Supreme Court to Hear NFRA’s Challenge Against Delhi High Court Ruling on Show-Cause Notices

The National Financial Regulating Authority (NFRA) has approached the Supreme Court to challenge the recent decision of the Delhi High Court, which quashed show-cause notices issued by the auditing standards watchdog against several leading audit firms, including Deloitte Haskins & Sells LLP and SRBC & Co LLP, as well as prominent Chartered Accountants (CAs).

A Supreme Court Bench comprising Chief Justice of India (CJI) Sanjiv Khanna and Justice Sanjay Kumar briefly discussed the matter today, admitting the appeal and issuing a notice returnable by April 28.

In the challenge to the February 7 ruling, the High Court upheld NFRA’s authority to take action against auditors or audit firms for professional misconduct. However, it criticized the NFRA for certain procedural irregularities that arose in initiating disciplinary proceedings in specific cases. The High Court emphasized that the NFRA must operate in divisions, stating that the division responsible for conducting audit quality reviews should not be the same one that initiates disciplinary actions against auditors. Consequently, it quashed several show-cause notices (SCNs) and the related disciplinary proceedings initiated by the NFRA for breaching this procedural standard.

Solicitor General of India Tushar Mehta, representing the NFRA, defended its approach, arguing that it is a composite body and cannot always function in divisions, particularly given that it only has three full-time members. “This has wide ramifications… Based on audit quality review reports (AQRRs), show-cause notices are issued. Where there are no AQRRs, those show-cause notices have also been set aside by the Delhi High Court… We are a composite body and we cannot work in divisions… These are the only three members,” SG Mehta stated.

The Supreme Court today declined to stay the High Court’s judgment. However, it clarified that the NFRA could continue disciplinary proceedings not only in instances where AQRRs have been prepared, but also in cases where an AQRR is yet to be prepared, in accordance with the High Court’s directive to ensure that the work is conducted by separate divisions. CJI Khanna noted, “This is a detailed judgment which we cannot stay… Under customs and excise laws, the same position emerges… Show cause notice is by a different authority and assessment is by another different authority… You can continue the proceedings as per the judgment. It allows it to be done by third parties also.

The Court further stated that any final orders passed by the NFRA should not be enforced for the time being. It is open to the petitioner (NFRA) to proceed in terms of the (High Court) judgment… We are aware of the seriousness. In those cases where AQRR has not been issued, NFRA can proceed as per the judgment. If it’s quashed, then issue fresh notices… Where final orders passed, they will not be given effect to,” the Court explained.

Senior Advocate Kapil Sibal represented Deloitte Haskins & Sells LLP during these proceedings.