India: National Financial Reporting Authority Rules, 2018 – An Overview

Last Updated: 15 January 2019
Article by Kumar Deep and Richa Soni

Introduction

The Ministry of Corporate Affairs vide its notification1 dated 13.11.2018 notified the National Financial Reporting Authority Rules, 2018 ("NFRA Rules") with an objective of strengthening the audit of companies by constituting an independent regulator namely the National Financial Reporting Authority ("Authority"). The Authority has the power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service or undertake investigation of auditors of certain class of companies and bodies corporate.

Applicability

In pursuant of Rule 3 (1) of the NFRA Rules, the class of companies or bodies corporate that will be governed by the NFRA Rules are:

1) listed companies i.e., all the companies whose securities are listed on any stock exchange in India or outside India;

2) unlisted public companies having paid-up capital of not less than INR 500 Crore or having Annual Turnover of not less than INR 1,000 Crore or having, in aggregate, outstanding loans, debentures and deposits of not less than INR 500 Crores as on the 31st March of immediately preceding financial year;

3) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act etc;

4) any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and

5) Body Corporate incorporated or registered outside India, which is a subsidiary company or associate company of the company or body corporate registered in India as referred in point (1) to (4) above; if the income or net worth of such subsidiary or associate company exceeds twenty per cent. of the consolidated income or consolidated net worth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d)Income or net worth of such body corporate exceeds 20% of the consolidated income or consolidated net worth of such company or the body corporate.

Accordingly, the companies which are exempted from the applicability of the NFRA Rules are:

1) Private Companies (unless referred by Central Government to the Authority in public interest); and

2) Unlisted public companies with paid-up capital or turnover or aggregate of loans, debentures and deposits below the limit stated under Rule 3(1).

Compliance requirements

On perusal of the provisions of the Rule 3(2) and 3(3) of the NFRA Rules, the compliances under the NFRA Rules are as under:

1) Every existing Body Corporate other than a company governed by the NFRA Rules, shall, within 30 days from the date of commencement of the Rules, inform the Authority in Form NFRA-1 about the particulars of the auditors as on the date of commencement of the NFRA Rules.;

2) Every Body Corporate other than Indian Companies shall within 15 days of appointment of an auditor, inform the Authority in Form NFRA-1, about the particulars of the auditors appointed by the body corporate under Section 139(1) of the Companies Act, 2013.

Further, in accordance with Rule 5 of the NFRA Rules, every auditor referred in Rule 3(2) and 3(3) of the NFRA Rules as above, has to file a return with the Authority on or before 30th April of every year in such form as may be specified by the Central Government.

Functions , duties and powers of the Authority

The major function of the Authority is to protect the public interest and the interests of investors, creditors, etc. by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by auditors. However, the other functions and duties of the Authority may be summarized as below:

  • Rule 6 elaborates on the function of recommending accounting and auditing standards. It states that the Authority shall receive recommendations from the ICAI for new standards and amendments to existing standards. It may seek additional information from the ICAI on such recommendations. It then considers such recommendations before making them to the Central Government.
  • Rule 7 and Rule 8 elaborate on the function of monitoring and enforcing compliance with accounting standards and auditing standards respectively, which is done by the Authority by reviewing the financial statements of a company or body corporate and directing such entity or its auditor by written notice to provide further information. It may also require personal presence of the officers of such entity for seeking additional information. It then publishes such findings relating to non-compliances on its website and in any other manner as it considers fit. It may decide on the further course of investigation if it finds that any accounting standard has or may have been violated by such entity.
  • Rule 9 elaborates on the function of overseeing the quality of service and suggesting measures for improvement. On the basis of review in abovementioned rule, the Authority has the power to direct an auditor to take measures for improvement of audit quality and such direction bears as a duty upon the auditor and send a report to the Authority about the compliance. With regards to this function, the Authority may refer cases to Quality Review Board constituted under Chartered Accountants Act, 1949 or call for any report or information in respect of such auditors or entity.
  • Rule 10 elaborates on the power of the Authority to investigate into any matter of professional or other misconduct under Section 132(4) of the Companies Act, 2013: 1. Upon reference by Central Government; 2. In furtherance of its compliance or oversight activities; or 3. Suo moto after recording reasons in writing. It then forwards such matter to its Division dealing with enforcement for carrying out investigation. If the Authority finds a matter which involves or may involve fraud amounting to rupees one crore or more, it shall report its findings to the Central Government. Upon the commencement of the Rules, only the Authority (and no other institute or body) shall be entitled to initiate proceedings/action against abovementioned misconduct by such auditors.
  • It is embodied with the duties inter alia, to maintain details of auditors appointed by companies and bodies corporate; recommend accounting and auditing standards for approval by the Central Government; monitor and enforce compliance; oversee the quality of service; promote awareness in relation to compliance, etc.
  • Rule 17 states that the Authority and all persons and organizations associated with it shall maintain complete confidentiality and it may enter into contractual arrangements to achieve the same.
  • Rule 18 imposes on the Authority a duty to not enter into any contract, agreement or relationship, etc. which may or is likely to be perceived to interfere with its ability to perform its functions and duties in an effective, fair and reasonable manner.

Specific Powers to initiate disciplinary proceedings and penalize defaulters

In addition to the general powers as stipulated under Rule 10, the NFRA Rules provides certain specific powers to the Authority under Rule 11 which may be summarized as under:

  • The Authority has been empowered under the Rules to initiate disciplinary proceedings if it believes that sufficient cause exists to take actions permissible under sub-section (4) of Section 132 of the Companies Act, 2013.
  • The concerned division begins the proceedings by issuing show cause notice to the auditor. The show-cause notice shall be in writing and detailed; shall enclose copies of documents relied upon; shall be served upon the auditor to his/its address provided to ICAI by registered post or electronic mail.
  • The concerned Division shall dispose of the show-cause notice within a period of 90 days of the assignment through a summary procedure, while adhering to the principles of natural justice.
  • The order passed by the Division shall not become effective until 30 days have elapsed from the date of issue of the order.
  • The afore-mentioned order is to be forwarded in all cases to – the Central Government, ICAI, Comptroller and Auditor General of India (in cases of sub-section (5) of Section 139 companies), SEBI, RBI, IRDA and to the concerned regulator in case the auditor is resident outside India.
  • The auditor who has been penalized with a monetary penalty shall deposit such amount with the Authority within 30 days of the order, provided if auditor prefers appeal, 10 percent of such amount shall be deposited.
  • If the auditor does neither of the aforementioned, the Authority shall inform about such non-compliance to each and every entity the auditor is functioning as auditor.
  • Wherein a company or its officer or an auditor or any other person contravenes the provisions of these rules, such shall be punishable as per Section 450 of the Companies Act, 2013.

Miscellaneous

  • The Rules provide for role of Chairperson and full-time members acting through one of the Divisions; advisory committees, study groups and task forces.
  • The Authority shall conduct training, workshops, conferences as a mean of suitable measures for the promotion of awareness and significance inter alia of accounting standards, auditing standards, auditors' responsibilities, etc.
  • In addition to this, the Authority may choose to become a member of and provide/receive assistance to/from regional or international associations of independent audit regulators and standard-setters as it deems fit.

Footnote

1 http://www.mca.gov.in/Ministry/pdf/NFRARules2018_13112018.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions