Anant Tiwari & Yashika Chouksey

Abstract: NFRA’s own Executive Body once wrote the report finding misconduct and then decided whether to pursue disciplinary proceedings, a combination that the Delhi High Court declared unlawful in Deloitte Haskins & Sells LLP v. Union of India in February 2025. The Corporate Laws (Amendment) Bill, 2026, even after scrutiny by the Joint Parliamentary Committee, nevertheless leaves that overlap capable of returning. This article tests the Bill against Deloitte and the Supreme Court’s reasoning in Competition Commission of India v. Steel Authority of India & Anr  on adjudicatory independence, tracing the safeguards the Bill removes to the institutional defects those decisions exposed. It finds NFRA squeezed from two directions at once, internally through the collapse of the separation between investigation and adjudication and externally through expanded governmental control over decisions that must remain independent. The Joint Committee had the opportunity to address both defects but retained the framework. Finally, the article proposes targeted statutory fixes that preserve NFRA’s regulatory strength while restoring the safeguards that make its disciplinary power legitimate.

INTRODUCTION 

The National Financial Reporting Authority (“NFRA”) was created under Section 132 of the Companies Act, 2013 (“the Act”) to take auditor oversight out of the profession’s own hands and place it with an independent regulator. Inside it, however, the same officials who prepare an audit quality review finding professional misconduct have been found to decide whether that finding should become a disciplinary proceeding.

In Deloitte Haskins & Sells LLP v. Union of India (“Deloitte”), the Delhi High Court found that NFRA had breached its own rules by letting exactly that happen. It upheld the constitutional validity of Section 132 and the NFRA Rules, but held that NFRA had acted contrary to the statutory scheme, thereby, requiring a separation of functions and quashing the resulting notices and orders. Yet, the Corporate Laws (Amendment) Bill, 2026 (“the Bill”) removes the statutory provisions requiring that very separation, including Section 132(1A) and Section 132(3A) of the Act. On 3 August 2026, the Joint Parliamentary Committee (“the Committee”) reported on the Bill without restoring the omitted provisions. It expands NFRA’s investigative and adjudicatory authority while deepening Central Government’s influence over its decision-making. Ultimately, NFRA is left with greater regulatory power, weaker internal constraints, and diminished institutional independence.

An appeal against the High Court’s finding is now pending before the Supreme Court, where it has allowed NFRA to continue disciplinary proceedings while directing that any final orders remain inoperative. The Supreme Court has also observed that NFRA should have separate divisions for investigation and adjudication. That observation tracks the separation requirement, which the High Court applied in Deloitte. Therefore, the appeal concerns a live question about NFRA’s regulatory structure and exercise of its disciplinary powers.

NFRA’s own defence before the Supreme Court stands in stark contrast to the observation made by the Supreme Court. It has argued that, as “a composite body”, it “cannot work in divisions in a strict sense.” Separating investigators from adjudicators, on NFRA’s own account, is therefore institutionally unworkable. By removing the very provisions that the High Court found to be requiring that separation, the Bill validates the position NFRA has advanced before the Supreme Court. Although para. 40.4.6 of the Committee’s report records a stakeholder’s request to restore the repealed provision, the Committee did not restore it.

The constitutional concern is broader than the procedural defect identified in Deloitte. NFRA’s concentration of investigative, prosecutorial, and adjudicatory power is constitutionally defensible only if specific statutory safeguards keep that power in check and prevent its arbitrary exercise. Now as reported by the Committee, the Bill removes those safeguards. It eliminates both the requirement to keep NFRA’s own functions separated, and the independence of its adjudicatory process from government direction. The amended framework therefore gives NFRA greater power while reducing the safeguards that keep that power in check. This article tests that framework against the constitutional guarantees of fairness, liberty, and equality that courts have applied to similarly structured regulators.

The article proceeds in three stages. First, it examines the removal of the statutory separation between NFRA’s investigative and adjudicatory functions, evaluating this shift against the Deloitte ruling. Second, it analyses the Bill’s provisions regarding governmental direction and supersession and shows how they undermine NFRA’s institutional independence. Finally, it proposes legislative reforms to restore the safeguards removed by the Bill.

