The National Financial Reporting Authority (NFRA) will be given the powers to draft regulations under a new Bill to be tabled in the winter session of Parliament. The Bill would also provide for creation of a separate fund for NFRA, to make it financially autonomous.
The Corporate Laws (Amendment) Bill, 2025 will bring in a host of changes in both the Companies Act, 2013 and the Limited Liability Partnership Act, 2008. It will seek to amend Section 132 of the Companies Act to give powers to NFRA to make regulations under specific circumstances by taking adequate safeguards, an official said.
NFRA’s Functional and Financial Autonomy
Such powers, the official said, will enable NFRA to act fast on issues that require immediate attention, especially the internal matters pertaining to its functioning. “Currently, the central government has the authority to make rules around NFRA’s functioning. It’s felt that the NFRA can be provided with additional powers for its smoother functioning. As such, regulators like Sebi, RBI, IRDAI, AERA, and others have powers to make regulations on their own,” the official said.
Further, the NFRA chairperson will be given powers of general superintendence, direction and control regarding administrative matters of NFRA.
“Granting NFRA the power to frame its own regulations and operate through an independent fund marks an important shift from a rule bound oversight model to a regulator with functional autonomy. A financially self-sustaining NFRA could respond more quickly to emerging issues in audit quality and financial reporting, something that has been difficult under a purely government-funded structure,” said Kalpit Khandelwal, partner at Aekom Legal.
At present, NFRA receives its funding entirely from the central government, but to maintain its autonomy like other regulatory bodies, financial autonomy of NFRA might be enabled through a dedicated fund. This fund will be used to pay salaries and allowances for chairperson, members and other employees of the regulatory body. In addition, the fund will sponsor other expenses of NFRA related to its functions and purposes.
A 2022 Company Law Committee Report also said that provisions concerning financial autonomy as is present for other regulatory bodies may also be incorporated for NFRA. “For example, Section 222 of the IBC establishes the ‘Board Fund’, which is meant to meet the expenses of the IBBI. Similarly, Section 51 of the Competition Act, 2002 establishes a Competition Fund, which receives monies from Central Government grants; fees received under the Act; and the interest accrued on the amounts received,” the report said.
Experts said that this could be the most decisive reform in India’s audit oversight framework since NFRA was created. “An auditor-regulator that has both financial autonomy and the power to frame operational regulations is better placed to act quickly, investigate rigorously, and deter non-compliance which will ultimately improve the credibility of financial statements relied upon by shareholders, creditors and acquirers,” said a company law expert.
Expanded Penal Powers
It’s also expected that the bill would give more powers to NFRA to take action against auditors and audit firms for non-compliance with Companies Act, especially the violations that do not qualify as ‘professional or other misconduct’. This would include violations of administrative rules of the regulator.
“The main role of the NFRA is to probe and penalise professional misconduct of the auditors, however, there have been instances where auditors or their firms were found to be violating the administrative or procedural rules of the regulator. In such instances, the NFRA will now be empowered to take penal action against the erring individuals or firms, including in cases where its order has not been challenged in the NCLAT,” the official said.
Experts said that there are recent instances of auditors warning auditors for not filing NFRA-2, an annual return to be filed by auditors under Rule 5 of the NFRA Rules, 2018. The due date for filing the return is November 30. Under the new bill, such instances will attract penalties after the due date is over.
