Introduction
Five years after the
Companies Act, 2013, MCA vide its Notification dated 01st October,
2018 constituted National Financial Reporting Authority (“NFRA”) and notified sub-sections (1) and (12) of Section 132 of
the Companies Act, 2013 (“Act”) to establish an independent regulator to
strengthen the audit profession and to provide for matters relating to
accounting and auditing standards. Further, by notification dated 24th
October 2018, the Ministry notified the remaining sub-sections of Section 132
of the Act.
Subsequently, the National
Financial Reporting Authority Rules, 2018 (“NFRA
Rules”) notified by the Ministry vide its Notification dated 13th
November 2018, w.e.f 13th November 2018. The NFRA rules deal with the
jurisdiction (scope), function, duties and powers of the NFRA. In this Article,
we have covered applicability of the Rules and confusions among the corporate professionals due to ambiguities
in the Rules.
Facts behind NFRA (An
audit Super Regulator)
Section 210A of the
Companies Act, 1956 empowered the Central Government to form a National
Advisory Committee on Accounting Standards (“NACAS”)
for making recommendation(s) on accounting policies and accounting standards to
the Government. After introduction of Companies Act, 2013, NACAS was replaced
by National Financial Reporting Authority (NFRA). Further, the Standing
Committee on Finance in its Thirty-Seventh Report on the Companies (Amendment)
Bill, 2016 recommended for expansion of the role of NFRA.
Considering the above, through
Section 132 of the Act, a new regulatory authority (NFRA) introduced with an enhanced
independent power to shift from the existing self-regulatory mechanism to an
independent regulatory model. NFRA has been constituted as a quasi-judicial
body with larger remit than NACAS which only advised on accounting policies and
standards.
Jurisdiction of NFRA (Applicability
of the Rules)
As per the Rule 3 (1) of
NFRA Rules, 2018, NFRA will have jurisdiction over the following class of
companies or bodies corporate, namely:
1. Indian
Companies whose securities are listed on any stock exchange in India or outside
India;
2.
Unlisted public companies falling under the below threshold as on 31st
March of immediately preceding Financial Year:
- having paid-up capital of not less than Rs. 500/- crores or;
- having annual turnover of not less than Rs. 1,000/- crores or;
- having, in aggregate, outstanding loans, debentures and deposits of not less than Rs. 500/- crores.
3.
Insurance companies, banking companies, companies engaged in the generation /
supply of electricity, companies governed by any special Act (i.e RBI, SBI,
UTI, LIC, etc) and bodies corporate incorporated by an Act as the Central
Government may specify by notification.
4.
Body Corporate/Companies/Persons or any class of them referred by the Central
Government to the NFRA in public interest;
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; and
b.
Income or net worth of such Subsidiary or Associate company exceeds 20% of the
consolidated income or consolidated networth of such company or the body
corporate.
Further, the companies or
body corporates, other than a company governed under this rule, shall continue
to be governed by the Authority for a period of three (3) years after it ceases
to be listed or its paid-up capital or turnover or aggregate of loans,
debentures and deposits falls below the limit stated therein. (Rule 3(4))
[Note: here
3 years of monitoring period is applicable only for Body Corporates, if any referred
by the CG as referred in point (3) and (4) above and for foreign Subsidiary or
Associate company as referred in point (5) above]
Graphical Presentation
of applicability of the NFRA Rules
Non-Applicability of
Rules
Considering the above
rule 3, following classes of companies will not be governed by NFRA:
1.
Private Companies;
2.
Unlisted public companies with paid-up capital or turnover or aggregate of
loans, debentures and deposits below the limit stated in Rule 3(1) and
3.
Limited Liability Partnership (LLP)
[Note: this
exemption is always subject to point (4) above where the Central Government may
refer any Body Corporate/Companies (including Private Company)/Persons to the
NFRA in public interest]
Reporting to NFRA &
Ambiguities in the Rules
As per Rule 3(2), Every
existing body corporate other than a company governed by these rules, shall
inform the Authority about details of the auditor(s) as on 13th
November 2018 by 12th December, 2018, in Form NFRA-1.
