NFRA Challenges Delhi High Court Ruling in Supreme Court
The National Financial Reporting Authority (NFRA) has taken a significant step by filing a special leave petition in the Supreme Court against a recent ruling from the Delhi High Court. This ruling quashed 11 show cause notices issued by the NFRA, citing violations related to the “division of functions” norm.
Sources indicate that the NFRA’s petition references a prior decision from the National Company Law Appellate Tribunal (NCLAT), which affirmed the regulator’s adherence to the law concerning the division of roles. Additionally, the NFRA highlighted subsequent Supreme Court judgments that supported the tribunal’s findings.
According to NFRA, their executive body, led by the chairperson and two additional members, possesses the authority to impose penalties and initiate disciplinary actions under Section 132(2) B of the Companies Act. The Delhi High Court’s decision, which addressed the constitutional legitimacy of the NFRA and its retroactive powers, emphasized the necessity of maintaining a clear division of functions when reviewing audits and forming opinions to commence disciplinary actions.
This ruling emerged in response to petitions from Deloitte Haskins & Sells LLP, SRBC & Co LLP, and a number of chartered accountants challenging NFRA’s constitutional validity. The court expressed concerns that the procedures followed by the NFRA, which supervises financial reporting and auditing in India, lacked neutrality and objective assessment.
However, the Delhi High Court also stated that the NFRA could initiate fresh proceedings if desired and suggested the issuance of new notices based on the findings highlighted in the audit quality review report.
In their judgment, the division bench, comprising Justice Yashwant Varma and Justice Dharmesh Sharma, noted that the lack of separation of functions could lead to NFRA facing allegations of bias. They mentioned that this scenario could diminish the credibility of the review process, implying that it is crucial for the regulatory body to operate impartially.
The court articulated that the absence of a bifurcation in functions could culminate in what the law identifies as the “useless formality theory,” akin to an appeal from Caesar’s wife, where the expectation of impartiality must be upheld. As the NFRA moves forward with its petition, the implications for audit regulation and financial accountability in India remain a critical focus for stakeholders across the industry.