REMOVING THE SAFEGUARD THAT DELOITTE REQUIRED

A regulatory body that adjudicates a matter it has itself investigated, risks carrying the presumption that its own investigation created into the decision on whether to initiate disciplinary proceedings. This kind of concentrated investigative and adjudicatory power is tolerable only while safeguards constraining its exercise remain intact. The Deloitte ruling was the first critical judicial test of this risk within NFRA’s actual institutional design.

The High Court in Deloitte upheld the constitutional validity of Section 132 of the Act in full, rejecting the challenge to the statutory framework itself. This was because its constitutional objection lay not in Section 132, but in how NFRA exercised the powers the provision conferred. NFRA’s Executive Body had prepared the audit review identifying misconduct and, in several of the connected matters, the same officials then heard and decided the disciplinary proceedings arising from it. It was held by the High Court that such collapse of investigative and adjudicatory powers into a single administrative unit compromised both actual and perceived fairness under Article 14 of the Constitution. Therefore, it quashed eleven show-cause notices and four final orders of NFRA.

Apart from identifying the constitutional defect, the High Court went further to prescribe the institutional safeguard needed to cure it. It directed that disciplinary proceedings be decided by members who had played no role in the underlying audit review. NFRA’s objection to this requirement is rooted in its limited pool of members, which it has described as making it a composite body incapable of working in watertight divisions. Rule 3(1)(b) of the NFRA (Appointment & Service Conditions) Rules, 2018 provides for only three full-time members, while Rule 14 of NFRA Rules, 2018 requires matters concerning investigation and disciplinary proceedings to be decided by the Chairperson or one or more full-time members. Functional separation must therefore operate within this limited pool of eligible members, making NFRA’s staffing constraint a genuine institutional concern. The Bill, however, does not address this constraint by strengthening the Authority’s capacity to maintain separate functions. In fact, it removes the statutory requirement of separation itself.

Sections 132(1A) and 132(3A) of the Act, which contained the safeguards, are repealed by the Bill as reported by the Committee. Sections 132(1A), now replaced with a provision describing NFRA simply as a body corporate, earlier required NFRA to function through separate divisions. Whereas, Section  132(3A), now omitted, required each division to be presided over by the Chairperson or a full-time Member authorised by the Chairperson. A stakeholder specifically asked the Committee to restore Section 132(3A), as recorded in para. 40.4.6 of the Report. However, the Committee did not state why it declined to restore the internal separation within the Executive Body between the audit-review function and the disciplinary function that Deloitte found could not lawfully be exercised by the same officials. The statutory separation that Deloitte required NFRA to maintain therefore remains absent.

The Executive Body’s concentration of investigative and adjudicatory functions is further enlarged by Section 132(3B) under the Bill as reported by the Committee. This provision assigns powers to the Executive Body for the efficient discharge of its functions under, among other provisions, Section 132(4). Notably, the investigative and adjudicatory functions of Section 132(4) are the very same ones that Deloitte found could not lawfully be exercised by the same unit. Moving even further, the Committee’s report expands this assignment by giving the Executive Body functions under newly inserted Sections 132(4A), 132A, 132C(2), and 132D. Every one of these functions therefore remains with the same undivided body, as nothing in Section 132(3B) mandates a separate body or division for any of them. The Bill thus adds functions to the Executive Body without restoring the internal separation safeguard that Deloitte required between the officials who investigate and those who adjudicate.

Moreover, delegation of powers under Section 132(3D) compounds the concern. As introduced, the provision allowed the Executive Body to delegate its powers by a general or special order in writing to a member, officer, or committee. The Committee, in para 40.6.2 of the report, recognised that concentration of powers may dilute institutional checks and balances and therefore removed the power to delegate by general order. But Section 132(3D), as reported by the Committee, does not require the person or body delegated adjudicatory powers under one order to be different from the person or body delegated investigative powers under another. Separate special orders can therefore place both powers in the same hands. The amendment limits the manner of delegation but does not prevent the functional overlap that Deloitte found impermissible.

NFRA’s own order further confirms that functional separation is institutionally workable. While its appeal remained pending before the Supreme Court, NFRA created four internal divisions as an interim measure. The order provides that the arrangement will continue only until the Bill is enacted or the pending appeals are decided, whichever is earlier. NFRA’s own arrangement therefore demonstrates that functional separation can operate within its existing structure. This substantially weakens the practical force of NFRA’s objection that staffing constraints make such separation institutionally unworkable.

