Crisis-Driven or Systemic? Decoding Enforcement Patterns at NFRA

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Crisis-Driven or Systemic? Decoding Enforcement Patterns at NFRA

I. Abstract

The National Financial Reporting Authority was established in 2018 as a direct response to the Punjab National Bank Scam, to strengthen audit accountability and enhance investor confidence. Its creation also followed systemic shocks in the form of Infrastructure Leasing & Financial Services Limited (IL&FS) collapse and Dewan Housing Finance Corporation (DHFL) Crisis, which further highlighted the need for going beyond the self-regulated Institute of Chartered Accountants of India (ICAI). Several years into its operation, questions arise about its enforcement trajectory. Its global counterparts like the Public Company Accounting Oversight Board (PCAOB) and Financial Reporting Council (FRC) have evolved towards an inspection-driven and risk-based supervision framework. But has NFRA developed into a steady, systemic regulator or does its enforcement actions reflect episodic responses to corporate failures? This blog aims to analyse whether NFRA’s enforcement record exhibits clustering and if so, what do such patterns reveal about the institutional capacity and regulatory evolution of NFRA?

II. Introduction

It took almost five years for the National Financial Reporting Authority (NFRA) to reach from legislative mandate to an institutional reality. Envisioned under Section 132 of the Companies Act, 2013, this provision stayed dormant until it was triggered by the PNB scam. It was one of the latest sections to be notified. It was reported that NFRA would have sweeping powers to act against the misconduct of auditors. Not even a year into inception, NFRA’s resolve was tested through two massive financial collapses. The Infrastructure Leasing & Financial Services (IL&FS) defaulted on nearly ₹99,000 crore of debts. It was soon followed by the Dewan Housing Finance Corporation Limited (DHFL) crisis which peaked around 2019. This blog traces NFRA’s evolution through its enforcement activities and examines whether regulator’s operations are episodic responses to major scandals or a risk-based one.

III. Early Shocks of IL&FS and DHFL

The IL&FS defaulted on its obligations, triggering liquidity panic in the non-banking financial sector. NFRA released Audit Quality Review Reports (AQRRs) with regards to the audit done by BSR & Associates and Deloitte Haskins of IL&FS. The regulator found that the auditors let the management conceal certain numbers to save the company’s NBFC status. The net owned funds of the company were running in negative. It would have led to license cancellation. NFRA conducted a comprehensive review over 11 months before releasing the report. In the case of DHFL, NFRA debarred 18 auditors for varying periods with penalties. Penalty of 1 lakh each was imposed and the debarment ranged from six months to one year.

IV. Enforcement Clusters across Years

A year-wise examination of the regulator shows that orders are concentrated within a limited number of years. The very first order was issued in the year 2020 with respect to the IL&FS matter. The enforcement activity remained relatively limited in 2021 and 2022 which could be attributed as the aftermath of the pandemic. There was a sudden surge during 2023 and 2024 but again stopped at one order in 2025 which was released in January 2025. There has been barely any activity since then as NFRA also got embroiled in a legal battle related to its constitutionality and legality of several of its provisions. While it awaits judicial clarity before the apex court, it has temporarily decided to not issue any disciplinary order altogether. There is no consistent annual rate at which NFRA disposes of cases. It is institutionally consolidating its investigative and adjudicatory capacity, rather than functioning through a routine enforcement pipeline. Its legal battle exposes its institutional vulnerability and constraints. This interruption has shed light on the current position of the regulator and how it still has to go a long way before it can become a self-sustaining institution.

