National Financial Reporting Authority (NFRA): formula sheet

Key formulas

Constitution

Section 132(1): Central Government may, by notification, constitute NFRA

Power is discretionary ("may"). Purpose: matters relating to accounting and auditing standards under the Act.

Composition

Chairperson + other members not exceeding fifteen (part-time and full-time)

Section 132(3). Chairperson is appointed by the Central Government and must be a person of eminence with expertise in accountancy, auditing, finance or law. Other terms are as prescribed.

Declaration

Chairperson and members declare no conflict of interest or lack of independence

Second proviso to Section 132(3). Made to the Central Government in the prescribed form.

Cooling-off for full-time persons

No association with any audit firm (including related consultancy firms) during appointment and for 2 years after ceasing

Third proviso to Section 132(3). Applies to chairperson and members in full-time employment with NFRA.

Divisions and executive body

Section 132(1A), (3A), (3B)

Functions are performed through prescribed divisions. A division is presided over by the Chairperson or an authorised full-time Member. The executive body is the Chairperson and full-time Members.

Head office

New Delhi (Section 132(12))

NFRA may meet at other places in India as it deems fit.

Accounts and report

Accounts audited by the C&AG (s.132(14)); annual report laid before each House of Parliament (s.132(15))

The Central Government causes the annual report and the C&AG audit report to be laid before Parliament.

Source of NFRA

Companies Act, 2013, section 132

Section 132 constitutes NFRA. Its functions and duties are in section 132(2).

Core functions (section 132(2))

Recommend policies and standards + Monitor and enforce compliance + Oversee quality of service (and suggest improvements) + Other related functions as prescribed

Remember as: recommend, monitor, oversee. Suggesting improvements sits inside the quality oversight limb.

Recommendation route

NFRA recommends → Central Government notifies

NFRA does not itself notify the standards.

Investigation and penalty

Section 132(4): investigate (on reference or suo motu) → penalty and debarment from six months up to ten years

Applies to prescribed classes of companies and bodies corporate. Misconduct must be proved before penalty or debarment.

Civil court powers

Summon and examine on oath + Production of documents + Evidence on affidavit + Commissions for witnesses or documents

These are the powers of a civil court under the Code of Civil Procedure, 1908, while inquiring into a matter.

Listed companies

Securities listed on any stock exchange in India or outside India → covered

Applies whatever the size of the company.

Unlisted public companies (any one test)

Paid-up capital ≥ ₹500 crore OR annual turnover ≥ ₹1,000 crore OR outstanding loans + debentures + deposits ≥ ₹500 crore, as on 31 March of the immediately preceding financial year

The thresholds are 'not less than', so exactly ₹500 crore or ₹1,000 crore qualifies. The loans test adds loans, debentures and deposits together.

Sector and special-law companies

Insurance companies, banking companies, companies generating or supplying electricity, companies governed by a special Act, and bodies corporate incorporated by an Act in India → covered

No size threshold applies.

Central Government reference

Any body corporate, company or person (or class of them) referred by the Central Government in public interest → covered

Covered only for the referred matter or entity.

Foreign subsidiary or associate

Income or net worth of the foreign subsidiary or associate > 20% of the Indian company's consolidated income or consolidated net worth → covered

Either income or net worth crossing 20% is enough. The foreign body must be a subsidiary or associate of an Indian company.

Overlap with the institute

If NFRA has initiated an investigation on a matter, the institute does not initiate or continue proceedings on it

For entities outside the NFRA list, the institute's disciplinary mechanism continues to apply.

Penalty on an individual (Section 132(4)(c)(A)(I))

Minimum ₹1,00,000; maximum 5 × fees received

Applies to individual members. The upper limit is linked to the fees received.

Penalty on a firm (Section 132(4)(c)(A)(II))

Minimum ₹5,00,000; maximum 10 × fees received

The minimum was ₹10,00,000 earlier and was substituted by ₹5,00,000 with effect from 9-2-2018.

Debarment (Section 132(4)(c)(B))

Minimum 6 months; maximum 10 years

Debars the member or firm from being appointed as auditor or internal auditor or undertaking any audit or internal audit of a company or body corporate, or from performing valuation under Section 247.

Appeal (Section 132(5))

Order under Section 132(4)(c) → Appellate Tribunal

Manner and fee as prescribed. Do not state a time limit unless it is given in the question.

Bar on parallel proceedings (proviso to Section 132(4)(a))

NFRA investigation started → no other institute or body can initiate or continue proceedings

Applies to the same matters of misconduct.

Quick revision

• Section 132: the Central Government may, by notification, constitute NFRA.
• NFRA deals with matters relating to accounting and auditing standards under the Act.
• Chairperson is appointed by the Central Government, with expertise in accountancy, auditing, finance or law.
• Members other than the chairperson: not exceeding fifteen, part-time and full-time, as prescribed.
• Full-time chairperson and members must not be associated with any audit firm during appointment and for two years after.
• Functions: recommend standards, monitor and enforce compliance, oversee quality of service of the profession.
• Section 133: the Central Government prescribes accounting standards recommended by ICAI, after examining NFRA recommendations.
• Investigation: suo motu or on Central Government reference, into misconduct of chartered accountant members or firms.
• Once NFRA starts an investigation, no other institute or body may start or continue proceedings on that misconduct.
• Individual penalty: not less than ₹1 lakh, up to five times the fees received.
• Firm penalty: not less than ₹5 lakh, up to ten times the fees received.
• Debarment: minimum six months, up to ten years. Appeal lies to the Appellate Tribunal, and head office is in New Delhi.

Common mistakes

• Writing that the Central Government 'shall' constitute NFRA. Fix: Section 132(1) says 'may'. Use 'may, by notification'.
• Saying NFRA has fifteen members in total. Fix: The Act says a chairperson and other members not exceeding fifteen. So the limit applies to members besides the chairperson.
• Saying NFRA notifies accounting and auditing standards. Fix: Write that NFRA recommends and the Central Government notifies.
• Mixing up functions and powers in one list. Fix: Keep separate headings in your answer: duties under section 132(2), and investigation and civil court powers.
• Applying the ₹500 crore and ₹1,000 crore tests to private companies. Fix: Write 'public' next to the thresholds in your notes. An unlisted private company is not caught by the size test.
• Requiring all three unlisted thresholds to be met together. Fix: They are alternatives. Any one of capital, turnover or loans plus debentures plus deposits is enough.
• Writing the firm's minimum penalty as ₹10 lakh. Fix: Use ₹5,00,000 as the minimum for firms. The text now reads five lakh rupees.
• Saying the maximum debarment is five years. Fix: Debarment is a minimum of six months and a maximum of ten years.

Exam tips

• Learn the exact wording: 'may', 'by notification', 'not exceeding fifteen', 'two years after ceasing'.
• In a descriptive answer, give a short heading for each point: constitution, chairperson, members, safeguards, divisions, administration.
• For MCQs, watch for option traps: 'shall' versus 'may', fifteen members versus fifteen plus chairperson, part-time versus full-time.
• Pair this topic with the NFRA powers and functions topic; a question often asks for both in one answer.
• Mention 'as prescribed' where the Act leaves terms and procedure to rules instead of inventing details.
• Learn the three-verb list: recommend, monitor and enforce, oversee quality. Add suggesting improvements under the third. It fits both short notes and MCQs.
• Always write who notifies standards. Examiners often test this in a statement-style MCQ.
• In a written answer, give separate headings for functions, investigation and penalty, and civil court powers. It reads cleanly and earns step marks.