NFRA: THE NEXT LEVEL OF AUDIT REGULATION
In November, 2018 the Ministry of Corporate Affairs (MCA) notified the National Financial Reporting Authority (NFRA) Rules, 2018. This has brought to reality the 5 year proposal of the government to create and establish an independent one stop regulatory authority to monitor the quality of services rendered by chartered accountants / statutory auditors of certain types of large entities. The Authority has been proposed in order to protect and safeguard interests of various parties such as creditors, investors and others associated with companies / bodies corporates by ensuring there is effective accounting and auditing standards in place.
Vide the notification dated 13th November, 2018 the MCA has clearly laid down the scope, jurisdiction, applicability, functions, duties and responsibilities of the NFRA.
A detailed look at the same:
1. Scope of the NFRA
The NFRA has been proposed to be established to monitor the professional services of auditors, enforcement and monitoring of accounting and auditing standards and initiate investigation of work of the auditors of notified entities.
The Rules shall be applicable to auditors of the following entities:
Once the NFRA rules become applicable to a company, then the applicability will continue for 3 more years even during such period the limits are reduced or the status of the entity changes.
3. Functions & Duties of the NFRA
NFRA Vs ICAI?
The enactment of the NFRA and rules actually sent mixed signals. Speculation was rife that the enactment of the authority will render the professional body of Chartered Accountants – the Institute of Chartered Accountants of India (ICAI) toothless tiger. Amidst uncertainty that the disciplinary powers of the ICAI will be clipped, the Ministry of Corporate Affairs clarified that the ICAI will still be the sole regulatory authority for sole proprietorships, Partnership Firms, LLP’s, Trusts, societies and private companies and unlisted public companies that do not fall under the threshold / limits prescribed in the NFRA Rules, 2018. The Rules only divests ICAI’s disciplinary and monitory powers over auditors of companies that come under the ambit of the NFRA Rules.
Besides the Quality review Board (QRB), constituted under Section 28A of the Chartered Accountants Act, 1949 since 2007 will very much make its presence felt by functioning in accordance with objects for which it was established – monitoring, quality analysis and audit, review, making recommendations and suggestions to the auditors in improving services.
Effective governance mechanism - need of the hour
There are many questions on whether there is need for another regulatory body in addition to the host of regulatory bodies already in place – the ICAI, SFO, RBI, CBI and even the Courts. But a look at the alarming increase in Non-performing assets (NPO) (across large companies, banks, insurance companies) large scale frauds, scams and tax evasion, sudden exit of auditors from such companies seem to have left the government with no other option except to establish another independent regulatory authority.
In doing so, India is only adopting accounting healthy practices followed by large economies the world over – be it the financial reporting council (FRC) in U.K or the The Public Company Accounting Oversight Board (PCAOB) in the U.S.A.
By bringing in the NFRA, the government has clearly demarcated companies and auditors that will be governed by it. The remaining will be under the scrutiny of authorities such as ICAI, SFO etc. However, ensuring proper systems, mechanism and credible people to run these bodies only can ensure their effective functioning. Given the unwanted excess baggage that the economy is carrying, establishing an independent public regulatory body is a welcome move. Time to pull up socks!
COMPANIES (AMENDMENT) ORDINANCE, 2019 - PROMULGATED
On 2nd November, 2018 the government approved the Companies (Amendment) Ordinance, 2018 suggesting for implementation, a host of amendments and relaxations in compliance. This ordinance would have ceased to operate on and from 21st January, 2019.
Since it was necessary to ensure continuity and the Bill, 2019 could not wait for formal approval in the Rajya Sabha when Parliament re- commenced, the President of India, under authority vested in him in Article 123 of the Constitution of India, has promulgated the Companies (Amendment), Ordinance 2019.
The Companies (Amendment) Ordinance, 2019 was issued on 12th January, 2019 after the cabinet cleared the proposal to re-issue the ordinance. Some of the key amendments approved:
8. Amendment in penalties for:
9. Punishments have been substituted by penalties for the following:
Besides the above, there have been various other sections which have been amended.
The emphasis of promulgating the Companies (Amendment) Ordinance, 2019 is to reduce the burden of the special courts – the NCLT. To this effect, the powers of the Regional Director (RD) have been enhanced to try has been from punishments to fines and monetary penalties under various sections to ease the special courts from the burden of dealing with routine voluminous cases and focus on corporate offences of more serious nature.
With the re-issue / re promulgation of the amendment ordinance, offences under a total of 34 sections have been moved from special courts to in house adjudication. Such divesting of routine voluminous to the RD’s and making it an in house adjudication process, is believed to reduce at least 60% of the work load from the special courts thereby allowing them to give more time and attention to matters of serious nature. This will ensure speedy dispute redressal and also timely compliance. .Ease of doing business for companies as well as special courts.
Liquidation of the Company due to Insolvency
Judgement by NCLT, Chennai bench
IDBI Consortium & Suzler India Pvt. Ltd vs. Nagarjuna Oil Corporation Ltd. 10/2017
On 11th December, 2018 the Chennai bench of National Company Law Tribunal (NCLT) ordered for liquidation of the Nagarjuna Oil Corporation (NOCL), an associate company of Nagarjuna Oil Refinery.
Suzler India became the operational creditor as Nagarjuna Oil (Corporate debtor) had an outstanding debt of approximately Rs. 1.24 Crores to be paid to Suzler India.
