Secretarial Audit Applicability for Private Companies

Key takeaways

• Secretarial audit is an independent compliance review by a practising company secretary, reported in Form MR-3 and annexed to the board's report under Section 134(3) of the Companies Act, 2013.
• A private company is not ordinarily subject to secretarial audit. It is caught only through one of two routes under Section 204 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
• Route one: a private company with outstanding loans or borrowings from banks or public financial institutions of ₹100 crore or more must conduct a secretarial audit, because Rule 9(1)(c) applies to "every company."
• Route two: a private company that is a subsidiary of a public company is deemed a public company under the proviso to Section 2(71), and is then tested against the ₹50 crore paid-up capital or ₹250 crore turnover thresholds.
• Non-compliance with Section 204 carries a flat ₹2 lakh penalty per defaulter, applying separately to the company, every officer in default, and the practising company secretary, following the Companies (Amendment) Act, 2020.

What secretarial audit checks

A secretarial audit is an independent verification of a company's records, books, and documents by a practising company secretary, to confirm whether the company has complied with the applicable corporate and securities laws and followed the required legal and procedural steps. It is an audit of the company's non-financial compliance, as distinct from the financial audit of its accounts. 

The auditor examines the process behind the corporate actions: whether meetings were validly convened, resolutions correctly passed and filed, share allotments properly approved, and statutory registers maintained. The output is a report in Form MR-3, annexed to the board's report under Section 134(3) of Companies Act, 2013.

The audit can only be signed by a practising company secretary, an independent professional in whole-time practice certified by the Institute of Company Secretaries of India (ICSI).

The legal basis is Section 204(1) of the Companies Act, 2013, read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Section 204 sets out the obligation and the penalty, while Rule 9 specifies the classes of company, beyond listed companies, that the obligation extends to.

When a private company has to do a secretarial audit

The starting position is that a private company sits outside Section 204. The section names listed companies directly, and Rule 9 then extends it to specified classes. Two of those classes are framed around public companies, and one is framed around any company.

A private company needs a secretarial audit in one of two situations:

• It owes ₹100 crore or more to banks or public financial institutions, or
• It is a subsidiary of a public company and crosses the public-company size thresholds.

If neither applies, there is no obligation. Each route is explained below.

The ₹100 crore borrowing threshold

Rule 9(1)(c) applies to "every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more." It was inserted by MCA notification G.S.R. 13(E) dated 3 January 2020, effective for financial years commencing on or after 1 April 2020.

The wording is the whole point. Rule 9(1)(a) and (b), which set the ₹50 crore paid-up capital and ₹250 crore turnover thresholds, both begin with "every public company." Rule 9(1)(c) deliberately begins with "every company."

So a private company that owes ₹100 crore or more to banks or public financial institutions must conduct a secretarial audit, even though it is privately held and has no public-company parent. This is how a standalone private company becomes subject to secretarial audit.

Being a subsidiary of a public company

The second route runs through the definition of a private company itself.

Under the proviso to Section 2(71) of the Companies Act, 2013, a private company that is a subsidiary of a public company is deemed to be a public company for the purposes of the Act. This holds even though the subsidiary keeps its private-company status in its own articles.

Because it is treated as a public company, it is measured against the public-company thresholds in Rule 9(1)(a) and (b). If such a subsidiary has paid-up share capital of ₹50 crore or more, or turnover of ₹250 crore or more, it must conduct a secretarial audit.

The voluntary option

If neither route applies, a private company has no obligation to conduct a secretarial audit.

Some still choose to. A voluntary audit ahead of a fundraise or an acquisition gives an incoming investor or buyer independent assurance that the company's corporate records are clean, which is the same corporate and Registrar of Companies (RoC) compliance ground covered in a due diligence report.

What counts toward the ₹100 crore borrowing figure

Two details decide whether you actually cross the threshold.

First, the source of the debt. The ₹100 crore is measured against borrowings from banks or public financial institutions specifically, where "public financial institution" carries its defined meaning under Section 2(72) of the Companies Act, 2013. Because the rule is confined to these two categories, borrowings from other sources fall outside the test.

Second, the measurement date. The explanation to Rule 9 fixes the figure as it exists on the last date of the latest audited financial statement. You test the threshold against your most recent audited balance sheet, not a live figure that moves day to day.

This matters when borrowings move during the year. A company that draws down a large facility mid-year does not become liable the moment it crosses ₹100 crore. The obligation is assessed at the audited-balance-sheet date and applies to the financial year that follows.

What the secretarial auditor reviews

The auditor's job is to confirm compliance across the corporate laws that apply to the company, and to record any non-compliance and recommendations in MR-3. The examination is broader than the Companies Act alone.

