Amidst of all the big-ticket corruption pertaining to window dressing of the Accounts and failure of the statutory auditors in pointing out the same and in many other cases hand in glove situation between corporate and auditor in concealing the failure of corporate governance pressed the Government to come up with the authority to regulate the statutory auditor.
With the enactment of Companies Act, 2013, Government came up with the provision of National Financial Reporting Authority under Section 132. Subsequently by exercising the power conferred under sub-sections (2) and (4) of section 132, sub-section (1) of section 139 and sub-section (1) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government came-up with the National Financial Reporting Authority Rules, 2018.
National Financial Reporting Authority Rules, 2018 is further divided into 19 different rules; however, in this write-up, I am focusing on Rule 3 only since it is the most important rule from the point of view of Company.
Before moving further with Rule 3, I like to reproduce two definitions from the Companies Act, 2013 which are being used here and which will help us in understanding these rules in a better way.
First one is Body Corporate:- 2(11) "body corporate" or "corporation" includes a company incorporated outside India, but does not include -
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;
The second one is 2(20) "company" means a company incorporated under this Act or under any previous company law.
Coming back to Rule 3, Rule 3 is further divided into 4 sub-rules. Where the sub-rule 1 elaborates the Bodies corporate and classes of company on which these rules are applicable.
Sub-rule (2) refers to the one-time return and sub-rule 3 refers to an event-based return to be filled by Bodies corporate whenever new auditor is appointed. Sub-Rule 4 refers to the fact that once any Body Corporate and or class of companies begin to governed by these rules then they keep on governing by these rules for 3 years from the date they cease to fulfill the criteria mentioned in sub-rule 1.
"Rule 3 Classes of companies and bodies corporate governed by the Authority."
(1) The Authority shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under sub-section (2) of section 132 or undertake an investigation under sub-section (4) of such section of the auditors of the following class of companies and bodies corporate, namely:-
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having an annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act;
(d) any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or net worth of such subsidiary or associate company exceeds twenty per cent. of the consolidated income or consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d).
(2) Every existing body corporate other than a company governed by these rules, shall inform the Authority within thirty days of the commencement of these rules, in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules.
(3) Every body corporate, other than a company as defined in clause (20) of section 2, formed in India and governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1) of section 139, inform the Authority in Form NFRA-1, the particulars of the auditor appointed by such body corporate: Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment of its auditor in Form NFRA-1.
(4) A company or a body corporate other than a company governed under this rule shall continue to be governed by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or aggregate of loans, debentures and deposits falls below the limit stated therein.'
Sub-Rule 1 talks about the Bodies corporate and class of companies governed by these rules, and power of the National Financial Reporting Authority over the Auditor of these Bodies corporate and classes of companies governed by these rules.
Power includes enforcing compliance with accounting and auditing standard, overseeing the quality of services rendered by these Auditors and undertaking investigation of these auditors.
Bodies corporate and classes of companies governed by these rules are;
(a) companies whose securities are listed on any stock exchange in India or outside India;
In this point it is to be noted that the word 'securities' has been used in place of shares, hence we have to understand the definition of securities as per Clause(H) of Section 2 of SCRA, 1956.
'securities' include -
(i)shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;
So if any of the above-mentioned securities are listed, whether securities are listed in India or abroad, then the company will be governed by these rules.
Points B, C, D, and E are self-explanatory so I am not going into their detail explanation. After considering the criteria following bodies corporate and classes of company are not governed by these rules.
(a) Unlisted Public Company not falling within the limits mentioned in point (B) i.e.
- unlisted public companies having paid-up capital of less than rupees five hundred crores or
- having an annual turnover of less than rupees one thousand crores or
- having, in aggregate, outstanding loans, debentures and deposits of less than rupees five hundred crores,
as on the 31st March of immediately preceding financial year.
(b)Private Limited Company.
(c) Limited Liability Partnership.
(d) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or networth of such subsidiary or associate company does not exceed twenty percent of the consolidated income or consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d).
Sub-Rule(2) of Rule 3 talks about one time return to be filed by the Body Corporate, however, due to drafting error it seems that 'Every Body Corporate other than company governed by these rules shall file NFRA-1 within 30 days of the commencement of these rules.'
In order to give clarification, MCA issued circular number 12/2018 dated 13th of December, 2018, extending the time to 30 days from date of deployment of the form on the website of National Financial Reporting Authority and also excluded the companies as defined under section 2 clause (20) of the Companies Act, 2013.
In this flow chart, we can see that if entity falls within the criteria as fixed in Sub-rule 1 'a to c' and such entity file ADT-1 then there is no requirement for filing NFRA-1 and in case of company don't file ADT-1 then the company need to file NFRA-1.
For example, all those entities governed by Special Act such as SBI since it is governed by the SBI Act, 1955 does not need to file ADT-1 so subject to other condition it may need to file NFRA-1.
If the entity does not fall with the criteria 'a to c' of sub-rule 1 of rule 3 then we will check for criteria as specified under 'e' and if they fall within the criteria then they have to file NFRA-1 otherwise they don't need to file NFRA-1.
In the case of Rule 3 sub-rule 1 (d), its special case and will be applicable on the recommendation of the central government.
Sub-Rule 3 of Rule 3 refers to the event-based return for every body corporate incorporated in India and for body corporate incorporated outside India if they fulfil the condition specified in Rule 3 sub-rule (1) (e). In these two cases, NFRA-1 needs to be filed within 15 days appointment of a new auditor. Sub-rule (3) also excludes the company as defined in Section 2 clause (20).
Sub-rule (4) states that Body Corporate or company will continue to governed by this rule for three years after it ceases to fulfill the criteria specified in sub-rule (1).
After reading the Rule 3 it is clear that; all the auditors of classes of company and bodies corporate falling within the criteria specified in Rule 3 Sub-Rule 1 will be governed by these rules, notwithstanding the fact that they don't need to file NFRA-1 if they are exempted under sub-rule (2) and (3).
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