Secretarial Audit Applicability: Who Needs a Form MR-3 Under Section 204

Short answer: a secretarial audit is compulsory if your company is listed, or is a public company with paid-up share capital of ₹50 crore or more, or turnover of ₹250 crore or more, or is any company — public or private — with outstanding loans or borrowings from banks or public financial institutions of ₹100 crore or more. Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 sets these tests. The audit is done by a company secretary in practice, and the report in Form MR-3 is annexed to the Board's Report.

The four tests, one by one

Every listed company. No threshold, no size test. If your securities are listed, the audit applies — and under Regulation 24A of the SEBI Listing Regulations, your unlisted material subsidiaries in India are pulled in as well (a material subsidiary is one whose income or net worth crosses 10% of the consolidated figure). Note the Regulation 15 carve-outs: listed entities with paid-up equity capital up to ₹10 crore and net worth up to ₹25 crore, and entities listed only on the SME exchange, sit outside Regulation 24A — though a listed company still faces the section 204 question on the Companies Act side.

Public company, paid-up share capital of ₹50 crore or more. Paid-up capital, not authorised capital — a distinction board papers get wrong surprisingly often.

Public company, turnover of ₹250 crore or more. Turnover as per the audited financial statements.

Any company with bank or public financial institution borrowings of ₹100 crore or more. This is the test that catches people. It is written for "every company", not "every public company" — so a private company with large bank debt is inside section 204 even though it fails, or rather never faces, the two public-company tests. A private company that is a subsidiary of a public company is also tested against the prescribed class like its parent.

All figures are taken as on the last date of the latest audited financial statements. Cross any one test and the audit applies for that year; there is no averaging and no grace year.

A worked example

Consider an unlisted public company with paid-up capital of ₹42 crore, turnover of ₹231 crore and bank borrowings of ₹88 crore. It crosses none of the three number tests, so no secretarial audit is due — this year. Its board approves a ₹20 crore term loan in October for a new plant. Borrowings at the next balance-sheet date become ₹108 crore, and the company is inside section 204 for that financial year, whether or not anyone in the secretarial department noticed the crossing. The loan agreement is the trigger event, and it happened in a treasury meeting, not a compliance meeting. This is why the applicability check belongs in the borrowing approval itself: one line in the board note — "this borrowing takes the company past the section 204 threshold; a secretarial auditor must be appointed" — saves the year-end scramble we are called into every season.

What the audit involves, and what MR-3 is

The secretarial auditor — who must be a company secretary in practice, and for listed entities must additionally be peer-reviewed under the amended Listing Regulations — examines compliance with the Companies Act, SCRA, the Depositories Act, FEMA to the extent it applies to FDI, ODI and ECBs, the SEBI regulations relevant to the company, and other laws specifically applicable to its business, along with secretarial standards and listing conditions. The report is issued in Form MR-3 and annexed to the Board's Report under section 134; the Board must explain any qualification, reservation or adverse remark the auditor makes. The company must give the auditor all assistance and facilities — that duty is in the section itself, not in convention. Fraud reporting duties apply to the secretarial auditor just as they do to the statutory auditor: if there is reason to believe a fraud is being committed, the reporting machinery of section 143(12) is switched on for the secretarial auditor too.

Think of the two audits as two different inspectors walking the same building: the statutory auditor checks the accounts room; the secretarial auditor checks whether the building's own rulebook — meetings, registers, filings, approvals — was actually followed. Lenders and investors read MR-3 qualifications the way they read audit qualifications: as a map of where governance is thin.

What goes wrong when applicability is missed

The failure is usually discovered late — at the Board's Report stage, during a due-diligence for funding, or by a lender's counsel reading last year's annual report and asking for an MR-3 that does not exist. There is no condonation shortcut that manufactures a missing audit after the year has closed; the company is left disclosing a non-compliance, and the penalty provisions of section 204(4) — a fine of ₹2 lakh on the company and on officers in default, and on the company secretary in practice who conducts an audit in contravention — frame the conversation. The cheaper path is dull: run the four tests every year when the audited figures land, minute the conclusion either way, and appoint the auditor at the first board meeting of the year if any test is crossed. Our secretarial audit service page sets out how the engagement runs; if you only need the applicability question answered for your company, that is a short conversation, and it is far better held in April than in September.

Questions boards ask us

We are a private company. Can section 204 ever apply to us? Yes — through the borrowings test (₹100 crore or more from banks or public financial institutions) or as a subsidiary of a public company that falls in the prescribed class.

Our turnover crossed ₹250 crore mid-year but closed lower. Audit due? The test reads the figures as on the last date of the latest audited financial statements. It is the closing position that decides.

Is the secretarial audit the same as the annual secretarial compliance report? No. The annual secretarial compliance report under Regulation 24A is a separate SEBI filing for listed entities, due within 60 days of the financial year's end. Listed companies generally carry both obligations.

Who can sign Form MR-3? Only a company secretary in practice holding a valid certificate of practice. For listed entities, the auditor must also be peer-reviewed. An in-house company secretary, however senior, cannot sign their own company's MR-3.

When should the auditor be appointed? There is no separate form or MCA filing for the appointment itself; the Board appoints, and good practice is to do it early in the financial year so the auditor can attend to compliance as it happens, not reconstruct it in August.