On a plain reading of
Rule 3 (2), all existing companies which are not covered by the NFRA Rules, are
also required to file form NFRA-1, intimating about the details of the auditors
which is completely vague. Also, covering all type of companies, big and small to
file the form about their auditor’s details is NOT the intent of the Rules.
Further, confusion persist as to reporting by the LLPs, as the rule states “every
existing body corporate” which includes LLPs. The text of the provisions will be
clear only if the punctuation is properly placed as below:
(2) Every existing body
corporate, other than a company, governed by these rules, shall inform . . .
Otherwise, it can be read
either ways – ‘Stop! not let go or Stop not, let go’.
Therefore, considering
the intent of the law, only "bodies corporate and companies governed by
the Rule 3(1)", those that are not companies, will have to file form
NFRA-1, on one-time basis under Rule 3 (2), and every time there is a change,
under Rule 3 (3). In other words, only Body Corporates, if any referred/specified
by the CG and foreign Subsidiary or Associate company as referred in rule 3(1)
are required to file form NFRA-1 initially.
As per Rule 3(3), Every
body corporate, other than companies incorporated under the Companies Act (i.e
Indian Companies), formed in India and governed under this rule shall, within
fifteen (15) days of appointment of an auditor under section 139(1), inform the
NFRA in Form NFRA-1, the particulars of the auditor appointed by such body
corporate:
Further, a body corporate
governed under Point 5 above (foreign body corporates) shall provide details of
appointment of its auditor in Form NFRA-1. (i.e foreign Subsidiary or Associate
company)
Subsequent disclosure
about the appointment of auditor is governed by the Rule 3(3), as per the rule,
Indian Companies are exempted from filing form NFRA 1. Only body corporate formed
in India and governed under this Rule 3(1) and foreign Subsidiary company or
Associate company as per Rule 3(1) are required to file form with NFRA. Here
also confusion arises as to reporting by the LLPs, as the rule says “every body
corporate formed in India” which again includes LLPs. Here, another ambiguity
is, Whether all the foreign body corporates are required to file NFRA 1 or only
those corporate falling under the threshold limits is required to file form
with NFRA? Since, the rule 3(2) & 3(3) states “every body corporate”
without referring the body corporate fulfilling the threshold limits of Rule
3(1).
Graphical Presentation
of filing Requirements under the Rules
Note: e-form NFRA 1 is yet to be hosted by the MCA in its portal
though the last date is 12-Dec-2018.
Annual Return by
Auditor(s)
Every auditor governed by
the NFRA (as referred to in Rule 3) shall file a return with the NFRA on or
before 30th April every year in such form as may be specified by the
Central Government.
Wherever the auditor is
mentioned, it is only an auditor of a company or a body corporate under section
139 of the Act (i.e Statutory Auditor) or under any other Act for the time
being in force. Hence, Internal Auditors (S. 138), Cost Auditors (S. 148) and
Secretarial Auditors (S. 204) of the Company or body corporate are not subject
to NFRA.
Conclusion
The new super regulator
has been entrusted with independent powers and large number of responsibilities.
Considering the vide powers, ambiguities
in the Rules due to drafting error may be rectified or clarified by way of
suitable circulars to avoid confusions among the corporate professionals and
corporates and such clarifications alone will pave way for better understanding
of scope and applicability of NFRA Rules.
***
DISCLAIMER:
The information given in this document
has been made on the basis of the provisions of the Companies Act, 1956/2013 and
Rules made thereunder. It is based on the analysis and interpretation of
applicable laws as on date. The information in this document is for general
informational purposes only and is not a legal advice or a legal opinion. You
should seek the advice of legal counsel of your choice before acting upon any
of the information in this document. Under no circumstances whatsoever, we are
not responsible for any loss, claim, liability, damage(s) resulting from the
use, omission or inability to use the information provided in the document.
