Categories: LAW AND ORDER

NFRA’s Investigative Powers Over Pre-2018 Audits Upheld by Supreme Court

Key Highlights:

  • Supreme Court Decision: The Supreme Court of India has affirmed the National Financial Reporting Authority’s (NFRA) authority to investigate statutory audits conducted before its establishment in 2018.
  • Tribunal Order: The National Company Law Appellate Tribunal (NCLAT) had upheld NFRA’s retrospective jurisdiction over audits conducted prior to October 2018.
  • Doctrine of Merger: The principle that only one operative order governs a particular subject at any time was a key factor in the court’s decision.

Background and Legal Context

The National Financial Reporting Authority (NFRA) was established in October 2018 to oversee the auditing profession and ensure the integrity of financial reporting. Questions arose regarding its jurisdiction over audits conducted before its creation.

Supreme Court Ruling

In March and May 2024, the Supreme Court dismissed appeals challenging NFRA’s retrospective powers. The apex court’s decision endorsed the NCLAT’s December 2023 order, affirming NFRA’s jurisdiction over audits predating its establishment. This ruling solidifies NFRA’s authority and ensures there is no regulatory gap in auditing oversight.

Significance of the Doctrine of Merger

The doctrine of merger was pivotal in the Supreme Court’s reasoning. This legal principle posits that when a higher court reviews a case and issues a decision, the lower court’s decision merges into the higher court’s judgment. Consequently, the higher court’s ruling becomes the definitive and enforceable judgment.

Implications for NFRA and Regulatory Oversight

  • Broadened Scope: NFRA now has confirmed authority to investigate historical audits, enhancing its regulatory reach.
  • Case of Dewan Housing Finance Corporation Ltd. (DHFL): The challenge to NFRA’s disciplinary actions by auditors of DHFL was a test case. The Supreme Court’s dismissal of appeals against the NCLAT order in this context sets a precedent for NFRA’s retrospective authority.
  • Future Challenges: While the Supreme Court’s decision reinforces NFRA’s jurisdiction, ongoing writ petitions in High Courts addressing the constitutionality of the law remain unaffected. These could potentially impact NFRA’s authority if decided otherwise.

Expert Opinions

Legal experts underscore the significance of the Supreme Court’s decision. According to Sonam Chandwani, managing partner at KS Legal & Associates, the doctrine of merger ensures that the final decision from a higher court prevails, thereby affirming the Supreme Court’s endorsement of NFRA’s retrospective jurisdiction.

Conclusion

The Supreme Court’s rulings in March and May 2024 affirm NFRA’s investigative powers over statutory audits conducted before its creation, reinforcing the regulator’s authority and ensuring continuous oversight of financial reporting standards. While this provides clarity and bolsters NFRA’s role, further legal scrutiny in High Courts may continue to shape the regulatory landscape.

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Ashutosh Dubey

legal journalist,Public Affair Advisor AND Founding Editor - kanishksocialmedia-BROADCASTING MEDIA PRODUCTION COMPANY,LEGAL PUBLISHER

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