"Only listed companies need a secretarial audit": what Section 204 actually says

Ask most promoters of an unlisted public company whether secretarial audit applies to them and you will hear a confident no. The reasoning is always the same: "We are not listed. Secretarial audit is a SEBI thing." That belief has cost boards a Rs.2 lakh penalty and, more often, a qualified MR-3 report discovered three days before an AGM. Section 204 of the Companies Act 2013 does not turn on listing status alone. It turns on four independent triggers, and three of them have nothing to do with the stock exchange.

The second common error runs the other way. Private limited companies, having heard that borrowings can trigger secretarial audit, assume a Rs.100 crore term loan pulls them in. It does not — the borrowing trigger is drafted narrowly, and reading it correctly saves a company an audit it never needed.

What the law actually says

Section 204(1) of the Companies Act 2013 requires every listed company and every company belonging to such other class of companies as may be prescribed to annex a secretarial audit report to its Board's Report. The prescribing is done by Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Rule 9(1) prescribes the following classes:

• Every public company having a paid-up share capital of Rs.50 crore or more.
• Every public company having a turnover of Rs.250 crore or more.
• Every company having outstanding loans or borrowings from banks or public financial institutions of Rs.100 crore or more — inserted with effect from 1 April 2020.

Note the drafting carefully. Triggers 1 and 2 say public company. Trigger 3 says company — and that word is deliberate. A private limited company with outstanding bank borrowings of Rs.100 crore or more is covered by Section 204. Private companies below that borrowing figure are not covered at all, regardless of capital or turnover.

The report must be in Form MR-3, and it must be given by a Company Secretary in Practice (PCS) — not by the statutory auditor, not by a chartered accountant, and not by an employee company secretary of the same company.

Section 204(2) places a positive obligation on the company: it must give the secretarial auditor all assistance and facilities necessary for the examination. Section 204(3) requires the Board to explain in full, in the Board's Report, every qualification or adverse remark made in the MR-3.

Section 204(4) is the penalty provision. As amended by the Companies (Amendment) Act 2020, if a company, any officer of the company, or the company secretary in practice contravenes Section 204, the company, every officer in default and the company secretary in practice in default shall each be liable to a penalty of Rs.2,00,000. It is a flat penalty now, not the earlier Rs.1 lakh to Rs.5 lakh fine range, and it is adjudicated by the Registrar rather than prosecuted in court.

For listed entities there is a second, separate layer. Regulation 24A of the SEBI (LODR) Regulations, 2015 requires every listed entity and its material unlisted subsidiaries to undertake secretarial audit and annex the MR-3 to the annual report. Regulation 24A also requires an Annual Secretarial Compliance Report from a PCS, to be submitted to the stock exchanges within 60 days of the end of the financial year. That compliance report is a different document from MR-3 and does not substitute for it.

Since the SEBI LODR amendments applicable from FY 2025-26, listed entities must also appoint the secretarial auditor with shareholder approval at a general meeting, with tenure capped at one term of five consecutive years for an individual PCS and two terms of five consecutive years for a PCS firm. Unlisted companies covered only by Rule 9 continue to appoint by board resolution, with Form MGT-14 filed where the company is a public company.

Practical implications

The turnover trigger catches companies mid-year. A public company that crossed Rs.250 crore of turnover in the financial year just closed becomes liable to annex an MR-3 to that year's Board's Report. Boards routinely discover this in August while finalising accounts, leaving a PCS six weeks to examine twelve months of records. The examination cannot be compressed honestly, and the result is either a delayed AGM or a heavily qualified report.

The Rs.100 crore borrowing test is measured on outstanding amount, not sanctioned limit. A company with a sanctioned working capital limit of Rs.150 crore but an average utilisation of Rs.60 crore has to look at what was actually outstanding. Practice is to test the position at the financial year end and to disclose the basis. Borrowings from NBFCs that are not public financial institutions under Section 2(72) do not count — a distinction that decides applicability for a large number of mid-market groups.

A wholly-owned subsidiary of a listed company is not automatically covered. It is covered only if it is a material unlisted subsidiary under Regulation 16(1)(c) of LODR, or if it independently crosses a Rule 9 threshold. Groups often over-comply here, commissioning MR-3 reports for every subsidiary at Rs.1.5 to Rs.4 lakh each.

The MR-3 is a public document. It sits inside the annual report, which is filed with the Registrar in Form AOC-4 and available to any lender, acquirer or counterparty who searches the MCA21 portal. A qualification in the MR-3 about, say, delayed FC-GPR filings or unregistered charges surfaces in every subsequent due diligence exercise. This is why the report deserves preparation, not last-minute cooperation.

