NFRA must separate audit review and disciplinary roles: Experts
February 11, 2025
An NFRA source told FE that Delhi HC judgment goes against the NCLAT December 2023 ruling that held that NFRA used the “divisions” as stipulated in law.
Even the National Financial Reporting Authority (NFRA) weighs its options after the Delhi High Court’s order quashing the show-cause notices issued by the regulator against the IL&FS and DHFL auditors, legal experts argue that the regulator would need to create separate divisions for the twin functions of audit review and disciplinary action to comply with the legal framework.
On Friday, Delhi HC observed that NFRA acted contrary to the Companies Act and NFRA Rules which clearly mandated it to create separate functions for the review of an audit and the formation of opinion to initiate disciplinary proceedings. The procedure which NFRA chose to follow in the instant cases clearly lacked attributes of neutrality and a dispassionate appraisal. This essentially meant that NFRA donned the role of both prosecutor and judge, the HC ruling said.
In its defence, NFRA has said that “its executive body has been entitled in law to discharge all functions and duties as placed upon the NFRA as a whole”.
“After the HC ruling, it’s now clear that NFRA will have to initiate division of authority – as pointed out by the court – if it has to fulfill its legal obligations,” said a senior lawyer, on condition of anonymity.
“The Companies Act 2013 and NFRA rules mandate distinct roles within NFRA, a legal provision requiring separation of function not maintained by NFRA. The decision to proceed against any firm for disciplinary action must be made independently by NFRA members who are unconnected with review process as dual role can not be assumed and proper separation of authority within its structure shall be done,” said Atul Gala, partner at Bhuta Shah & Co LLP.
An NFRA source told FE that Delhi HC judgment goes against the NCLAT (National Company Law Appellate Tribunal) December 2023 ruling that held that NFRA used the “divisions” as stipulated in law. Further, the source said that NCLAT’s view was confirmed by the Supreme Court in its orders when it dismissed the appeals against the NCLAT judgment.
Nykaa Q3 Results: Profit surges 51.35% at Rs 26.41 crore, revenue up 26.74% YoY
However, legal experts argued that NCLAT is a quasi-judicial forum, and not a constitutional court, and therefore, its doesn’t look into constitutional matters.
“NCLAT rulings are based on the statutory framework of company and insolvency laws, without addressing broader constitutional questions. Therefore, when the Supreme Court upholds an NCLAT ruling, it does so within that statutory context, not as a verdict on the constitutionality of the matter. In contrast, the recent High Court order, issued in response to writ petitions, specifically pertains to constitutional validity,” said the senior lawyer quoted above.
[The Financial Express]
