24 June 2022
Ministry of Corporate Affairs introduces National Financial Reporting Authority Rules, 2022

The Ministry of Corporate Affairs (MCA) has issued a notification regarding an amendment to the National Financial Reporting Authority (NFRA) Rules, 2018 with the introduction of NFRA, 2022 effective immediately.

Furthermore, the following changes are made in Rule 13 of NFRA Rules.
 
NFRA Rules, 2018 NFRA Rules, 2022
Earlier, the penalty for NFRA Rules, 2018 was read along with Section 450 of the Companies Act, 2013 i.e. as follows:

In case of contravention of any of the provisions of the rules
  1. The Company and every company officer who is in default or such other person shall be liable to a penalty of INR 10,000.
  2. In case the contravention continues, a penalty of INR 1000 per day will be levied after the first instance, and the amount can go upto a maximum of INR 2,00,000 for a Company and INR 50,000 in case of an officer who is in default or any other person.
 Through the amendment rules, the following shall be substituted in Rule 13 i.e. as follows:

In case of contravention of any of the provisions of the rules
  1. A maximum fine of INR 5,000 will be levied on whoever contravenes the provisions of these rules.
  2. And where the contravention continues, a fine not exceeding INR 500 each day will be levied.

Our Comments
  • NFRA was enacted as an independent authority by the Government of India as proposed in Section 132 of the Companies Act, 2013, to oversee the auditing profession and accounting standards of the specified Companies in India. Independent audit regulators are present in most major economies of the world, and India as the world's largest economy should have one. The requirement of NFRA originated from the need to tighten the corporate governance and reporting requirements for the corporate entities in the backdrop of recent corporate failures and financial scams.
  • In the last year, NFRA has been actively strengthening the fundamentals of accounting standards. In this notification, NFRA has amended the penalty in case of infringement of NFRA Rules. Earlier, it had a dependence on Section 450, i.e. (Punishment where no specific penalty or punishment is provided) of the Companies Act, 2013 was applicable and referred. Now, the reference to the Companies Act is dropped and the rule itself prescribes the penalty quantum.
  • This amendment reduces the one-time penalty volume, but maximum limits are removed for the continuing default exposing the defaulter to a higher monetary risk.
  • Overall the industry has welcomed the rationalization of penalties, but it is expected that audit professionals should not deviate from professional standards and compliance requirements.

The notification link is attached for your ready reference: Notification dated 17 June 2022
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