicability conclusion.
For example, assume an unlisted private company has paid-up capital of ₹20 crore and turnover of ₹180 crore, but outstanding bank borrowings of ₹112 crore on the last date of its latest audited financial statements. It does not meet the public-company capital or turnover limbs, but the ₹100 crore borrowing limb is independently sufficient to bring it within Rule 9.
What is Form MR-3?
Rule 9 states that the format of the secretarial audit report is Form MR-3. MR-3 is therefore the prescribed reporting format through which the practising company secretary reports the secretarial audit conclusion for a company covered by section 204 and Rule 9.
The important practical point is not to treat MR-3 as a year-end form-filling exercise. The auditor's ability to report depends on the quality of records maintained throughout the year: Board and committee papers, minutes, statutory registers, filings, approvals, disclosures, notices, share-capital records and other compliance evidence relevant to the company.
A practical applicability workflow
- Confirm whether the company is listed. If yes, section 204 applies.
- Identify the legal status of the company. If it is a public company, test both paid-up share capital and turnover against the Rule 9 thresholds.
- Test borrowings for every company. Check outstanding loans or borrowings from banks or public financial institutions against the ₹100 crore threshold, even for a private company.
- Use the correct reference date. Take the relevant figures from the last date of the latest audited financial statement, as required by the Rule 9 explanation.
- Document the conclusion. Keep a short applicability memo showing the company type, audited reference date and figures used for each test.
- Plan the audit early. If the company is in scope, organise records during the year rather than waiting until the Board's report is being finalised.
- Track qualifications and observations. Ensure that any qualification, observation or remark in MR-3 is specifically addressed in the Board's report as section 204 requires.
What records should management keep ready?
The exact audit scope depends on the company and the laws applicable to it, but a disciplined year-end file should allow the auditor to reconstruct major governance and compliance actions without chasing fragmented evidence. A useful preparation checklist includes:
- Board, committee and general-meeting notices, agendas, minutes and attendance records.
- Statutory registers and records supporting changes in directors, KMP, share capital, members and charges where relevant.
- Copies and acknowledgements of statutory filings made during the year.
- Approvals and supporting papers for major corporate actions and related governance decisions.
- Compliance trackers showing applicable laws, responsible owners, due dates, filings and unresolved exceptions.
- Evidence supporting closure of earlier secretarial-audit observations.
Common mistakes to avoid
- Assuming all private companies are outside section 204. The Rule 9 borrowing limb applies to every company.
- Testing only one threshold. Capital, turnover and qualifying borrowings are separate applicability routes.
- Using current unaudited figures instead of the Rule 9 reference point. The rule directs the test to the last date of the latest audited financial statement.
- Treating MR-3 as a filing exercise. Weak minutes, registers, approvals and evidence can become reportable issues even if forms were filed.
- Ignoring remarks in the Board's report. Section 204 requires the Board to explain qualifications, observations and other remarks made by the practising company secretary.
- Waiting until year-end to collect records. Secretarial compliance is easier to audit when evidence is maintained when the underlying event occurs.
What happens if section 204 is not complied with?
The current text of section 204 provides a penalty of ₹2 lakh for the company, every officer of the company who is in default, and the company secretary in practice who is in default. Because penalty provisions can be amended, practitioners should confirm the current statutory text before relying on the amount in a live compliance decision.
Practical takeaway
Secretarial-audit applicability should be tested through a short, repeatable decision process: check listed status, test the public-company capital and turnover limits, test the ₹100 crore bank or public-financial-institution borrowing threshold for every company, and use the latest audited financial-statement date as the reference point. If the company is covered, plan MR-3 as a year-round evidence and governance exercise, and make sure the Board's report responds to every qualification or observation rather than treating the audit report as an attachment-only compliance.