It covers:

• The Companies Act, 2013 and its rules: how board and general meetings were conducted, whether resolutions requiring filing were filed with the Registrar of Companies, whether share allotments and transfers were validly approved and recorded, and whether statutory registers were maintained.
• Securities and depository law, where relevant: the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.
• Foreign exchange law, where the company has cross-border dealings: the Foreign Exchange Management Act, 1999, particularly the foreign direct investment, overseas direct investment, and external commercial borrowing provisions.
• Specified SEBI regulations listed in Form MR-3. Most are tied to listed or to-be-listed companies, so they rarely apply to a standalone private company.
• Secretarial standards on board and general meetings issued by ICSI, which carry statutory force under Section 118(10).

For a private company caught by the borrowing threshold, the secretarial auditor traces whether every corporate action over the year, from each capital raise to each board appointment, was approved through the correct resolution, filed in time, and recorded in the statutory registers.

Who can sign the report and how they are appointed

Only a company secretary in practice can issue an MR-3 report.

Under Section 2(25) of the Companies Act, 2013, a company secretary in practice holds a certificate of practice from ICSI and acts as an independent professional rather than as an employee of the company. This is why an in-house company secretary on the company's payroll cannot sign the secretarial audit report for the same company. The report is meant to be an independent verification, and an employee verifying their own employer's compliance would not be independent.

The appointment is a board-level decision. Under Section 179(3), read with Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014, the board appoints the secretarial auditor by a resolution at a board meeting.

The company then issues an engagement letter recording the scope and terms, and gives the auditor access to its records. Section 204(2) places a statutory duty on the company to provide all the assistance and facilities the auditor needs.

Cost of secretarial audit non-compliance

If a company fails to obtain and annex a secretarial audit report when required, or otherwise contravenes Section 204, the penalty is a flat ₹2 lakh. It applies separately to the company, to every officer of the company in default, and to the practising company secretary in default.

How secretarial audit differs from statutory audit

A statutory audit asks whether the financial statements are accurate and give a true and fair view of the company's position. A secretarial audit asks whether the company followed the law in the corporate actions behind those statements.

They are not substitutes. They examine different things and give different assurances. Everything else follows from that distinction:

• Who conducts it? Statutory audit is done by a chartered accountant under Section 143, because it is an examination of accounts. Secretarial audit is done by a company secretary in practice under Section 204, because it is an examination of corporate-law compliance.
• Who does it apply to? Statutory audit applies to every company, because every company's accounts need verification. Secretarial audit applies only to the larger and structurally significant companies.
• What does it produce? A statutory auditor reports in the standard audit report format. A secretarial auditor reports in Form MR-3.

FAQs on secretarial audit applicability

What is the turnover limit for secretarial audit?

The turnover limit is ₹250 crore, but it applies only to public companies, not private ones. Under Rule 9(1)(b) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a public company with turnover of ₹250 crore or more must conduct a secretarial audit. A private company is not caught by a turnover test at all, unless it is a subsidiary of a public company and is therefore deemed a public company under the proviso to Section 2(71). A standalone private company becomes liable only through the ₹100 crore bank-borrowing threshold.

What is the purpose of a secretarial audit?

The purpose is to independently verify that a company has complied with corporate and securities law, and to put any non-compliance on record. A practising company secretary examines whether meetings, resolutions, filings, share allotments, and statutory registers were handled lawfully, then reports the findings in Form MR-3 annexed to the board's report. It gives the board, shareholders, and prospective investors assurance that the company's corporate actions were validly authorised, separate from the financial assurance a statutory audit provides.

Is MGT-8 the same as secretarial audit?

No. MGT-8 is a certification by a company secretary in practice on the accuracy of a company's annual return, required for prescribed companies and attached to Form MGT-7. A secretarial audit is a broader compliance examination of the company's corporate-law conduct across the year, reported separately in Form MR-3. The two arise under different provisions and serve different purposes. For the annual-return certification specifically, see EquityList's coverage of Form MGT-8.

What is Section 138 applicability?

Section 138 of the Companies Act, 2013 governs internal audit, which is a different requirement from secretarial audit and is outside the scope of this post. It applies to listed companies and to prescribed classes of unlisted public and private companies based on turnover, borrowings, and deposit thresholds, and it requires an internal auditor rather than a secretarial auditor. For the full applicability criteria, see EquityList's coverage of company compliance requirements.

What is Section 204 of the Companies Act, 2013?

Section 204 is the provision that mandates secretarial audit for bigger companies. It requires every listed company, and every other company in the classes prescribed under Rule 9, to annex a secretarial audit report in Form MR-3 to its board's report, prepared by a company secretary in practice. It also sets the penalty for non-compliance: a flat ₹2 lakh on the company, every officer in default, and the practising company secretary, following the Companies (Amendment) Act, 2020.