Deadlines to work backwards from: the Board's Report must be approved before the AGM notice goes out, which is 21 clear days before the AGM. For a 31 March year end with a 30 September AGM, the MR-3 must be signed by roughly early August. A PCS needs eight to twelve weeks of records access before that.

Step-by-step: what to do

• Test applicability as at the financial year end. Check four things: listing status; paid-up share capital (public companies); turnover (public companies); and outstanding loans and borrowings from banks and public financial institutions (all companies). Document the test in a board note — this is the first thing an adjudicating officer asks for.
• Appoint the PCS early — by 30 June for a 31 March year end. Unlisted covered companies appoint by board resolution; file MGT-14 within 30 days if the company is a public company. Listed entities must place the appointment before shareholders and observe the five-year tenure caps.
• Hand over the records set before the auditor asks. At minimum: statutory registers under Sections 85, 88 and 189; minutes of board, committee and general meetings; all MCA e-forms filed during the year with SRN acknowledgements; the register of charges and CHG-1/CHG-4 filings; related-party approvals under Section 188 and the Form AOC-2 disclosure; deposits or exempt deposits documentation (DPT-3); and CSR records under Section 135 with Form CSR-2.
• Reconcile MCA filings against actual dates of events before the audit begins. Late filings with additional fee are not a breach; unfiled forms are. The two most commonly qualified items are charge satisfaction not filed in CHG-4 and board meeting gaps exceeding 120 days under Section 173(1).
• Deal with FEMA and SEBI items separately. MR-3 covers FEMA only to the extent of foreign direct investment, overseas direct investment and external commercial borrowings. Pull the FC-GPR, FC-TRS, ODI Part I and ECB-2 filings with their FIRMS portal acknowledgements as a distinct bundle.
• Read the draft MR-3 before it is signed. If there is a qualification, Section 204(3) forces the Board to explain it in the Board's Report anyway. Better to correct the underlying default — file the missing form, ratify the omitted resolution — and let the auditor record the remediation than to publish an unexplained adverse remark.
• Annex the signed MR-3 to the Board's Report and ensure it carries the PCS's UDIN. Listed entities additionally file the Annual Secretarial Compliance Report with the exchanges within 60 days of year end.

FAQ

Can our statutory auditor sign the secretarial audit report?
No. Section 204(1) restricts the report to a company secretary in practice. A chartered accountant, cost accountant or the company's own employee company secretary cannot sign Form MR-3. Appointing the wrong professional means the report is invalid and the company has not complied, exposing it to the Rs.2 lakh penalty under Section 204(4).

Does a private limited company ever need a secretarial audit?
Yes — in exactly one situation. If it has outstanding loans or borrowings from banks or public financial institutions of Rs.100 crore or more, Rule 9(1)(c) applies, because that clause says "every company" rather than "every public company". Paid-up capital and turnover thresholds do not apply to private companies at all.

We crossed the turnover threshold this year but will fall below it next year. Do we audit both years?
You audit the year in which the threshold was crossed. Applicability is tested each financial year independently. If turnover falls below Rs.250 crore in the following year and no other trigger applies, no MR-3 is required for that following year — but you should record the negative test in a board note rather than simply stopping.

What exactly does the CS auditor examine?
The scope in Form MR-3 covers the Companies Act 2013 and rules; the Securities Contracts (Regulation) Act 1956; the Depositories Act 1996; FEMA to the extent of FDI, ODI and ECB; the applicable SEBI regulations (SAST, Prohibition of Insider Trading, ICDR, Share Based Employee Benefits, LODR, Delisting, Buyback); Secretarial Standards SS-1 and SS-2 issued by ICSI; and any other law specifically applicable to the company's industry. The auditor works to ICSI Auditing Standards CSAS-1 through CSAS-4, which is why the record request list is longer than most boards expect.

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Secretarial audit applicability is a four-line test that takes twenty minutes to run and, run late, costs a qualified public report and a Rs.2 lakh penalty. Run it in April, not August.

For your specific situation, book a consultation at harunraaj.com

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See Also

• "Bank branch audit is just ticking vouchers": what RBI's LFAR and IRACP norms actually demand
• "My CA said turnover under Rs.10 crore means no tax audit": what Section 44AB actually says
• "The statutory audit is just a formality": what Section 143 and CARO 2020 actually require your auditor to verify

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