The Ministry of Corporate Affairs (MCA) introduced the Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020, to strengthen governance standards and refine compliance under the Companies Act, 2013. These rules, effective from 1 April 2020, made significant changes in two areas: the threshold for appointing a whole-time company secretary (CS) and the scope of secretarial audit.
The threshold for mandatory appointment of a whole-time CS was increased, offering relief to smaller companies. At the same time, the ambit of secretarial audit was widened to include more categories of companies, especially those handling large borrowings from banks and public financial institutions. The intent was clear: balance ease of compliance for smaller companies while tightening governance checks where public funds are involved.
This blog examines the amendments in detail, supported by illustrations, and reflects on their broader impact on corporate governance in India.
1. Brief Overview
The MCA notified the Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020, amending the earlier 2014 rules. These amendments apply to financial years beginning on or after 1 April 2020.
The changes sought to regulate managerial personnel more effectively and ensure adherence to corporate law. The alert focuses on two major aspects:
- Raising the threshold for appointment of whole-time company secretaries.
- Expanding the scope of secretarial audit to cover additional companies.
Through these changes, the government aimed to refine compliance requirements without overburdening smaller corporates.
2. Appointment of Whole–Time Company Secretary
One of the key changes was increasing the paid-up share capital (PSC) threshold for mandatory appointment of a whole-time CS.
- New threshold: Companies with PSC of ₹10 crore or more must appoint a whole-time CS.
- Earlier threshold: Companies with PSC of ₹5 crore or more had this requirement.
Applicability under Section 203(1) and Rules 8 & 8A
- Every listed company must appoint whole-time key managerial personnel (KMP).
- Every public company with PSC of ₹10 crore or more must appoint whole-time KMP, including a CS.
- Every private company with PSC of ₹10 crore or more must appoint a whole-time CS.
Key managerial personnel includes:
- Managing Director, Chief Executive Officer, or whole-time Director
- Company Secretary
- Chief Financial Officer
The amendment excluded smaller companies from this obligation, thereby easing compliance for unlisted public and private companies below the new threshold.
Practical uncertainties
The rules did not clarify certain aspects:
- Cut-off date: Whether PSC should be assessed at the end of a financial year or at any point during the year.
- Increase in PSC: If capital rises mid-year due to rights issue, bonus issue, or preferential allotment, it is unclear whether appointment must be immediate or by next financial year.
- Reduction in PSC: In cases of buyback or capital reduction, whether the rule becomes inapplicable immediately, or if a cooling-off period applies, is not defined.
Penalties for non-compliance
Section 203 prescribes:
- ₹5 lakh penalty on the company.
- ₹50,000 penalty on every defaulting director and KMP.
- ₹1,000 per day for continuing default.
The amendment thus provided relief to smaller businesses while setting strict consequences for larger ones failing to comply.
3. Secretarial Audit for Bigger Companies
The ambit of secretarial audit was significantly widened.
Applicability under Section 204(1) and Rule 9(1)
Secretarial audit is now mandatory for:
- Every listed company.
- Every public company with PSC of ₹50 crore or more.
- Every public company with turnover of ₹250 crore or more.
- Every company (public or private) with outstanding loans or borrowings of ₹100 crore or more from banks or public financial institutions.
This audit must be conducted by a practising company secretary and reported in Form MR-3, annexed to the Board’s Report.
Clarifications
- Thresholds are to be assessed based on the latest audited financial statements.
- Only borrowings from banks and public financial institutions are considered. Loans from directors, body corporates, NBFCs, or deposits are excluded.
Purpose
The government’s intent was to safeguard public interest. Companies with significant exposure to public money through bank loans or institutional borrowings must undergo secretarial audit to ensure strong compliance and governance frameworks.
Points of concern
The exclusion of deposits accepted from the public by unlisted public companies was viewed as an oversight. Since deposits also involve public money, many argued they should be included in calculating thresholds, similar to other provisions like internal audit requirements under Section 138.
Illustrations
Illustration 1: Range Ltd
- Equity share capital: ₹7 crore
- Preference share capital: ₹4 crore
- Loans: Director – ₹10 crore, ABC Bank – ₹40 crore, LIC – ₹20 crore, NBFC – ₹40 crore
Total PSC = ₹11 crore → Appointment of MD/CEO, CFO, and CS required under Section 203.
Borrowings from bank and LIC = ₹60 crore → Secretarial audit not required, since below ₹100 crore threshold.
Illustration 2: XYZ Private Ltd
- Paid-up capital: ₹45 crore
- Debentures: ₹5 crore (listed)
- Loans: ₹10 crore
Since debentures are listed, it is a listed private company.
- Appointment of MD/CEO, CFO, and CS required.
- Secretarial audit is mandatory, since all listed companies fall under Section 204, regardless of turnover or borrowings.
These examples highlight how different combinations of capital, borrowings, and listing status determine applicability.
4. M2K Remarks
The amendments reflect a two-fold approach:
- Relaxation: Smaller companies are spared from appointing whole-time CS by raising the capital threshold.
- Tightening: Larger entities, particularly those with heavy borrowings or public exposure, face stricter oversight through mandatory secretarial audits.
Secretarial audit serves as an independent check on corporate governance and helps detect non-compliances early, allowing corrective measures before issues escalate. This strengthens investor and public confidence.
At the same time, ambiguities—such as treatment of public deposits, timing of threshold assessment, and changes in capital during the year—need clearer guidance from the government to avoid inconsistent interpretations.
Overall, these amendments strike a balance between ease of doing business for smaller corporates and enhanced accountability for companies dealing with significant public funds.
