Vinita Nair – vinita@vinodkothari.com; Nitu Poddar – nitu@vinodkothari.com
With the objective of arresting the financial scams that the nation has witnessed of late, the Ministry of Corporate Affairs (MCA) has finally rolled out the National Financial Reporting Authority Rules, 2018 (Rules), from 14 November 2018. The enforcement of the Rules is followed by the coming into force of the third and final phase of section 132 on 24 October 2018.
With the Rules coming into force since 14 November 2018, the corporate and auditor fraternity is hit by a common concern that companies that are not to be regulated by NFRA, will have to file the aforesaid Form before 31 July, 2018, which is extremely close. The reason for the apprehension seems to be the use of the uncommon phrase “Every existing body corporate, other than a company governed by these rules” in sub-rule (2) of Rule 3.
Had this been the case, the entire galaxy of companies incorporated in India would have to file the said Form except for the companies actually governed by the Rules. However, this is neither the purport nor the interpretation of the provision of Rule 3(2).
It is to be noted that NFRA-1 only requires filing of particulars of the auditors in relation to certain body corporate. We should note that all the companies are anyway required to file these particulars in e-form ADT-1 in case of appointment of auditors under Section 139. It is only the body corporates, other than companies, that do not file the particulars of auditors with any regulator. Therefore, these Rules mandate filing of the said particulars by such body corporates.
The NFRA conceived as the single independent authority regulating the audit of the companies and the auditors, has been endowed with wide ranging powers, inter alia, to monitor and enforce compliance of both accounting and auditing standards, to investigate into matters of professional misconduct of the auditors and to initiate disciplinary proceedings towards an auditor.
Applicability and filing particulars of the auditor
There are certain classes of entities (companies, body corporates and persons) who shall be regulated by the NFRA. Of the entire gamut of entities that will be regulated by NFRA, the “body corporates, other than company, falling under Rule 3 (1)” will be required to file the particulars of appointment of auditors with the NFRA in form NFRA-1.
Initial filing has to be done by July 31, 2019 by all such body corporates and going forward, within 15 days of the appointment of the auditor.
Body corporates that will be required to file NFRA-1
Rule 3(2) prescribes that any body corporate, other than a company, governed by the Rules pursuant to falling in Rule 3(1), shall be required to file NFRA-1. The list of body corporates who are required to file NFRA-1 can be better drawn in the following tabular manner:
| Clause No of Reg 3(1) | Particulars | Whether NFRA-1 to be filed? | Rationale |
| a. | Companies whose securities are listed on any stock exchange in India or outside India | No | Since, the listed companies are anyway filing eForm ADT-1 for particulars of auditors, with the Registrar. |
| b. | Unlisted public companies having
a) paid-up capital of not less than Rs 500 crores; or b) having annual turnover of not less than Rs 1000 crores; or c) having, in aggregate, outstanding loans, debentures and deposits of not less than Rs 50 crores as on the 31st March of immediately preceding financial year |
No | Being “companies”, all such companies file eForm ADT-1 for particulars of auditors, with the Registrar. |
| c. | insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act | Only by entities which are not “companies” but “body corporates” | There are few banking companies esp. Public Sector Banks, insurance companies like LIC, that are not “company” incorporated under Companies Act.
Such banks and other entities incorporated under clause (b) to (f) of section 1(4) of Companies Act, 2013 are not “companies” but “body corporates”. Accordingly, such body corporates shall be required to file Form NFRA-1. |
| d. | any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest. | For “body corporates” as may be referred to the NFRA by the CG | This is an enabling provision which empowers Central Government to refer certain class of companies in public interest. |
| e. | a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or networth of such subsidiary or associate company exceeds twenty per cent. of the consolidated income or consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d) | Yes | The requirement will applicable if following conditions are satisfied:
a. The entity should be a body corporate incorporated or registered outside India; and b. The entity should be a subsidiary or associate of an entity covered under clauses (a) to (d); and c. Such subsidiary or associate should be contributing to more than 20% of the consolidated income or networth of the holding entity or investor entity. It is to be noted that subsidiaries/ associates incorporated in India as companies must anyways be filing ADT-1. Therefore, such entities are not covered under these Rules. |
Continued governance
It is to be noted that, pursuant to Rule 3(4), an entity within the ambit of NFRA that eventually ceases to fall within the criteria, “will continue to be governed by NFRA” for three years after ceasing to meet such criteria.
Conflicting provisions under Rule 3(2) and 3 (3)
| Provision | Conflict |
| (2) Every existing body corporate other than a company governed by these rules, shall inform the Authority within thirty days of the commencement of these rules, in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules. | · Rule 3 (1) of NFRA Rules specifies the class of companies which NFRA intends to govern. NFRA shall enforce powers granted under Section 132 only in case of class of companies specified therein.
· Therefore, the form filing cannot be mandated to every body corporate other than companies governed by the Rules. |
| Harmonious interpretation:
Body corporate, other than a company as defined in clause (20) of Section 2, falling under Rule 3 (1) shall be required to file. |
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| (3) Every body corporate, other than a company as defined in clause (20) of section 2, formed in India and governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1) of section 139, inform the Authority in Form
Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment of its auditor in Form NFRA-1. |
· While the initial filing requirement is for all body corporate, other than companies, governed by Rule 3 (1), event based filing is required to be done only by body corporate formed in India, within 15 days of appointment of auditor.
· However, the Rules refer to appointment of auditor under Section 139 (1), which is not applicable to any body corporate. It is only applicable to companies incorporated under the Act. |
| Harmonious interpretation:
Every body corporate doing the initial filing of NFRA 1 shall be required to comply with event based requirement as well within following timeline: Indian Body Corporate [Rule 3 (3)] – within 15 days of appointment of auditor; Foreign Body Corporate [Proviso to Rule 3(3)] – no specific timeline prescribed. |
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Conclusion
While the initiative is commendable, the flawed language and implementation difficulty may dilute the intent and the end result.
The end purpose of filing particulars of auditors is to mandate every auditor of entities referred in Rule to file a return with NFRA on or before 30th April every year in such form as may be specified by the Central Government.
Therefore, body corporate need to assess applicability and ensure timely filing.