Deloitte upheld a framework that required institutional separation as a safeguard, not an administrative choice. The Bill removes that separation, while the Committee leaves it unrestored and expands the functions assigned to the same Executive Body, leaving open the possibility that the same person or body may first investigate and then adjudicate the same matter. What Deloitte found necessary to keep NFRA’s exercise of power consistent with Article 14, the Bill removes without restoring an equivalent statutory safeguard. Deloitte therefore cannot be read as approving the framework the Bill creates.

THE UNDERMINING OF ADJUDICATORY INDEPENDENCE

As discussed above, restoring the separation between NFRA’s investigative and adjudicatory functions would address one of the concerns. However, a distinct constitutional question would still remain. An adjudicatory process may be internally fair yet still be compromised by external influence over the determination of disciplinary liability. Sections 132G and 132H, retained by the Committee in the form in which they were introduced, raise that second concern by subjecting NFRA’s adjudicatory process to greater governmental control.

Competition Commission of India v. Steel Authority of India & Anr (“SAIL”) supplies the standard by distinguishing the investigative stage from the adjudicatory stage of regulatory proceedings. At the investigative stage, a regulator may gather material and form a prima facie view without a prior hearing because it does not yet determine rights or liabilities. Once the matter reaches adjudication, however, the regulator determines rights and liabilities and must comply with the requirements of natural justice. The distinction SAIL draws is functional rather than statute-specific and therefore applies to NFRA because it likewise investigates, adjudicates, and determines liability within one statutory framework.

Crucially, this exact functional distinction also determines what fairness requires once the proceedings reach that adjudicatory stage. Under SAIL, every quasi-judicial order must conform to the principles of natural justice and that the exercise of quasi-judicial power must be “fair and free of arbitrariness”. On that basis, final adjudicatory orders must therefore rest strictly on the evidentiary record and the parties’ submissions before the authority, rather than on considerations introduced from outside the proceedings. Section 132G tests that requirement directly. It confines the Central Government’s written directions to “questions of policy” and requires, as far as practicable, that NFRA be given an opportunity to express its views before such directions are issued. Yet the provision makes the Government’s own determination of whether a matter concerns a question of policy final. Consequently, the limit on executive direction is defined entirely by the executive itself, undermining the independent adjudication that SAIL demands.

The concern, however, is not with executive policy direction itself. Such directions are common across Indian regulatory statutes, and some degree of executive accountability is justified given NFRA’s significant regulatory powers. Instead, the concern with Section 132G lies in how that power operates. The provision makes a government direction binding on NFRA while it exercises its statutory powers and performs its functions, including adjudication. Such a direction may therefore govern the proceeding in which NFRA determines an individual’s liability, without giving that person any opportunity within the proceeding to challenge the direction itself. Prior consultation with NFRA narrows but does not resolve this concern because the Government retains the final say on whether a matter concerns a question of policy. Nor does requiring the direction to be in writing cure the problem, since the provision requires the direction to be recorded but not the reasons for treating the matter as one of policy.

Furthermore, Section 132H(1)(b) compounds this concern. It empowers the Government to supersede the Authority for up to six months in case of persistent non-compliance with its direction, coupled with resulting deterioration in NFRA’s financial position or administration. Read together, Sections 132G and 132H leave NFRA with a difficult choice even at the adjudicatory stage: it must either comply with a government direction that binds it while exercising its statutory functions, or face the possibility of supersession for persistent non-compliance. Therefore, this mechanism creates a collision between executive direction and the independence required at the adjudicatory stage.

Ultimately, SAIL makes the consequence of this collision clear. It rests on the premise that disciplinary liability must be determined through an adjudicatory process insulated from outside executive direction and governed by natural justice. Sections 132G and 132H weaken that institutional guarantee by allowing government-defined policy to bind NFRA during adjudication and attaching statutory consequences to persistent non-compliance. Executive interference might not occur in every case, but the statute no longer secures the independence on which SAIL’s adjudicatory framework depends. What SAIL requires to be an independent adjudicatory determination, the Bill as reported by the Committee leaves subject to binding executive direction and, ultimately, institutional pressure.

