DECRIMINALISATION AND THE DELOITTE ANOMALY: RETHINKING NFRA’S SECTION 132(4A)

This post is authored by Anant Tiwari, second-year B.A. LL.B (Hons.) student at National Law Institute University, Bhopal.

Introduction

The National Financial Reporting Authority (“NFRA”) was created under Section 132 of the Companies Act, 2013 (“the Act”), shifting auditor oversight from professional self-regulation to an independent regulator. The scope and exercise of NFRA’s powers were challenged before the Delhi High Court in Deloitte Haskins & Sells LLP v. Union of India (“Deloitte”). The Court upheld the constitutional validity of Section 132 and NFRA’s powers under Section 132(4), including the power to investigate, hold hearings, impose penalties and debar auditors. It nevertheless quashed the notices and final orders challenged before it for violating the statutory requirement of separation of functions. However, with the appeal arising from the Deloitte case pending before the Supreme Court, it has presently restricted NFRA from passing final orders in ongoing proceedings and giving effect to certain orders already passed. On 3 August 2026, while that litigation remained pending, the Joint Committee tabled its report on the Corporate Laws (Amendment) Bill, 2026 (“the Bill”) in Parliament.

The Bill proposed inserting Section 132(4A) (a), under which failure to pay an NFRA penalty imposed under Section 132(4)(c), or non-compliance with an NFRA order, for ninety days would be punishable with imprisonment or fine. The Committee’s report then amended the provision by removing imprisonment and expressly citing “decriminalisation” as the reason. That removal was entirely correct because a missed payment should not expose a professional to imprisonment when the default can be cured by payment. But decriminalisation remains incomplete because the fine that survives was not converted into a civil penalty. This distinction is critical because a civil penalty is a regulatory liability that NFRA can impose and recover without court proceedings, whereas a fine is a criminal sanction that requires prosecution and is imposed through the court process.

The Doctrinal Backdrop: Deloitte’s Civil Characterisation

In February 2025, more than a year before the Bill and Section 132(4A) existed, the Delhi High Court decided Deloitte. It upheld Section 132’s validity but quashed NFRA’s orders because the body that drafted the audit findings also adjudicated the disciplinary proceedings, collapsing the separation the statute requires between investigating and adjudicating. The firms also raised an Article 20(1) challenge, arguing that Section 132(4) was being applied retrospectively to audits completed before the provision came into force in 2018. The Court rejected this argument, holding that NFRA’s disciplinary proceedings are civil and regulatory rather than criminal, and therefore the constitutional protection under Article 20(1) did not apply.

Hathising Manufacturing Co. Ltd. v. Union of India, cited in Deloitte itself, explains the significance of that finding, as it held that failure to discharge a civil liability does not become an offence unless the statute expressly makes it one. SEBI v. Ajay Agarwal, also relied on in Deloitte, reinforces the distinction, holding that adjudicatory proceedings do not make a person “an accused.” The finding in Deloitte that NFRA’s proceedings are civil therefore matters because the Bill now makes non-compliance with an NFRA order punishable with a fine.

Removing imprisonment settled that failure to pay an NFRA penalty should not threaten an individual’s liberty, but the surviving fine raises a different question. Section 132(4A) (a), as reported by the Committee, makes that fine an additional consequence of failing to pay the penalty already imposed by NFRA. Is this additional monetary consequence still civil, or does “punishable with fine” make it a criminal punishment requiring prosecution? The Bill’s own wording provides the answer.

Penalty or Fine?

Fines are not unusual, as SEBI and tax authorities impose them, but NFRA itself imposes penalties under the newly inserted Section 132D of the Bill. The issue is not the use of a fine in Section 132(4A) (a), but that the Committee’s decriminalisation exercise treats it differently from NFRA’s civil penalties. That distinction matters because Deloitte had already characterised NFRA’s proceedings as civil, not criminal.

The Bill’s own wording shows that “fine” and “penalty” are distinct and not used interchangeably. Section 128(6) of the Bill, which concerns a company’s books of account, changes “punishable with fine” to “liable to a penalty of five lakh rupees.” The Committee retained that amendment, describing it as part of the Bill’s broader decriminalisation exercise. Sections 132A and 132C, both new provisions in the NFRA cluster, likewise use “liable to penalty” for other defaults. Three provisions in the same decriminalisation reform therefore use the civil term “penalty” for non-compliance. Among these NFRA provisions, Section 132(4A) (a) is the only one that retains “fine”, making that choice difficult to dismiss as careless drafting.

That distinction predates the Bill, with the Company Law Committee’s 2019 review of 46 penal provisions in the Act, treating the two consequences differently. Some defaults were to move to an in-house mechanism, where a regulator could decide the case and impose a civil penalty without criminal proceedings. Others were to remain offences but lose imprisonment, leaving the fine unchanged. These were two forms of decriminalisation, not two names for the same consequence. Section 132(4A) (a) takes the latter approach as it removed imprisonment but retained the fine as a punishment for non-compliance with an NFRA order, even though Deloitte had characterised the underlying NFRA process as civil.

