The National Financial Reporting Authority (NFRA) performs a vital three-fold role in the Indian financial ecosystem by recommending accounting and auditing policies to the government, monitoring and enforcing compliance with these standards, and creating awareness among stakeholders to improve reporting quality. While it serves as a powerful oversight body, the NFRA possesses no independent legislative power; it functions as an advisory entity that provides expert suggestions to the Central Government, which is the authority responsible for officially notifying and making rules.
The NFRA circular dated January 7, 2026, and the legal framework of Section 132(2)(d) of the Companies Act, 2013, define a relationship where the NFRA acts as an advisory and monitoring body, while the final rule-making authority remains with the Central Government.
Question 1 – Is this NFRA circular binding on the Board and Audit Committee of the Company? What is the ambit of Section 132(2)(d)?
The circular is strictly binding where it reiterates existing statutory duties under the Companies Act, 2013, and Standards on Auditing, making any non-compliance a legal violation and professional misconduct. Under Section 132(2)(d), NFRA’s ambit includes overseeing the quality of professional services and implementing measures to improve financial reporting. While it acts as a powerful monitor and advisor, the NFRA cannot independently notify new rules; it instead recommends formulations to the Central Government, which holds the final legislative authority.
Question 2 – If yes, to what extent – Placing this circular before the Board and AC? Is the policy & system framing necessary? Do we need to document and conduct meetings as guided in the circular?
The circular is explicitly addressed to all listed companies and entities under Rule 3 of the NFRA Rules, 2018. It specifically requests Company Secretaries to bring the contents to the notice of the Board of Directors and the Audit Committee. Since it reiterates “joint or collective mandatory obligations” of the Governing Body and the Auditors, formal tabling before the Board/AC is necessary to ensure they are aware of their oversight responsibilities and the potential for regulatory action in case of non-compliance.
Question 3 – Are the propositions made by NFRA over and above what laws have already prescribed OR is it just a compilation?
- Compilation and Reiteration of Existing Law: A significant portion of the circular acts as a formal compilation of existing statutory mandates to ensure they are not overlooked.
- Statutory Obligations: It restates the existing duties of the Board (Section 134), Independent Directors (Schedule IV), Audit Committees (Section 177), and Auditors (Section 143) under the Companies Act, 2013.
- Standards on Auditing (SAs): It summarizes mandatory requirements from SA 260 and SA 265, such as identifying Those Charged with Governance (TCWG) and the necessity of written communication regarding internal control deficiencies.
- Propositions “Over and Above” (New Regulatory Expectations): While the NFRA does not make new law, it uses its oversight power under Section 132(2)(d) to propose specific “measures for improvement” that go beyond the literal text of the current SAs.
Question 4 – If the propositions made by NFRA are not compulsory, what should be the approach of the Board and AC?
While the NFRA circular includes certain “recommended” propositions, the Board and Audit Committee should view them as essential benchmarks for effective governance and professional due diligence. Since the regulator considers these measures necessary to fulfill the “letter and spirit” of the law, it is ultimately the company’s responsibility to bridge any gaps by establishing the required systems or adopting the NFRA guidelines as their own practice. By proactively formalizing these suggestions into a documented internal policy—such as appointing nodal officers and maintaining rigorous written records of at least two annual meetings—the Board ensures its oversight meets regulatory expectations and protects the entity against future findings of procedural violations or governance misconduct.
Question 5 – What if the Company doesn’t frame the systems and maintain the documentation expected in the circular but meets the expectations in some other form? Will it be construed as noncompliance of any of the provisions of the Act or rules made thereunder?
While the NFRA’s three-fold role is primarily advisory and it cannot independently create new laws, its “suggestions” carry significant weight because they define the standard of care required to comply with existing statutes. While failing to adopt a specific recommended format might not be a direct breach of a rule, it leaves the Board and Audit Committee vulnerable to charges of failing their statutory oversight duties under the Companies Act. Therefore, if these suggested systems are not currently in place, companies should proactively adopt them to ensure their practices meet the regulatory benchmark for “effective governance” and to mitigate the risk of being penalized for professional misconduct.
The NFRA circular primarily serves as a formal reiteration of the statutory obligations already mandated under the Companies Act, 2013, and the Standards on Auditing (SAs). Rather than introducing new laws, the NFRA is highlighting the critical need for companies to move beyond mere procedural compliance and truly adopt and maintain robust communication systems in “letter and spirit”.