Secretarial Due Diligence/Audit: Why Every Business Should Conduct Before Major Transactions

In today's dynamic business environment, making informed decisions is more important when you are planning to raise funds, acquire another business, seek bank finance or invite investors, understanding the legal and compliance status of a company is essential. This is where Secretarial Due Diligence plays a vital role.

Secretarial Due Diligence is more than just checking statutory records, it is a comprehensive review of a company's corporate and legal compliances that helps identify risks, uncover hidden issues and ensure that the business is legally sound before any significant transaction.

What is Secretarial Due Diligence/Audit?

Secretarial Due Diligence or Audit is a systematic review of a company's legal, secretarial and regulatory records to verify whether it has complied with the applicable laws and regulations.

The review focuses on corporate governance, statutory compliances, approvals, filings, licences and legal documentation to identify any compliance gaps or potential liabilities that may affect the company or a proposed transaction.

The objective is to provide stakeholders with a clear understanding of the company's legal and compliance position before making business decisions.

When is Secretarial Due Diligence/audit Conducted?

Secretarial Due Diligence/audit is commonly conducted during:

• Mergers and Acquisitions (M&A)
• Private Equity and Venture Capital investments
• Fundraising transactions
• Strategic partnerships and Joint Ventures
• Business restructuring
• Corporate insolvency or revival
• Pre-IPO preparedness
• Internal compliance reviews
• Sale or purchase of a business
• Large contractual transactions

Mandatory secretarial audit is applicable to

●  Every listed company; and

●  Every public company having:

• Paid-up share capital of ₹50 crore or more, or
• Turnover of ₹250 crore or more, as prescribed under Section 204 of the Companies Act, 2013

●  Company having outstanding borrowings exceeding 100 Crores

Scope of Secretarial Due Diligence/Audit

A Secretarial Due Diligence/audit exercise generally covers the following areas:

Corporate Records

• Certificate of Incorporation
• Memorandum of Association (MOA)
• Articles of Association (AOA)
• Shareholding pattern
• Capital structure
• Corporate history

Statutory Registers and Records

• Register of Members
• Register of Directors & KMP
• Register of Charges
• Register of Contracts
• Register of Loans, Guarantees and Investments
• Minutes Books

MCA Filings

Verification of statutory filings including:

• Annual Returns
• Financial Statements
• DIR-12
• PAS-3
• MGT-14
• SH-7
• CHG Forms
• Other event-based filings

Board and Shareholders' Approvals

Review of:

• Board Meeting Notices
• Agenda Papers
• Minutes
• Resolutions
• Annual General Meeting records
• Extraordinary General Meeting records

Agreements and Contracts

Review of key agreements such as:

• Shareholders' Agreements
• Share Subscription Agreements
• Joint Venture Agreements
• Loan Agreements
• Employment Agreements
• Vendor Agreements
• Customer Agreements
• Lease Agreements
• Intellectual Property Agreements
• Non-Disclosure Agreements

Regulatory Compliances

Depending on the business, the review may include compliance under:

• Companies Act, 2013
• FEMA
• SEBI Regulations
• RBI Guidelines
• Labour Laws
• MSME Act
• Environmental Laws
• Industry-specific regulations

Common Issues Identified During Secretarial Due Diligence

Some frequently observed issues include:

• Delayed MCA filings
• Incomplete statutory registers
• Missing Board or Shareholders' approvals
• Non-compliance with FEMA regulations
• Improper maintenance of Minutes
• Unregistered charges
• Defective allotment procedures
• Non-compliance with related party transaction provisions
• Inadequate disclosures by Directors
• Expired licences and approvals

Identifying these issues early enables businesses to take corrective action before entering into important transactions.

What is an RBI-mandated diligence report?

RBI has mandated half yearly or quarterly or annual diligence report from companies enjoying multiple banking/consortium banking arrangements covering 25 points as per their prescribed format.

The format includes:

• Corporate records
• Details of Loan taken or provided or paid along with security 
• Change in Management
• Affirmation on Listing compliances, PF Compliances, related party transactions
• Changes to the Memorandum and Articles of Association
• Forex exposure

Bank Due Diligence helps lenders minimise legal and operational risks.