NFRA: The threshold limit has to be pragmatic, says Amarjit Chopra

Let us first try to understand why it took five years for NFRA to be notified. The Companies Act 2013, vide Section 132, had envisaged constitution of the NFRA. But due to the efforts of the ICAI, it did not get notified. It was argued by the ICAI that the governing council is composed of 40 members, out of which eight are government nominees. Similarly, the ICAI’s disciplinary committee has government nominees as its members. Also, the number of disciplinary-related cases decided by the ICAI was presented to the government. Barring one or two years, the number of cases decided has been credible. It was also explained that in high-profile cases various courts were granting stay leading to delay in judgements. All these arguments found favour with the government and Section 132 despite being there was not implemented for five years.

There were times when the demand for constitution of the NFRA became louder but with the efforts of the council and the cooperation of certain political leaders who saw merits in the ICAI arguments, its formation did not take place. The scam in Punjab National Bank (PNB) undid all the efforts of the ICAI and the Cabinet approved constitution of the NFRA in a diluted form. Whereas disciplinary cases in respect of listed entities and unlisted entities above a threshold limit (which to my mind would be quite significant) would be dealt with by the NFRA, all other cases would be dealt with by the ICAI. This would mean that a large part of the membership would be still under the ICAI disciplinary mechanism.

The day NFRA would be notified, the National Advisory Committee on Accounting Standards (NACAS) would come to an end. Earlier, accounting standards were being prepared by the ICAI, approved by the NACAS and notified by the government. Now, the same procedure would be applicable to notification of standards on auditing.

Bureaucracy had been pushing for the NFRA, citing examples from other countries but the political leadership resisted such move. The PNB scam created an environment socially and politically for the government that it could not be delayed further.

Questions are being raised whether a dual regulatory structure would work. In my view, the dual structure is the best case scenario for the constitution of the NFRA.

However, for the NFRA to be effective, the threshold limit has to be pragmatic. The NFRA should focus on cases where substantial public interest is involved. The technical committee and the enforcement committee of the NFRA should have experts in accounting, auditing and the disciplinary mechanism. 

There is an issue that needs to be addressed in case of listed banks, non-bank finance companies or similar such entities. Should the branch auditors of these entities be covered by the NFRA? In my view, even if it were so, this should be in respect of branches that conduct a large amount of business, keeping in view the overall entity size.