NFRA has appealed to the Supreme Court against the Delhi High Court’s decision quashing show-cause notices to major audit firms for procedural lapses in disciplinary actions, impacting ongoing proceedings.
New Delhi: The National Financial Regulating Authority (NFRA) has moved the Supreme Court against the Delhi High Court’s decision to quash show-cause notices issued to leading audit firms, including Deloitte Haskins & Sells LLP and SRBC & Co LLP, along with prominent Chartered Accountants (CAs).
A Supreme Court Bench comprising Chief Justice of India (CJI) Sanjiv Khanna and Justice Sanjay Kumar heard the matter briefly and admitted the NFRA’s appeal, issuing a notice returnable by April 28.
The Delhi High Court’s ruling on February 7, while upholding the NFRA’s authority to take action against auditors for professional misconduct, found procedural lapses in how disciplinary proceedings were initiated.
The High Court emphasized that the NFRA must operate in divisions. It ruled that the division conducting audit quality reviews should not be the same one initiating disciplinary actions. Citing this procedural lapse, the High Court quashed several show-cause notices (SCNs) and the related disciplinary proceedings.
The NFRA has now challenged the High Court’s decision to invalidate the SCNs. Representing the NFRA, Solicitor General Tushar Mehta argued that the regulatory body is a composite entity with only three full-time members, making it difficult to strictly function in separate divisions.
“This has wide ramifications … Based on audit quality review report (AQRR) show cause notices are issued. Where there are no AQRRs also, those show cause notices (have also been) set aside (by Delhi High Court) … We are a composite body and we cannot work in divisions,”
Mehta told the court.
The Supreme Court refused to stay the Delhi High Court judgment but allowed NFRA to continue its disciplinary proceedings in cases where AQRRs had been prepared as well as those where an AQRR was yet to be issued. However, it clarified that final orders passed by the NFRA should not be implemented for now.
“This is a detailed judgment which we cannot stay like this … Show cause notice is by a different authority and assessment is by another different authority … You can continue the proceedings as per the judgment,”
observed CJI Khanna.
The Court further stated that if a show-cause notice was quashed, the NFRA could issue a fresh notice while ensuring compliance with the High Court’s procedural directions.
Senior Advocate Kapil Sibal appeared for Deloitte Haskins & Sells LLP during the proceedings.
The case is now set for further hearings as the Supreme Court examines the NFRA’s challenge.
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