This brought the curtains down on a case that was originally filed by Suzler India in the Madras High Court and got transferred to the Chennai bench of the NCLT in July, 2017 consequent to the enactment of the Insolvency and Bankruptcy Act. An Interim resolution professional was appointed in August, 2017. The first Committee of Creditors (CoC) meeting was held in October, 2017where in Expression of interests (EOI) were invited in the first round. Bharat Petroleum (BPCL) and Citax Energy submitted bids. BPCL’s bid amount was too low while Citax wanted a Bank guarantee which was not entertained by the CoC. Hence a second round of EOIs were invited to submit bids in April, 2018. Haldia Petrochemicals and Gulf Petroleum also submitted their bids in this round. Both were rejected. Both filed application with the NCLT which directed them to submit their bids. They resubmitted their bids in July, 2018. In the final CoC meeting in July, 2018, the bids were analysed and it was found that Gulf petroleum’s bid amount was much lesser than the liquidation value, while in the case of Haldia, there were several conditions precedent to releasing payment that made it look unstable. In that meeting, the CoC unanimously passed a resolution with a 100% vote, to liquidate the company. Consequently, the IRP moved the NCLT seeking an order to liquidate Nagarjuna Oil. In December, 2018 the Chennai bench of the NCLT passed an order directing the liquidation of Nagarjuna Oil Corporation Limited. it further directed the Company Liquidator to issue a public statement to that effect within 2 days from date of receipt of order.
To discover and disclose to a magistrate any secret crime.
Accumulation of unfilled orders.
In the civil law, property of an inheritable quality; property such as descends to an heir.
Damage; the loss or diminution of what is a man’s own, either by fraud, carelessness or accident.
Brothers in Arms
IN THE NAME OF THE FATHER (1993) (Movie)
This 1993 movie is based on the true story of Guildford bombings in 1974 when members of the Irish Republican Army (IRA) detonated bombs in two popular pubs frequented by British soldiers. 4 soldiers and a civilian were killed while many were wounded. The bombings escalated tension in the already troubled Northern Ireland. In the backdrop of riots and unrest, four people – the “Guildford four” were arrested and convicted to life imprisonment. One of the four - Gerry Conlon vociferously protested against the conviction stating they were innocent and the police tortured them in to confessing to the bombings they never committed. To add further agony, Gerry Conlon’s father who had gone to Belfast to help his son with legal defence and few other family members were also arrested. Known as the “Maguire Seven”, they were convicted to life in prison as scientists falsely proved that they has nitro glycerine which was used in the bombs. In prison, Gerry meets the original perpetrator of the bombings who tells him that the police knew of the real criminals and yet covered up in order to save themselves from the embarrassment of a botched up investigation. When Gareth Pierce, a lawyer fighting human rights injustice takes on the case, things look hopeful for Gerry and his father as she begins systematically uncovering the truth. Gareth establishes about the cover up in the appeal that leads to the immediate overturning of the conviction and release of the four. By that time though the Gerry Conlon has served 15 years in prison and his father Giuseppe Conlon has died in prison.
The movie is a poignant yet hard hitting adaptation of the biography - Proved Innocent: The Story of Gerry Conlon of the Guildford Four. It was nominated for a host of awards including the Academy Awards. Realistic performances by a stellar cast and the tragic and happy ending of the story makes the movie an absolute must watch.
SILENT JUSTICE - WILLIAM BERNHARDT (2000)
(Book / Novel)
A legal thriller that inter twines two parallel stories interestingly. An industrial giant is charged with polluting the water with intoxicating substances that results in the death of young children in a small town in Tulsa, Oklahoma. Affected families seek justice through a class action law suit against the corporation. The job is entrusted to Ben Kincaid - an affable lawyer who though not exactly competent in class action cases takes up the case on behalf of the community. The corporation hires the largest and the most powerful law firm with cut throat lawyers representing the corporation. Added to the challenge is the notoriety of the Judge who is known to favour such law firm. As the community and lawyers prepare to commence the case, the town is besieged by a series of sadistic murders / killings. Slowly the lawyer uncovers a dramatic relationship between the case on hand and the gruesome murders. Read the 9th novel in a series of legal fiction by William Bernhardt to unravel the connection.
SHARK (2006-2008) (TV Series)
A hot shot lawyer in Los Angeles gives up his flourishing criminal defence career after his defence of a wife abuser results in the death of the wife. Disillusioned, he plans to quite practicing law when he is invited to become public prosecutor with the District Attorney. He forms his own private team and encourages them to keep pace with his speed and experience in solving crimes. I doing so he maintains the delicate balance between doing all it takes to get to the bottom of the case while staying within the ambit of law.
Law is social engineering
– Roscoe Pound
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Sanjeev Memorial Foundation v. Kamrup Housing Projects Pvt Ltd. 10 / 2019
The Appeal was dismissed as there was no illegality in the order passed by NCLT
R.C. Dhandapaani v. Vengarai Seshadri Sowrirajan & Anr. 391 / 2018
Appeal dismissed as the Promoter was ineligible to file “resolution plan”
Sharad Kesarwani v. Planetcast Media Services Limited & Anr. 272 / 2018
Appeal admitted as Demand notice was not issued to the present address of the Debtor
B.K. Bhuwania Bhunania v. TDI Infrastructure Limited 103 / 2018
Application dismissed as Infructuous with liberty to file claims before the IRP
My Box Technologies Private Limited v. Siti Vision Digital Media Private Limited 1475 / 2018
Application dismissed with liberty to revive it if the issued cheques were dishonoured