MCA Imposes Rs.9 Lakh Penalty on Company & Directors for Ignoring Auditor Remarks   

In a recent enforcement action, the Ministry of Corporate Affairs (MCA), through the Registrar of Companies (RoC), Uttar Pradesh – Kanpur, has imposed a penalty of Rs. 9 lakhs on Shubhmangal India Nidhi Limited and its three directors for failing to respond to auditor's remarks in their Board Reports for the financial years 2017-18 and 2018-19.

The order, issued under Section 454 of the Companies Act, 2013, highlights the importance of statutory reporting compliance and the consequences of neglecting critical audit observations.

Also read:  MCA Issues Show Cause Notices for Cost Audit Non-Compliance

What Went Wrong?

Nidhi Limited, registered under the Companies Act, 2013, with an authorized capital of Rs. 15 lakhs, failed to include proper explanations or comments in its Board of Directors’ reports concerning remarks made by its statutory auditor for FY 2017-18 and 2018-19.

 According to the MCA:

• The company did not include required explanations for remarks or qualifications made by the auditor in the board reports.
• This violates Section 134(3)(f) of the Companies Act, which makes it mandatory for the Board of Directors to comment on every qualification, reservation, adverse remark, or disclaimer made by the statutory auditor or secretarial auditor.
• Despite being issued a Show Cause Notice on 25th April 2024, neither the company nor its directors replied. As a result, no hearing was granted, and the penalty was imposed directly.

In this case:

• The company was fined Rs. 3 lakhs per financial year.
• Each of the three directors was fined Rs. 50,000 per year, amounting to Rs. 1.5 lakhs per year in total.

Total Penalty Imposed:

• FY 2017–18: Rs. 4.5 lakhs
• FY 2018–19: Rs. 4.5 lakhs
• Grand Total: Rs. 9 lakhs

The company and its directors have been directed to make the e-payment within 90 days of receiving the order.

How to Avoid This Kind of Non-Compliance

1. Carefully Review Auditor’s Reports

• Read the statutory auditor’s report and secretarial audit report (if applicable) in detail.
• Identify any qualifications, adverse remarks, disclaimers, or reservations.

2. Include Proper Explanations in the Board’s Report

For every negative comment in the auditor’s report, provide a clear explanation or response in the Board’s Report under Section 134. The explanation should address:

• Why the issue occurred
• What actions the Board is taking to resolve it
• Any corrective measures implemented

3. Maintain Strong Documentation

• Keep records of internal meetings and discussions where the auditor’s remarks were reviewed.
• Document Board decisions or resolutions taken in response to the audit comments.

4. Consult Professionals

Get help from Company Secretaries, Chartered Accountants, or Legal Experts to review your reports before filing. They can help you draft compliant Board Reports and identify hidden risks.

5. Timely Filing of Annual Returns

Ensure all statutory filings like AOC-4 (financials), MGT-7 (annual return), and Board Reports are accurately filed on time with the MCA.

6. Stay Alert to MCA Notices

• If you receive a Show Cause Notice (SCN) or communication from the Registrar of Companies, never ignore it.
• Respond within the given time frame and attend hearings if scheduled.

7. Periodic Compliance Audits

Conduct a compliance health check at least once a year.

Tools like compliance scorecards or external audits can reveal gaps before the RoC does.

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Frequently Asked Questions

What did the company do wrong in this case?

The company failed to include explanations for the auditor’s remarks in the Board Report for the financial years 2017-18 and 2018-19, which is a legal requirement under Section 134(3)(f) of the Companies Act, 2013.

What is Section 134(3)(f) of the Companies Act, 2013?

Section 134(3)(f) mandates that a company’s Board of Directors must explain or comment on every qualification, reservation, adverse remark, or disclaimer made by:

• The statutory auditor in the audit report, and
• The company secretary in practice in the secretarial audit report (if applicable)

This explanation must be included in the Board’s Report that accompanies the financial statements presented at the AGM.

In simple terms:

If an auditor points out a problem (e.g., late filings, irregularities, or missing data), the company’s Board must formally address and explain it in the report. Ignoring such remarks is a compliance violation and can lead to penalties.

3. Is this rule applicable only to public or listed companies?

No. This applies to all companies, including private limited companies, Nidhi companies, and unlisted public companies.

4. Can penalties be avoided by responding late?

Once a penalty order is passed and deadlines are missed, the company must either file an appeal with the appropriate authority or pay the penalty. Responding late without legal follow-up does not automatically revoke the penalty.

5. What is the penalty for violating Section 134(3)(f)?

As per Section 134(8):

• The company can be fined Rs. 3 lakhs
• Each director/officer in default can be fined Rs. 50,000

These are per instance penalties, and can add up if violations occur across multiple financial years.

6. How can I avoid this kind of non-compliance?

• Always review and respond to audit qualifications in the Board Report.
• File your annual returns and reports on time (AOC-4, MGT-7, etc.).
• Seek guidance from professionals or compliance experts.
• Respond promptly to any Show Cause Notice issued by the RoC or MCA.

Stay Compliant. Stay Safe!

This case is a reminder that compliance is not just good practice — it's the law. If you’re unsure about your company's current standing, it’s best to act now before any notice arrives.

Let IndiaFilings help you protect your business.

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