NFRA Retrospective Jurisdiction: Telangana HC Dismisses Writ Petitions Challenging Show Cause Notices for Pre-2018 Professional Misconduct [Read Order]

Mukund Vijayrao Joshi (Petitioner) filed a writ petition, including auditors and chartered accountant firms, seeking to quash show cause notices issued by NFRA. These notices, dated between June 2023 and January 2024, sought explanations regarding audits conducted for companies like M/s. Concord Drugs Limited for financial years 2015-16 and 2016-17.

The petitioners argued that NFRA lacked retrospective jurisdiction to investigate audits conducted before its formation, citing the absence of explicit statutory provisions in Section 132 of the Companies Act, 2013, and potential violations of Article 20(1) of the Constitution of India, which prohibits retrospective penal laws.

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The petitioners contended that Section 132, enforced on October 24, 2018, lacks clear language indicating retrospective application. The petitioner argued that the provision to Section 132(4)(a), which prevents other bodies like the Institute of Chartered Accountants of India (ICAI) from continuing proceedings once NFRA initiates an investigation, does not confer retrospective jurisdiction.

The respondent’s counsel argued that the term “continue” in the provision to Section 132(4)(a) implies retrospective jurisdiction, as NFRA was established to address past mismanagement in auditing practices.

The counsel relied on the National Company Law Appellate Tribunal (NCLAT) decision in Harish Kumar T.K v. NFRA (2023), which upheld NFRA’s retrospective powers, and noted that the Supreme Court dismissed related appeals in 2024.

The Bench comprising Justice C.V. Bhaskar Reddy, in a common order, observed that the core issue was whether NFRA could investigate misconduct for financial years prior to 2018.

The court referred to the Delhi High Court’s judgment which upheld Section 132’s validity and clarified that NFRA’s inquiries into pre-2018 misconduct do not create new offenses but evaluate conduct based on existing obligations.

The court observed that the Companies Act, 2013, was amended to establish NFRA following recommendations from the Parliamentary Standing Committee on Finance and the Supreme Court’s observations in S. Sukumar v. ICAI (2018), which highlighted the need for an independent regulator to address self-regulation failures by ICAI.

The court held that NFRA’s issuance of show cause notices to seek information and initiate inquiries for prior financial years is within its jurisdiction. It emphasized that enhanced penalties under Section 132(4)(c), such as fines up to five times the fees for individuals or ten times for firms and debarment for up to ten years, cannot be applied retrospectively due to Article 20(1).

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The writ petitions were dismissed with no order as to costs, and all pending miscellaneous petitions were closed.

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