Report of The Company Law Committee (2022) recommends various changes to the Companies Act, 2013 to recognise new concepts, expedite corporate processes, improve compliance requirements, and remove ambiguities from existing provisions. The Report also includes recommendations to enable producer organisations to incorporate under the Limited Liability Partnership Act, 2008.
The CLC has submitted its latest Report (2022) to the Government on 21st March, 2022 which has been placed on the website of the MCA. It has been decided to invite comments/suggestions on the said Report from all the stakeholders through e-Consultation Platform on the MCA website till 06th May 2022.
One of the recommendations is strengthening the national financial reporting authority by enhancing NFRA’s ability to take penal action against auditors, provision for dedicated NFRA fund, and regulations making powers.
Section 132(1) of CA-13 empowers the Central Government to constitute the National Financial Reporting Authority (“NFRA”) for matters relating to accounting and auditing standards for companies.
NFRA seeks to protect public interest and the interests of investors, creditors and others associated with the companies or bodies corporate.
It has powers to investigate misconduct committed by any member or firm of chartered accountants registered under the Chartered Accountants Act, 1949 i.e., it aims to ensure oversight over professionals in their audit and accounting related services to companies.
Sub-sections (3), (3A) and (3B) of Section 132 further provide the composition and manner of appointment of chairperson and members of NFRA.
Section 132(13) obligates NFRA to maintain books of accounts in the form prescribed by the Central Government in consultation with the Comptroller and Auditor General (“CAG”) of India.
While taking note of the provisions concerning NFRA, the Committee deliberated upon the autonomy of NFRA and its powers under CA-13.
In particular, this includes the NFRA’s ability to take penal action against auditors, have a dedicated NFRA fund, and make regulations.
(1) Penal action against companies and auditors for matters other than professional or other misconduct
Section 132(4) of CA-13 provides that NFRA shall have the power to investigate matters of ‘professional or other misconduct’ committed by any member or firm of chartered accountants.
When such misconduct is proved, it can impose a penalty or debar the member or the firm from being appointed as an auditor or internal auditor or valuer under CA-13 or from undertaking an audit, internal audit and valuation under the Act.
The amount of penalty and period of debarment (both in the case of individuals and firms) has been provided under such provisions.
Professional or other misconduct has the same meaning assigned under Section 22 of the Chartered Accountants Act, 1949, which reads as under:
“For the purposes of this Act, the expression “professional or other misconduct” shall be deemed to include any act or omission provided in any of the Schedules, but nothing in this Section shall be construed to limit or abridge in any way the power conferred or duty cast on the Director (Discipline) under sub-section (1) of Section 21 to inquire into the conduct of any member of the Institute under any other circumstances.”
The First and Second Schedules under the Chartered Accountants Act,1949, contain matters that would be considered “professional misconduct” about chartered accountants in practice, chartered accountants in service, members of the Institute of Chartered
Accountants of India (“ICAI”) generally, and other misconduct about members of the ICAI generally.
The Committee discussed that NFRA does not have the powers to take actions against individuals and firms for non-compliance with CA-13 and requirements thereunder, which do not qualify as ‘professional or other misconduct’. In particular, it was informed that as per data with the MCA, approximately 11,000 auditors had not filed NFRA 2 – an annual return to be filed by auditors under Rule 5 of the NFRA Rules, 2018.
The Committee was accordingly of the opinion that NFRA should be empowered to take appropriate action against other contraventions in addition to its existing powers to take action against ‘professional or other misconduct’. There should also be specific provisions to enable NFRA to initiate appropriate penal action in case its orders are neither complied with nor any appeal against such an order has been filed in the NCLAT.
(2) Constitution of a NFRA fund
Currently, NFRA receives its funding entirely from the Central Government.
These funds are used for the
(a) salaries and allowances etc., for Chairperson, Members and other officers and employees of NFRA; and
(b) other expenses of NFRA connected with functions and purposes of NFRA under CA-13.
Given their specialised nature, regulatory authorities like NFRA require the necessary capabilities to discharge their functions. The Committee deliberated the necessity for augmenting the degree of financial autonomy for NFRA.
The Committee was of the opinion that provisions concerning financial autonomy as is present for other regulatory bodies may also be incorporated for NFRA. For example, Section 222 of the IBC establishes the ‘Board Fund’, which is meant to meet the expenses of the IBBI. The Board Fund receives monies from all grants, fees received by the IBBI; all sums received from such other sources as decided by the Central Government; and such additional funds as may be specified by the IBBI or prescribed by the Central
Similarly, Section 51 of the Competition Act, 2002 establishes a Competition Fund, which receives monies from Central Government grants; fees received under the Act; and the interest accrued on the amounts received. It is used for the (a) salaries and allowances of
the Chairperson, Members, and officers of the Competition Commission, and (b) other expenses of the Commission in connection with the discharge of its functions and purposes under the Act.
The Committee was of the opinion that suitable amendments be made to CA-13 for the constitution of a NFRA Fund.
