NCLAT upholds NFRA order debarring DHFL branch auditor

The National Company Law Appellate Tribunal has upheld the orders by the National Financial Reporting Authority against the auditors of erstwhile Dewan Housing Finance Corporation Ltd.

The case pertains to an order by the NFRA in April, when it had debarred and imposed monetary penalties for audit lapses in 17 branch audits of DHFL by four partners of the firm K Varghese & Con who had been working as engagement partners. Four appeals had been filed challenging the orders of NFRA. 

In its recent order, the NCLAT dismissed the appeals and held that “NFRA has superior and overriding powers in matters relating to professional misconduct of the Chartered Accountants in terms of Section 132 of Companies Act, 2013…”

The ruling is expected to give further backing to the NFRA, which was set up in 2018 as a statutory body to monitor the implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. 

The NCLAT also held that NFRA has “retrospective” jurisdiction in initiating proceedings against auditors or audit firms in respect of the audits conducted prior to NFRA coming into force and said that for matters of misconduct committed prior to coming into force of Section 132 (4), NFRA can initiate an investigation.

“…after taking into consideration the background for forming NFRA, the judgment of the Apex Court, proven scams, need to restore shaken confidence of public and investors at large and prevent any adverse impact on Indian economy, we hold that NFRA has clear and required retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants for period prior to formation of NFRA or prior to coming into effect relevant portion of Section 132 of Companies Act, 2013,” the NCLAT said in its order.

Underlining that auditors must realise their responsibilities which is necessary not only to the company but also to the public, the NCLAT said that giving effect to the NFRA orders which highlights the professional misconduct and other misconduct on the part of the appellant vis-à-vis a public listed company become quintessential so as to make public aware and enable them to make informed and sound financial decisions and investments.

“NFRA, as an independent audit regulator has been entrusted by the Parliament after great debate for protecting public interest including of the creditors by exercising effective oversight over accounting and auditing functions,” said the ruling by NCLAT bench of Rakesh Kumar Jain, Member (Judicial) and Naresh Salecha, Member (Technical).

The erstwhile DHFL was merged with Piramal Capital and Housing Finance Ltd in September 2021. Based on media reports on the alleged siphoning of public money of around Rs 31,000 crore and the Enforcement Directorate’s reported action in April 2020 on an alleged banking fraud of about Rs 3,700 crore by the promoter and directors of DHFL, NFRA took suo motu notice of the matter and conducted an Audit Quality Review (AQR). Since then, the NFRA has passed a number of orders against the auditors of DHFL.