The recovery mechanism in the Bill as reported by the Committee makes the difference clearer. Section 132D (3) provides for recovery of unpaid “penalty” imposed under Section 132 through the Recovery Officer under Section 454B, who can attach property or bank accounts without approaching a court. The Committee also removed the officer’s power to arrest and detain a defaulter as part of its decriminalisation changes. Section 132D (3), however, applies only to “penalty”, not the “fine” in Section 132(4A) (a), which itself says that the fine applies “without prejudice to the penalty that such person is liable to pay.” The fine does not substitute for the penalty, nor does it serve as an alternative mechanism for its recovery. Instead, the Bill treats the two as distinct liabilities: the penalty remains payable and enforceable under Section 454B, while the fine is an additional monetary consequence of failing to pay.

Still a Prosecution

Under the Companies Act, “fine” and “penalty” are not interchangeable. A penalty for a civil default can be imposed by an adjudicating authority without a court proceeding. A fine, by contrast, is punishment for an offence and is imposed by a special court. Section 441 of the Act reinforces this distinction by providing for the compounding of offences punishable under the Act, including those carrying a fine. Therefore, Section 132(4A) (a), by making non-compliance with an NFRA order punishable with fine, places it within the Act’s offence and prosecution framework rather than its civil penalty framework.

That framework necessarily brings both the Special Court and the complaint mechanism into the picture. Section 435 of the Act provides for Special Courts for speedy trial of two categories of offences, those punishable with imprisonment of two years or more, and all other offences. A fine-only offence under Section 132(4A) (a) falls in the second category and is tried by a Special Court constituted by a Metropolitan Magistrate or Judicial Magistrate of the First Class. However, the court cannot simply impose the fine on NFRA’s request. Section 439 requires a complaint before the court can take cognizance. The Committee accordingly recommended amending Section 439 by inserting Clause 96A, allowing a person authorised by NFRA to file such a complaint for an offence under Section 132(4A) (a). Thus, the Committee’s own report treats Section 132(4A) (a) as an offence, not merely as civil non-compliance. Crucially, the court can impose the additional fine only after determining that an offence was committed, whether through a guilty plea or conviction at trial, rather than as part of NFRA’s administrative recovery of the civil penalty.

In its submissions before the Committee, NFRA itself referred to Section 132(4A) (a) as creating an “offence” and described the auditor or audit firm as the person or entity who had “committed an offence under the Act.” This reinforces the distinction between NFRA’s administrative recovery of the civil penalty and the additional fine, which can arise only upon the court’s determination of a separate offence.

This fine-only prosecution is not unusual under the Act, and Section 454(8) uses almost the same structure for failure to comply with an order within ninety days, making that default punishable with a fine. The Committee examined it under Clause 101 and described such matters as “courts trying non-compliance prosecutions.” Section 132(4A)(a) applies the same prosecution model to non-compliance with an NFRA order. This creates a stark anomaly because it subjects non-compliance arising from NFRA’s proceedings to criminal prosecution leading to a fine, even though Deloitte had characterised those proceedings as civil and regulatory.

If Section 132(4A) (a) intended to create another civil penalty, NFRA could impose and recover it under Sections 132D and 454B, without a complaint or court. Instead,  Clause 96A  attaches criminal prosecution to non-payment of the NFRA penalty through a complaint before the court.

The Committee, in para 40.6.6 of the report, justified retaining the fine as necessary to preserve adequate deterrence, and in para 96A.2, justified Clause 96A as necessary for effective prosecution of offences under Section 132(4A) (a). Yet it did not explain why that deterrence required criminal prosecution when Sections 132D and 454B already provided a civil recovery mechanism for NFRA penalties. The report therefore explains the need for deterrence, but not why that deterrence had to remain criminal.

Conclusion: Completing the Decriminalisation

Removing imprisonment was a necessary first step, but calling that complete decriminalisation would be inaccurate. Under Section 132(4A) (a), failure to pay an NFRA penalty remains a criminal offence punishable with a fine. A professional therefore remains exposed to criminal prosecution for failing to pay an amount arising from an NFRA proceeding that Deloitte had already characterised as civil.

Parliament can cure this anomaly without weakening regulatory deterrence, which remains the legitimate purpose of ensuring NFRA’s penalties are actually paid. Section 132(4A) (a) should replace “punishable with fine” with “liable to an additional penalty of”, following the formulation Section 128(6) already uses to convert an identical fine into a penalty. The monetary consequence would remain, but its recovery would move from the criminal process to the civil penalty framework, recoverable like the underlying penalty under Section 454B.  This targeted change would complete the provision’s decriminalisation while preserving NFRA’s ability to enforce compliance. It would also promote proportionate corporate regulation and ease of doing business.

With NFRA’s final orders still before the Supreme Court, Parliament can make this correction before the first test case reaches a Magistrate. True decriminalisation should require dismantling the entire prosecutorial machinery, not just the possibility of imprisonment.