Context: The Supreme Court has dismissed appeals against a tribunal order, reinforcing the National Financial Reporting Authority's (NFRA) jurisdiction, even for audits predating its creation in 2018. This development has significant implications for the oversight of corporate and financial sectors in India.

What is the issue?

• The National Financial Reporting Authority (NFRA) was established on October 1, 2018, according to a Ministry of Corporate Affairs (MCA)

• The rules governing NFRA were notified on November 13, 2018. However, the audits (in question) examined by NFRA were conducted for the financial year 2017-18, and the audit reports were issued before NFRA's establishment.

• This led to the argument that NFRA lacked jurisdiction to retrospectively review these audits.

Key Points

• Legal Doctrine: The "doctrine of merger" establishes that when a higher court issues a decision on a case, the lower court's ruling becomes absorbed into it. This principle maintains legal hierarchy and prevents conflicting judgments.

• NFRA's Jurisdiction: The NFRA's retrospective jurisdiction was affirmed by the National Company Law Appellate Tribunal (NCLAT) in December 2023. The tribunal upheld the NFRA's authority over alleged audit lapses, even for audits conducted before its establishment.

• The Supreme Court's refusal to intervene in the NCLAT's decision solidifies NFRA's authority, including its retrospective jurisdiction.

Implications

• The clarity on NFRA's retrospective powers ensures continuity in oversight of statutory audits, avoiding regulatory gaps.

• The Supreme Court's endorsement of the NCLAT's decision establishes NFRA's authority in setting financial reporting standards and norms.

National Financial Reporting Authority (NFRA)

• The National Financial Reporting Authority (NFRA) was established under Section 132 of the Companies Act, 2013, effective from October 1, 2018.

It serves two main purposes

• To create an independent regulatory body responsible for accounting and auditing regulations.

• To enhance trust among investors and the public in a company's financial reporting.

Government Objective

The government's objective in creating NFRA is to:

• Ensure a separate and impartial regulatory body for overseeing accounting and auditing laws.

• Restore confidence in financial reporting following recent corporate scandals.

What is Retrospective Jurisdiction?

• Retrospective jurisdiction refers to the authority of a regulatory body or legal entity to investigate and take action on events or matters that occurred before its establishment or before certain laws or regulations were enacted.