Year	Number of Orders Passed	Major Case Trigger
2020	3	IL&FS
2021	0	–
2022	3	Miscellaneous
2023	52	DHFL, Coffee Day, SRS
2024	20	Reliance Group, DHFL, Coffee Day
2025	1	Miscellaneous

Source: National Financial Reporting Orders [This table includes all the orders passed by NFRA till 30/01/2025]

V. Enforcement Cluster across Corporate Groups

The surge during 2023 and 2024 also corresponds with investigations into several high-profile corporate failures. A large number of enforcement orders culminate from a very small number of corporate groups. One of the most prominent examples is DHFL which alone accounts for around 36% of all orders. There is an enforcement cluster around other large groups such as Coffee Day Group, SRS Group, IL&FS. The magnitude of DHFL related enforcement actions implies that a single investigation can generate dozens of disciplinary orders. Hence, enforcement statistics may see a spike in certain years despite generating from a very few investigations. A similar pattern albeit on a smaller scale was seen in the case of Coffee Day Group where related entities like MACEL were also a part of the investigations. This pattern shows an investigation-driven activity rather than inspection-driven.

Order Frequency	Corporate Groups
29	DHFL Group
20	Miscellaneous (single-order cases)
7	Coffee Day Group (CDGL + MACEL + CDEL)
4	SRS Group
3	IL&FS
3	Burnpur Cement
3	Reliance Group
2	Vikas WSP
2	Vikas Proppant
2	Man Industries
2	Tanglin Development
2	Women Next

Source: National Financial Reporting Orders [This table includes all the orders passed by NFRA till 30/01/2025]

VI. Cross-Jurisdictional Comparison of Enforcement Model of PCAOB and FRC

The Public Company Accounting Oversight Board (PCAOB) in the United States and the Financial Reporting Council (FRC) in the United Kingdom have very different enforcement trajectories. The PCAOB reflects a high-volume and deterrence driven enforcement model whereas the FRC follows a graduated enforcement framework. The PCAOB has an inspection-heavy approach where most of its enforcement actions are initiated from lapses identified during routine inspections of the regulated entities. PCAOB conducts extensive inspections across hundreds of audit engagements, which increases the regulator’s frequency to catch onto any audit deficiencies first-hand rather than being triggered by a monumental market collapse episode due to audit failure. However, even PCAOB seems to have had a slower pace of activity for the past couple of years due to change in leadership and regulatory recalibration. On the contrary, FRC has resorted to a more gradual and flexible enforcement strategy where it does not rely on punitive disciplinary measures alone. Recent trend shows a reduction in the number of investigations initiated by the FRC. But supervisory and engagement-based interventions have only expanded. The regulator has shifted its attention towards ‘Constructive Engagement’ where audit quality concerns are addressed without opening a full fledged investigation into the matter. This preliminary review method allows FRC to assess potential breaches and less serious matters in an expedited manner. FRC’s decline in formal investigation has been balanced out by innovative expansion of enforcement toolkits for timely and resource-effective alternatives to long drawn investigative processes. Both the regulators (PCAOB and FRC) have a proactive stance when it comes to regulatory responses unlike NFRA which is majorly a reactive oversight body.

VII. Way Forward

NFRA can draw inspiration from both the PCAOB’s inspection-driven approach and FRC’s graduated supervision to strengthen its own enforcement activity. So far NFRA has published only 12 inspection reports of which majority of the reports are related to the audit firms of the companies involved in the major corporate scandals. It may benefit from switching to a systemic supervisory regime. There should be routine inspections and continuous monitoring of audit firms. It can expand the number of audit files reviewed annually and prioritise audits of entities from specific sectors (for e.g., banking) that pose greater systemic risk. This will help the regulator reduce the deficiencies in audit reports through regular supervision as auditors will be more cautious. The regulator can rely on data-driven analytics to identify risks, conduct surveys to identify trends and patterns across sectors. Then it’ll be easier for NFRA to determine which group of entities are more vulnerable and it can expend its resources accordingly rather than being on a wild goose chase. It can also draw insights from FRC which has emphasised on accelerated resolution processes and early admission mechanisms. This approach will allow the regulator to navigate the litigation hurdle it is currently facing while keeping its enforcement activities ongoing. Recent developments indicate that NFRA may already be moving in this direction as it plans to expand its inspection to 35-40 companies in 2026. This shows that NFRA can strengthen its institutional capacity into a stable, risk-based audit regulation rather than being a crisis driven body.