Delhi High Court Grants Interim Relief to EQCR Partner, Questions NFRA’s Jurisdiction: In a significant ruling, the Delhi High Court has prima facie held that an Engagement Quality Control Reviewer (EQCR) partner does not fall within the definition of an “auditor” as per the National Financial Reporting Authority (NFRA) Rules. The court observed that the EQCR partner is not appointed as a statutory auditor under Section 139 of the Companies Act, 2013, and thus, the NFRA may lack jurisdiction to initiate disciplinary proceedings against such professionals.
The court granted interim relief, staying further proceedings pursuant to a show-cause notice issued by the NFRA. This decision comes in response to a writ petition filed by Sunil Wahal, challenging the NFRA’s authority to issue the notice under Section 132(4) of the Companies Act, 2013, and Rule 11 of the NFRA Rules, 2018.
Background of the Case
The dispute arose from a show-cause notice issued by the NFRA, which sought to hold the petitioner, Sunil Wahal, accountable for alleged professional misconduct in his role as the EQCR partner during the statutory audit of Religare Finvest Ltd. for the financial year 2017-18. The NFRA’s notice was based on its interpretation of its powers under Section 132(4) of the Companies Act and Rule 11 of the NFRA Rules.
However, the petitioner contested the NFRA’s jurisdiction, arguing that the authority’s powers are limited to actions against “auditors” as defined under Rule 2(1)(d) of the NFRA Rules. According to the petitioner, the EQCR partner does not qualify as an “auditor” under the Companies Act or the NFRA Rules, as the role is distinct from that of a statutory auditor appointed under Section 139.
Key Arguments Presented
- Definition of ‘Auditor’ Under NFRA Rules:
The petitioner emphasized that Rule 2(1)(d) of the NFRA Rules defines an “auditor” as an individual or firm appointed under Section 139 of the Companies Act. Since the petitioner was not appointed as a statutory auditor but served as an EQCR partner, he argued that he falls outside the NFRA’s jurisdiction. - Role of EQCR Partner:
The petitioner highlighted that the EQCR partner’s role is defined under Standard 7(c) of the Standard on Auditing (SA) 220, which pertains to quality control for audit engagements. This role, he contended, is supervisory and does not involve the direct responsibilities of a statutory auditor. - Statutory Framework:
The petitioner referenced Section 132(4)(a) of the Companies Act, which empowers the NFRA to investigate “such class of bodies corporate or persons” as prescribed. Rule 3 of the NFRA Rules specifies the classes of companies and bodies corporate that fall under the NFRA’s purview. However, the petitioner argued that the EQCR partner does not fit within these prescribed categories. - Precedent from Bombay High Court:
The NFRA, in its defense, cited an order dated June 13, 2023, from the Bombay High Court in Writ Petition No. 5323/2022, which it claimed supported its position. However, the Delhi High Court found the petitioner’s arguments compelling enough to grant interim relief.
Court’s Observations and Interim Relief
The Delhi High Court, after considering the arguments, prima facie agreed with the petitioner’s contention that the EQCR partner does not fall within the definition of an “auditor” under the NFRA Rules. The court noted that Rule 11 of the NFRA Rules specifically contemplates disciplinary action against “the auditor” and does not extend to other professionals, such as EQCR partners.
In light of these observations, the court granted interim relief, staying further proceedings in response to the show-cause notice. This decision provides temporary reprieve to the petitioner while the court continues to examine the broader legal questions surrounding the NFRA’s jurisdiction.
Legal Representation
The petitioner, Sunil Wahal, was represented by Senior Advocate Abhimanyu Bhandari, along with Arjun Syal, Shreyan Das, and the legal team from Syal and Co. Their arguments successfully persuaded the court to question the NFRA’s jurisdiction in this matter.
Implications of the Ruling
This ruling has significant implications for the auditing profession, particularly for professionals serving in quality control roles. It raises important questions about the scope of the NFRA’s powers and whether it can extend its disciplinary actions to individuals who are not statutory auditors.
For now, the interim relief granted by the Delhi High Court offers clarity on the limitations of the NFRA’s jurisdiction, at least in cases involving EQCR partners. However, the final outcome of the case will be crucial in determining the extent to which regulatory bodies like the NFRA can hold non-statutory auditors accountable for professional misconduct.
Conclusion
The Delhi High Court’s decision to grant interim relief in this case underscores the importance of clearly defining the roles and responsibilities of professionals within the auditing ecosystem. As the legal proceedings continue, this case will likely set a precedent for how regulatory authorities interpret their jurisdiction over non-statutory auditors and quality control professionals.
For now, the stay on further proceedings provides a temporary resolution, but the broader legal questions remain unresolved. The auditing community will be closely watching this case, as its outcome could reshape the regulatory landscape for audit professionals in India.