Govt may allow NFRA to split audit review and disciplinary functions

The government is considering a division of functions within the National Financial Reporting Authority (NFRA), and may allow the regulator to bifurcate its functions of review of an audit and the disciplinary proceedings to be taken thereafter, according to official sources.

 

Currently, the NFRA executive body is entitled to discharge all functions and duties assigned to the authority as a whole.

 

The Ministry of Corporate Affairs, the nodal ministry for NFRA, would have to enable the regulator to delegate its investigation or review function to its officials outside of the executive board by amending the Companies Act, the sources said.

 

The Delhi High Court, in an order earlier this year, had said that the absence of a bifurcation of functions exposes NFRA to allegations of bias, a tendency to dismiss challenges to pre-formed opinions, and disregard for arguments aimed at review and reappraisal.

 

“It would thus be akin to what we in law term as the useless formality theory — an appeal from Caesar to Caesar’s wife,” the court observed.

 

The court order was in response to petitions filed by Deloitte Haskins & Sells LLP, SRBC & Co LLP, and several chartered accountants (CAs) challenging the constitutional validity of NFRA.

 

NFRA had informed the court that its executive body, headed by its chairperson and two other members, has the powers to impose penalty and carry out disciplinary proceedings, according to section 132 (2) B of the Companies Act.

 

“India’s regulatory framework has drifted away from the constitutional principle of checks and balances. The Supreme Court has repeatedly expressed concern and urged corrective steps…When regulators become both rule-makers and adjudicators, the first casualty is accountability - and the second is justice,” said Sumit Agrawal, senior partner, Regstreet Law Advisors, and former Sebi officer.

 

NFRA had appealed against the Delhi high court order in the Supreme Court challenging the quashing of its 11 show cause notices on grounds of violating the “division of functions” norm. The Supreme Court in an interim order had allowed NFRA to continue with its proceedings, but withhold the final orders till they take a decision. 

 

Other regulators, experts pointed out, such as Competition Commission of India or Securities and Exchange Board of India have different sets of people conducting investigation and disciplinary proceedings. CCI for instance has a director general investigation office, which submits its probe reports to the CCI, where its members take a decision on disciplinary action. 

In a nutshell

• NFRA currently handles all functions through its executive body
• Deloitte and others challenged NFRA’s constitutional validity
• Experts warn overlapping powers erode accountability and justice