Reliance Capital Audit Lapses| Delhi HC Refuses Interim Relief In Plea Against NFRA Penalty Of Rs 4.5 Crores On CAs & Audit Firm

The Delhi High Court has dismissed an interim application filed against the decision of the National Financial Reporting Authority (NFRA), which imposed penalties on CAs and audit firm for lapses in the audit of Reliance Capital Limited for the FY 2018-19.

The Bench of Justice Yashwant Varma and Justice Dharmesh Sharma observed that, "Bearing in mind the aforesaid facts and conclusions which the NFRA has come through record, we find no ground to grant any interim relief at this stage."

M/s Pathak HD & Associates (PHD), CA Parimal Kumar Jha, and CA Vishal D. Shah were involved in the statutory audit of Reliance Capital Limited (RCL) for the Financial Year 2018-19. They approached the Delhi High Court to contest an order from the National Financial Reporting Authority (NFRA), which debarred CA Parimal Kumar Jha and CA Vishal D. Shah from auditing for 10 years and 5 years respectively, and imposed penalties of INR 3 crore on PHD, INR 1 crore on CA Parimal Kumar Jha, and INR 50 lakhs on CA Vishal D. Shah. The Petitioners also challenged the constitutional validity of Section 132(4) of the Companies Act, 2013, and certain NFRA Rules.

For FY 2018-19, Reliance Capital was jointly audited by M/s Price Waterhouse & Co LLP (PW) and PHD. PW resigned from the audit without issuing a report and reported suspected fraud to the Ministry of Corporate Affairs. PHD, however, reported no irregularities. Before resigning, PW had sent a letter to Reliance Capital, its Audit Committee, and PHD, highlighting concerns about loans, investments, and disposal of Compulsory Convertible Debentures worth approximately INR 12,571 crore. This prompted NFRA to examine PHD's audit file.

The investigation revealed that Reliance Capital's Consolidated Financial Statements for FY 2018-19 showed loans from banks amounting to about INR 12,000 crore and other external borrowings totaling INR 32,000 crore. It was alleged that these funds were used by Reliance Capital to extend loans and make investments in other group companies. PW reported suspected fraud regarding loans and investments of around INR 12,571 crore, which were listed as recoverable. NFRA claimed that despite evidence and communications from PW, the Petitioners failed to take necessary actions. Consequently, NFRA concluded that the Petitioners were negligent, did not obtain sufficient audit evidence, and failed to report material misstatements in RCL's financial statements.

The High Court noted that NFRA's order highlighted major deficiencies in the audit conducted by M/s Pathak HD & Associates (PHD) and its partners for Reliance Capital Limited. PHD failed to independently investigate significant concerns raised by their joint auditor, Price Waterhouse & Co LLP (PW), regarding potentially irrecoverable loans and investments totaling approximately ₹12,571 crore made to group companies. PHD's Engagement Partner (EP) did not perform independent audit procedures and dismissed the possibility of fraud without sufficient investigation.

It was further observed that the Audit Committee's conclusions were heavily influenced by the EP's presentation, and the audit files lacked evidence of PHD's independent examination or disagreement with PW's observations. NFRA also found issues with RCL's financial disclosures, noting that PHD's work was used for disclosures, resulting in a self-review, which violates principles of independence and objectivity.

Given these findings and violations of auditing standards, the High Court rejected the applications for interim relief by the Petitioners, emphasizing the significant discrepancies and failures in the audit process.

Cause Title: Vishal Dhiren Shah vs Union of India

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