(3) Enabling NFRA to make regulations and granting supervisory powers to the NFRA Chairperson
Section 132 of CA-13 enables the Central Government to make Rules for the functioning of NFRA. For example, the Government has prescribed the (i) NFRA (Manner of appointment & other terms and conditions of service of Chairperson and Members) Rules, 2018; (ii) NFRA Rules, 2018; (iii) NFRA (Meeting for Transaction of Business) Rules, 2019; and (iv) NFRA (Recruitment, Salary, Allowances and other Terms and Conditions of Service of Secretary, Officers and other Employees of Authority) Rules, 2019. Presently, NFRA does not have any regulation-making powers under CA-13.
The Committee received suggestions that Section 132 may be amended to include enabling powers for NFRA to make regulations concerning certain matters. In this light, the Committee deliberated that when Section 132 was notified, it did not include regulation making powers. Any divergence would require due consideration. The Committee believed that certain regulation-making powers, sufficiently encumbered by checks and balances, may be given to NFRA.60 As such, the Committee thought it may be prudent to enable NFRA to make regulations in specific instances that shall be outlined in CA-13. This includes instances where autonomy is required for smoother internal functioning and instances that necessitate subject-matter expertise and immediate requirement for regulation.
The Committee thought granting such powers to NFRA would require accountability and good governance. In this regard, the Committee was apprised of the regulation-making powers of other regulators.
As particular examples, Section 52 of the Airports Economic Regulatory Authority of India Act, 2008, which enables the concerned regulator to make regulations, is encumbered by Section 13 (4), which imposes checks and balances on the regulator by mandating consultations with all stakeholders and documenting and explaining all decisions.
Similarly, Section 240 of the IBC enables the IBBI to make regulations. Given good governance practices, IBBI has enacted the IBBI (Mechanism for Issuing Regulations) Regulations, 2018, which govern its regulation-making process and ensure accountability.
Other regulators, particularly the RBI, SEBI, the Insurance Regulatory and Development Authority of India,66 the Pension Fund Regulatory and Development Authority, also have regulation-making powers under the parent statute, albeit, with adequate safeguards.
Thus, the Committee recommended that NFRA should be enabled to make regulations for specific matters such as form and manner of filing information with NFRA, and place, timing, and procedure to be followed for meetings of the NFRA.
However, it discussed that in accordance with principles of good governance and accountability followed by the Central Government, such powers should be sufficiently encumbered with safeguards.
In keeping with the need for operational autonomy of NFRA, the Committee also deliberated the need to specify that the Chairperson shall have the powers of general superintendence, direction and control regarding administrative matters of NFRA. Similar provisions are included in Section 13 of the Competition Act, 2002 and Section 191 of the IBC.
It was thus of the opinion that Section 132 be suitably amended to provide the NFRA Chairperson with powers of general superintendence and direction within NFRA.
Note: Extract of Section 132 of the Companies Act, 2013
The Companies Act, 2013
Chapter-IX Accounts of Companies
Section 132: Constitution of National Financial Reporting Authority.
132. (1) The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act.
[(1A) The National Financial Reporting Authority shall perform its functions through such divisions as may be prescribed.]
(2) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall—
(a) make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;
(b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
(c) oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and
(d) perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.
(3) The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government and such other members not exceeding fifteen consisting of part-time and full-time members as may be prescribed:
Provided that the terms and conditions and the manner of appointment of the chairperson and members shall be such as may be prescribed:
Provided further that the chairperson and members shall make a declaration to the Central Government in the prescribed form regarding no conflict of interest or lack of independence in respect of his or their appointment:
Provided also that the chairperson and members, who are in full-time employment with National Financial Reporting Authority shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment.
[(3A) Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson.
(3B) There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions under sub-section (2) [other than clause (a)] and sub-section (4).]
(4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall—
(a) have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949:
Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section;
(b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:—
(i) discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers and other documents of any person referred to in clause (b) at any place;
(iv) issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, have the power to make order for—
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and
(II) not less than [five lakh rupees], but which may extend to ten times of the fees received, in case of firms;
[(B) debarring the member or the firm from—
I. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
II. performing any valuation as provided under section 247,
for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.]
Explanation.—For the purposes of his sub-section, the expression “professional or other misconduct” shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.
(5) Any person aggrieved by any order of the National Financial Reporting Authority issued under clause (c) of sub-section (4), may prefer an appeal before [the Appellate Tribunal in such manner and on payment of such fee as may be prescribed.]
(10) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed.
(11) The Central Government may appoint a secretary and such other employees as it may consider necessary for the efficient performance of functions by the National Financial Reporting Authority under this Act and the terms and conditions of service of the secretary and employees shall be such as may be prescribed.
(12) The head office of the National Financial Reporting Authority shall be at New Delhi and the National Financial Reporting Authority may, meet at such other places in India as it deems fit.
(13) The National Financial Reporting Authority shall cause to be maintained such books of account and other books in relation to its accounts in such form and in such manner as the Central Government may, in consultation with the Comptroller and Auditor-General of India prescribe.
(14) The accounts of the National Financial Reporting Authority shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and such accounts as certified by the Comptroller and Auditor-General of India together with the audit report thereon shall be forwarded annually to the Central Government by the National Financial Reporting Authority.
(15) The National Financial Reporting Authority shall prepare in such form and at such time for each financial year as may be prescribed its annual report giving a full account of its activities during the financial year and forward a copy thereof to the Central Government and the Central Government shall cause the annual report and the audit report given by the Comptroller and Auditor-General of India to be laid before each House of Parliament.