17 January, 2019
National Financial Reporting Authority
Pursuant to the notifications dated October 1, 2018 and October 24, 2018, the National Financial Reporting Authority (‘NFRA’) has been constituted and the Ministry of Corporate Affairs (‘MCA’) has notified the provisions under the Companies Act, 2013 (‘Companies Act’) dealing with the powers and duties of the NFRA, appeals against orders of the NFRA as well as certain procedural and compliance requirements for the NFRA. NFRA’s duties include making recommendations to the Central Government on accounting and auditing policies and standards for adoption by companies and their auditors, monitoring and ensuring compliance with the aforementioned accounting and auditing standards, and overseeing the quality of services of professions associated with these. NFRA has been granted the authority, inter alia, to investigate matters of professional or other misconduct committed by any member or firm of chartered accountants, and to pass orders (covering both imposition of fine and debarment) in such matters. An appeal against an order of the NFRA can be preferred before the Appellate Tribunal. However, the rules in relation to this are yet to be prescribed.
Subsequently, on November 13, 2018, the MCA also notified the National Financial Reporting Authority Rules, 2018 (‘NFRA Rules’) which specify that, inter-alia, the following classes of companies and auditors are subject to the governance and supervision by the NFRA in relation to accounting and auditing standards and compliances:
i. Indian companies listed in India or overseas;
ii. unlisted public companies with paid up capital of ¤ 500 crores (approx. US$ 72 million) or more, or annual turnover of ¤ 1000 crores (approx. US$ 140 million) or more, or having outstanding loans, debentures and deposits (in aggregate) of ¤ 500 crores (approx. US$ 72 million) or more, in each case as of March 31 in the previous financial year;
iii. insurance companies, banking companies, electricity generating and supply companies and companies governed by a special legislation;
iv. any body corporate or person who is referred to the NFRA by the Central Government in public interest; and
v. any foreign body corporate which is a subsidiary or an associate company of an Indian company or other body corporate referred to in (i) to (iv) above, provided that the income or net worth of such foreign subsidiary or associate company exceeds 20% of the consolidated income or consolidated net worth of such Indian company or other body corporate.
All existing body corporates covered under the NFRA Rules (other than companies governed by the NFRA Rules) are required to file Form NFRA-1, setting out the particulars of their respective auditors, within 30 days from the date of deployment of Form NFRA-1.
Companies (Amendment) Ordinance, 2018
The Companies (Amendment) Ordinance, 2018, which was promulgated on November 2, 2018, to further amend the Companies Act to give effect to the recommendations made in the Report of the Committee to Review Offences under the Companies Act, has been re-promulgated pursuant to the Companies Amendment Ordinance, 2019 (‘Ordinance’) dated January 12, 2019 as the earlier ordinance would have ceased to be operational from January 21, 2019. The Ordinance will remain valid for a maximum period of six weeks from the reassembly of the Parliament, unless prior to the expiration of the six week period, the Ordinance is: (i) disapproved by both Houses of Parliament; or (ii) withdrawn; or (iii) replaced (and repealed) by a law amending the Companies Act, which is passed by both Houses of Parliament and is duly approved by the President and notified. The Companies (Amendment) Bill, 2018 has also been introduced in the Lok Sabha, whose provisions are substantially the same as the Ordinance. Some of the key changes brought about by the Ordinance pertain to:
i. Changes to regime relating to offences and penalties:
- 16 offences have been re-categorised as defaults carrying civil liabilities which would be subject to an in-house adjudication framework;
- Section 454 dealing with adjudication of penalties has been amended to ensure compliance upon default and has also provided for higher penalties in the event of repeated defaults;
- penalties for non-compliance with certain provisions have been amended such that the maximum penalty remains unchanged, while introducing a penalty for continuing non-compliance of such provision.
ii. De-clogging the NCLT: Earlier, the approval of the National Company Law Tribunal (‘NCLT’) was required to approve certain actions (such as a change in the financial year). The Ordinance has now empowered Regional Directors of the Registrar of Companies to ease the NCLT’s caseload.
iii. Strengthening compliance: Certain provisions to enhance compliance have been introduced, such as re-introduction of the declaration for commencement of business post incorporation of companies and the power of the Registrar of Companies to cause a physical verification of the registered office. This is applicable to companies incorporated after November 2, 2018.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
