NFRA gets a shot in the arm with Telangana HC order
June 25, 2025
Telangana High Court upholds NFRA’s authority to investigate audit lapses before its 2018 formation, but bars imposing penalties beyond those valid at the time of misconduct. The ruling boosts regulatory oversight and scrutiny for legacy cases, pending final verdict from the Supreme Court.
The Section 132 deals with the constitution of NFRA, its functions, and powers, including the penalty provisions in case of auditing lapses.
The Telangana High Court’s recent ruling that the National Financial Reporting Authority (NFRA) can investigate chartered accountants for audits conducted before its formation in October 2018, would strengthen hands of the regulator. The order make it clear that the NFRA could take definitive action against errant auditors, even in past cases.
However, the ruling prevents the NFRA from imposing penalties, higher than those prescribed in the period when the lapse occurred.
Experts said that the HC order allows NFRA to look into audit lapses in a whole lot of old cases, and increases the scrutiny risks for auditors. Even high-profile cases IL&FS and DHFL could feel the impact.
In 2023, the National Company Law Appellate Tribunal (NCLAT) too had ruled that the NFRA has power to probe cases of professional misconduct that had occurred before the audit regulator was set up in 2018. The tribunal held that the legal provisions to probe the auditors for lapses had existed even before the NFRA came into being, and only the forum to exercise it has changed (from ICAI to NFRA). So there was no arbitrary retrospective application of powers by NFRA, the tribunal ruled. But this was challenged in various high courts by different sets of petitioners.
A final view may be taken by the Supreme Court, which is also hearing petitions challenging the NCLAT ruling.
“The present writ petitions filed questioning the show cause notices (to the petitioners) are devoid of merits and the same are liable to be dismissed,” the latest Telangana HC order said. While quashing a batch of six petitions challenging the regulator’s powers in cases before its creation, the court said that the “Section 132 of the Companies Act does not create a new disqualification or create a novel set or category of misdemeanor to constitute professional or other misconduct.”
The Section 132 deals with the constitution of NFRA, its functions, and powers, including the penalty provisions in case of auditing lapses.
Earlier, the NFRA had barred some auditors involved in the IL&FS fiasco from taking up fresh work, and imposed penalties on them. Later, while disposing of petitions challenging the regulator’s move, the Delhi high court upheld the constitutional validity of Section 132 of the Companies Act.
“NFRA can proceed against the auditors for professional or other misconduct which relates to audits pertaining to period before NFRA came in to existence. It can issue show cause notice and conduct further proceedings short of issuing final orders,” said Ashok Haldia, former secretary at the Institute of Chartered Accountants of India (ICAI).
“The order implies that law of limitation is not applicable in such investigations,” said GP Madaan, managing partner, Madaan Law Offices.
While dismissing the petitions, the Telangana HC said that the NFRA may be permitted to initiate disciplinary inquiries for misconduct committed prior to its existence, it cannot impose enhanced punishments that were not in force at the relevant time. “It is a well-settled principle of law that the legislature has the authority to enact laws with either prospective or retrospective effect. However, while it may retrospectively declare an act to be an offence, it cannot impose a punishment greater than what was prescribed at the time the act was committed,” the order said.
On the matter of penalties, the petitioners had contended that the prior to the formation of NFRA, the auditors were governed by the disciplinary mechanism of the Chartered Accountants (CA) Act where the penalties were limited to removal of the member’s name from the register either permanently or for a fixed period, or the imposition of a fine up to Rs 0.5 million. After NFRA, the penalties became significantly more stringent.
In December 2023, the NCLAT dismissed a series of appeals questioning the “retrospective powers” of NFRA by stating that “if a new law is made to take care of known wrongs for the benefits of the society on its own, then the provision of retrospective application in new law may not be required and necessary implication need to be made out from the language employed.”
[The Financial Express]