THE ROAD AHEAD: RESTORING SAFEGUARDS

The reforms proposed here do not alter the Bill’s underlying purpose. Instead, they address the safeguards needed to preserve NFRA’s institutional separation and adjudicatory independence. Each reform preserves NFRA’s regulatory authority while placing targeted limits on how that authority is exercised. Parliament has not yet enacted the Bill, leaving an opportunity to incorporate these safeguards before the amended framework becomes operative.

Sections 132(1A) and 132(3A) should be restored as self-executing statutory safeguards. NFRA should be required to function through separate divisions, one responsible for audit review and investigation and the other for disciplinary adjudication under Section 132(4), with each division presided over by the Chairperson or an authorised full-time Member. This would restore the institutional separation that Deloitte treated as necessary to ensure that NFRA’s proceedings are not only fair but reasonably perceived as fair under Article 14. Leaving the matter to NFRA’s internal rules would reproduce the very institutional discretion through which the separation was lost in the first place.

A further amendment is needed to Section 132(3D) to prohibit the Executive Body from delegating an adjudicatory function to any member, officer, or committee that has already exercised an investigative function in the same matter. This additional bar would prevent rotation between the two divisions from recreating the overlap that Deloitte condemned, while preserving NFRA’s flexibility to allocate functions within its limited pool of eligible full-time members. It would therefore complement the restored divisional structure without requiring NFRA to maintain separate personnel pools for each function.

Under Section 132G, the Central Government should be required to record its reasons for treating a matter as a “question of policy” and communicate those reasons to NFRA with the direction. This would not subject the Government’s classification to prior approval by NFRA. It would instead make the exercise of executive direction reasoned and capable of scrutiny, reducing the risk that a policy classification could operate as an unexplained constraint on an adjudicatory proceeding.

Lastly, Section 132H should be amended to exclude from the definition of “persistent non-compliance” any failure to comply with a Section 132G direction concerning the adjudication of a specific matter or the determination of an individual’s liability. The existing six-month limit on supersession need not change, and genuine deterioration in NFRA’s financial position or administration would remain within Section 132H(1)(b). This proviso would prevent supersession from being used to enforce a government direction that reaches into the determination of rights and liabilities. Ultimately, it would preserve the Government’s power to address genuine institutional failure without allowing supersession to become a means of influencing the adjudication process.

CONCLUSION: INDEPENDENT IN NAME, CONTROLLED IN PRACTICE

NFRA emerges from the Bill with greater disciplinary power and fewer safeguards against its misuse. Deloitte established that the legitimacy of NFRA’s concentrated powers depends on separating investigation from adjudication, while SAIL makes adjudicatory independence central to a fair and non-arbitrary determination of liability. The Bill, as reported by the Committee, removes the statutory separation, leaves delegation capable of recreating the same functional overlap, and permits government-defined policy to operate during adjudication, with persistent non-compliance carrying the possibility of supersession. The problem is therefore not the strength of NFRA’s powers, but the weakening of the conditions that make their exercise legitimate.

The appropriate response is not to dilute NFRA’s mandate or remove legitimate executive accountability. It is to restore the safeguards that keep those powers institutionally constrained: statutory separation between investigation and adjudication, a bar on delegation that would collapse that separation in the same matter, and limits on executive direction and supersession where they reach into adjudication. These measures would preserve NFRA’s ability to investigate and determine disciplinary liability while ensuring that its decisions remain free from arbitrariness and independent of government influence. Parliament can still ensure that the regulator built to keep audit oversight out of the profession’s own hands does not become, under this Bill, independent in name but controlled in practice.

The larger lesson extends beyond NFRA. Regulatory expertise does not justify unchecked concentration, and executive accountability does not require executive influence over adjudication. A regulator earns the legitimacy to exercise coercive power not merely by possessing expertise or authority, but by remaining subject to institutional constraints that make its decisions independent, reasoned, and fair. Parliament should therefore strengthen NFRA not by making it less powerful, but by ensuring that the power given to it remains power that the institution can exercise independently and the public can trust.

Anant Tiwari is a second-year B.A., LL.B. (Hons) student at the National Law Institute University (NLIU), Bhopal. His academic interests lie in corporate law reforms. He is particularly interested in corporate governance, insolvency and bankruptcy law and securities regulation.

Yashika Chouksey is third-year B.A., LL.B. (Hons) student at the National Law Institute University (NLIU), Bhopal. She is keen on exploring contemporary legal and policy issues through a constitutional lens.