MUMBAI: The simmering standoff between the Institute of Chartered Accountants of India (ICAI) and the National Financial Reporting Authority (NFRA) stems from the typical overlapping of regulatory mandates in the financial services landscape of India.
Several other regulatory pairs also encounter similar overlapping of mandates as in the case of Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI); RBI and Insurance Regulatory and Development Authority of India (IRDAI); SEBI and Ministry of Corporate Affairs (MCA); Pension Fund Regulatory and Development Authority (PFRDA) and EPFO, to name a few.
The standoff between ICAI and the NFRA has been triggered by a recent dispute over which regulatory body has the authority to set and modify auditing standards, particularly the new Standards of Quality Management (SQMs).
Standards of quality management
ICAI recently introduced revised standards, SQM 1 and SQM 2, aiming to improve quality management at the firm level. However, NFRA challenged ICAI’s authority to make these modifications, suggesting they were “legally void”, paving the way for the present conflict between the two regulators.
ICAI, a statutory body, has traditionally been responsible for regulating the auditing profession and setting standards for chartered accountants in India.
On the other hand, NFRA was established in 2018 as an independent regulatory body to oversee the quality of audit services for public interest entities and ensure adherence to the standards of financial reporting.
NFRA’s relavance
In fact, NFRA’s creation shifted some oversight responsibilities away from ICAI, especially in the auditing standards applicable to entities deemed significant to the public interest.
ICAI claims that it holds the authority to set and modify standards for quality management in firms that fall outside NFRA’s direct oversight, such as smaller firms and non-public interest entities.
Contending that ICAI’s revisions are legally void, NFRA argues that ICAI has overstepped its authority. NFRA views the introduction of new standards as a move that should have its oversight, given the NFRA’s mandate to ensure high-quality auditing practices across the profession.
Potential areas of regulatory overlapping
RBI and SEBI: There are regulatory common areas where both SEBI and RBI enjoy mandates. These two prominent regulators have jurisdictional overlaps concerning instruments like perpetual bonds, though are issued by banks, also involve securities characteristics, which naturally invite in the oversight from both bodies.
RBI and IRDAI: Bancassurance (banks selling insurance products) often falls under both banking and insurance regulations. Insurance products offered through bank channels have raised questions about regulatory authority, as banks regulated by RBI distribute insurance policies regulated by IRDAI.
Talking to businessbenchmark.news, an insurance expert said in some cases, RBI and IRDAI have created joint guidelines, though the jurisdictional clarity remains challenging, at times.
SEBI and MCA: The area that could potentially lead to confusions is the corporate governance, particularly around disclosures and compliance for publicly listed companies.
SEBI’s Listing Obligations and Disclosure Requirements (LODR) and MCA’s Companies Act regulations both cover corporate governance, sometimes leading to dual compliance requirements and potential conflicts.
Experts clarified that SEBI and MCA have collaborated on some regulations, such as the harmonisation of definitions for related-party transactions, to reduce duplication.
