Quashing of showcause notices: NFRA moves apex court against HC ruling

Court order pertains to quashing NFRA's 11 show cause notices to multiple auditors and CAs

The National Financial Reporting Authority (NFRA) has filed a special leave petition in the Supreme Court against a recent Delhi High Court order quashing 11 of the audit regulator’s show cause notices on grounds of violating the “division of functions” norm, according to people in the know. 

 

It is learnt that NFRA has cited a previous order by the National Company Law Appellate Tribunal, which found the regulator in compliance with the law regarding the division of functions, and the subsequent Supreme Court orders upholding the tribunal’s ruling.

 

NFRA earlier submitted that its executive body headed by its chairperson and two other members had the powers to impose penalty and carry out disciplinary proceedings, according to section 132 (2) B of the Companies Act. The Delhi High Court, while upholding the constitutional validity of the NFRA and its retrospective authority, stated that it was obliged to maintain a division of functions between reviewing an audit and forming an opinion to initiate disciplinary proceedings.

 

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. The Delhi High Court quashed 11 show cause notices issued by NFRA, primarily in IL&FS matters, on the grounds that the procedure followed by the regulatory body overseeing financial reporting and auditing standards in the country lacked neutrality and a dispassionate appraisal.

 

However, the Delhi High Court order added, “We leave it open to the NFRA to draw proceedings afresh if so chosen and advised from the stage of issuance of fresh notices based on the findings recorded in the audit quality review report.”

 

A division Bench comprising Justice Yashwant Varma and Justice Dharmesh Sharma noted 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 Delhi High Court observed. 

Setting The Limits

 

*  Quashed notices were issued primarily in IL&FS matters

 

*  Procedure followed by the regulatory body lacked neutrality, the HC had said

 

*  It stated the NFRA was obliged to maintain division of functions between reviewing an audit and forming an opinion to initiate disciplinary proceedings

 

*  NFRA has contented that its executive body is powered to carry out disciplinary proceedings, according to Companies Act