CS Professional · Compliance Management, Audit and Due Diligence

Compliance Framework for CS Professional Paper 3

The Compliance Framework chapter covers what corporate compliance means, how a company builds a compliance framework and policy, and four Companies Act provisions: the company secretary's functions (section 205), recovery of remuneration on restatement (section 199), registration of existing companies (section 367) and the liquidation statement (section 344). You solve questions by stating the provision, applying it to the facts and concluding.

What this chapter covers

This chapter is the base of Paper 3, Compliance Management, Audit and Due Diligence. It starts with the idea of compliance: following the laws, rules, standards and internal policies that apply to a company. It then shows how a company organises this through a compliance framework and a compliance policy.

The second half of the chapter is statutory. You study four short provisions of the Companies Act, 2013. Section 205 sets out what a company secretary must do. Section 199 requires recovery of excess pay from top managerial persons when financial statements are restated. Section 367 deals with the certificate of registration of existing companies. Section 344 requires a company in winding up to say so on its business documents.

The chapter links to the rest of the paper. Compliance management is the 40-mark part of Paper 3, and audit and due diligence is the 60-mark part. Audit and due diligence test whether the framework you learn here actually works. Section 205 also ties in with the Board's report under section 134, which carries the directors' statement on systems to ensure compliance with all applicable laws.

The chapter is short, but the provisions are precise and the questions are case-based, so you can score well if you know the exact words and conditions. It also supplies vocabulary and reasoning that you reuse in the audit, due diligence and secretarial answers across the paper. A student who knows who must do what, who must pay what and what must be stated gains marks that others lose by writing general answers.

Compliance Framework: topics in the order to study them

1Concept and Meaning of Corporate ComplianceStart here because every later topic assumes you know what compliance is and why companies need it.
2Compliance Framework and Compliance PolicyNext, see how a company turns the concept into structure: roles, processes, reporting and a written policy.
3Role of Company Secretary under Section 205This links the framework to a person. The company secretary reports compliance to the Board and ensures secretarial standards are followed.
4Recovery of Remuneration under Section 199It shows the consequence of non-compliance in financial reporting, so study it once you know the compliance role.
5Existing Companies and Registration under Section 367A short provision on registration of existing companies. Learn it after the main compliance topics, as it is a standalone rule.
6Statement of Liquidation under Section 344Finish with this short provision with a fixed penalty range; it is easy to revise last.

How to prepare Compliance Framework

Prepare this chapter in two passes: understand the concepts first, then memorise the statutory wording and apply it to facts.

Read the concept and framework topics once for understanding. Write a one-page note on the elements of a framework and what a compliance policy should contain.
Read section 205 line by line. Note its three functions: report to the Board on compliance with the Act, rules and other applicable laws; ensure compliance with applicable secretarial standards; discharge other prescribed duties.
Learn that section 205(2) says sections 204 and 205 do not affect the duties of the Board, the chairperson, the managing director or a whole-time director.
For section 199, list the conditions: restatement of financial statements due to fraud or non-compliance, the persons covered (past or present managing director, whole-time director, manager, CEO), and recovery of excess remuneration including stock options.
For sections 367 and 344, note the trigger, the action required and the consequence. For section 344, remember the fine of not less than fifty thousand rupees and up to three lakh rupees.
Practise case-based answers in three parts: the provision, application to the facts, conclusion. Use the exact words of the section.
Revise with the quick revision list two days before the exam, then write one timed answer for each section.

Common mistakes in Compliance Framework

Saying the company secretary alone is responsible for all compliance.
Fix: Remember the company secretary reports on compliance with the Act and other laws and ensures secretarial standards. Section 205(2) says the duties of the Board and directors are not affected.
Applying section 199 to every employee or every restatement.
Fix: Check two things: restatement is due to fraud or non-compliance with the Act or rules, and the person is a past or present MD, whole-time director, manager or CEO.
Recovering the whole remuneration under section 199.
Fix: Recover only the excess over what would have been payable as per the restated financial statements, for the restatement period.
Mixing up who is penalised under section 344.
Fix: Name the company and every officer, the Company Liquidator and any receiver or manager who wilfully authorises or permits the non-compliance.
Writing general compliance theory in case-based answers.
Fix: Open with the provision, apply it to the named facts, then conclude. Keep theory to a line or two.
Confusing secretarial standards with any standard.
Fix: State that section 205 refers to standards issued by ICSI and approved by the Central Government.

Last-day revision: Compliance Framework

Compliance means following applicable laws, rules, standards and internal policies.
A compliance framework gives structure: roles, processes, monitoring and reporting.
A compliance policy is the written statement of the company's approach and responsibilities.
Section 205(1)(a): company secretary reports to the Board on compliance with the Act, rules and other applicable laws.
Section 205(1)(b): company secretary ensures compliance with applicable secretarial standards.
Secretarial standards under section 205 are those issued by ICSI and approved by the Central Government.
Section 205(2): it does not reduce the duties of the Board, chairperson, MD or whole-time director.
Section 199 applies when financial statements must be restated due to fraud or non-compliance.
Section 199 recovery covers excess remuneration, including stock options, from past or present MD, whole-time director, manager or CEO.
Section 367: the Registrar certifies that the existing company is incorporated under the Act, and as limited if it is a limited company.
Section 344: a company in winding up must state this on invoices, orders for goods and business letters bearing its name.
Section 344 fine: not less than ₹50,000 and up to ₹3,00,000, on the company and officers who wilfully authorise or permit the default.

Compliance Framework practice questions

Compliance Framework in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Compliance Framework: frequently asked questions

What are the functions of a company secretary under section 205?

The company secretary reports to the Board about compliance with the Act, the rules and other applicable laws. The company secretary also ensures the company complies with applicable secretarial standards and discharges other prescribed duties.

When does section 199 apply?

It applies when a company must restate its financial statements due to fraud or non-compliance with the Act or rules. The company then recovers excess remuneration, including stock options, from covered past or present top managerial persons.

What must a company in liquidation do under section 344?

Every invoice, order for goods or business letter bearing its name must state that the company is being wound up. This applies to winding up by the Tribunal or voluntarily.

How should I answer case-based questions from this chapter?

Write the relevant provision in plain words, apply it to the facts given, and end with a clear conclusion. Mention the penalty or consequence if the facts show a default.