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In the Indian context, the Satyam incident has been a wake-up call for policy- makers. Pursuant to the global trend of shift from SRO model to an independent regulatory model for audit profession, the Companies Act, 2013 provided for the setting up of the National Financial Reporting Authority (NFRA).

However, the continued opposition to the establishment of NFRA has delayed the implementation of this critical reform. Consequently, although Companies Act, 2013 was enacted in August 2013, the section establishing NFRA was notified only on March 21, 2018 along with the NFRA Chairperson and Members Appointment Rules, 2018. Once NFRA becomes fully operational, it will be adequately equipped to handle the contemporary challenges in relation to auditors, audit firms and networks operating in India.

31. Pursuant to the provisions contained in clauses (2) and (3) of Rule 3, every existing body corporate other than a company governed by that Rule is obliged to furnish the particulars of its auditors in Form NFRA-I.

32. Apart from the various functions and obligations which have been placed upon the NFRA by virtue of Section 132(2), one of its principal statutory responsibilities is to undertake an investigation and inquiry in respect of professional or other misconduct. This power flows from sub-section (4) of Section 132 which empowers the NFRA to undertake disciplinary action against a member or firm of chartered accountants registered under the CA Act. By virtue of the Proviso appended to Section 132(4), no institute or body is entitled to initiate or continue proceedings in respect of misconduct once the NFRA has commenced an investigation in terms of that Section. Section 132(4) thus confers a power upon the NFRA to initiate an investigation either suo moto or on a reference made to it by the Union Government. The penalties which it could impose, in case where professional or other misconduct is proved, is set out in Section 132(4)(c). As is manifest from a reading of that provision, the NFRA stands empowered to impose not just monetary penalties but also debar a member or the firm from being appointed as an auditor, internal auditor or undertaking an audit in respect of financial statements of any company or body corporate for a minimum period of six months or such larger period not exceeding 10 years as may be determined by the NFRA.

FACTUAL MATRIX

36. Having broadly sketched out the statutory scheme which prevails, this would constitute an appropriate juncture to notice some of the salient facts which preceded the institution of the present writ petitions.

37. Deloitte Haskins & Sells LLP 12 had issued an audit report for IL & SL Finance Service Limited 13 for Financial Year14 2017-18 on 28 May 2018. The audit of IFIN was stated to be a joint audit which it conducted along with BSR and Associates LLP15 and the audit report itself being jointly signed by DHS and BSR. On 12 February 2019, NFRA addressed an email to DHS requiring it to submit the audit file and audit report drawn by it in respect of IFIN for FY 2017-18. In terms of a subsequent mail, the aforesaid request was reiterated by NFRA with it being observed that the aforesaid audit file was required to enable it to perform and undertake an initial review of the compliance by DHS with the applicable auditing standards. The audit record is stated to have been submitted by DHS to NFRA on 11 March 2019. On 28 June 2019, NFRA conveyed its prima facie observations and conclusions to DHS. DHS submitted a response dated 03 August DHS IFIN FY BSR 2019 refuting the various prima facie observations which had been conveyed by NFRA.

39. On 30 October 2019 some of the engagement team members who had performed the IFIN audit for FY 2017-18 made a representation before the NFRA. This was followed by written submissions being tendered by DHS to the NFRA in response to the various observations, comments and conclusions appearing in the DAQRR. NFRA, thereafter, circulated the Audit Quality Review Report18 where significant conclusions relating to fraud and collusion with IFIN management came to be alleged. On 17 January 2020, based on the conclusions contained in the aforenoted AQRR, NFRA issued a Show DAQRR EQCR AQRR Cause Notice 19 under Section 132(4) upon Mr. Udayan Sen. Separate SCNs dated 24 and 28 January 2020 came to be issued against Mr. Shrenik Baid and Mr. Rukshad Daruvala, respectively. The aforenoted partners of DHS assailed the validity of the SCNs by filing writ petitions before this Court. Those writ petitions also questioned the constitutional validity of Section 132(4) of the Companies Act as well as the jurisdiction of NFRA to investigate matters of professional and other misconduct in respect of audits which had come to be concluded prior to Section 132 coming into force.