Separation of functions in NFRA discipline failed where the same body reviewed audit reports and initiated proceedings, causing bias.

Section 132 of the Companies Act, 2013 and the National Financial Reporting Authority Rules, 2018 were upheld against challenges based on retrospectivity, vicarious liability, and Article 20(1), because the scheme enforced a pre-existing concept of professional misconduct and treated audit-firm liability as permissible in audit work. The Court also held that the summary procedure was not inherently unfair where notice, disclosure of material, and hearing were provided. However, the same Executive Body had both prepared the audit quality reports and decided to issue show-cause notices, breaching the required separation between review and initiation of discipline. That overlap created a reasonable apprehension of bias and predetermination, so the notices and final orders were quashed.

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Issues: (i) Whether Section 132 of the Companies Act, 2013 and the National Financial Reporting Authority Rules, 2018 were unconstitutional or otherwise invalid on grounds of retrospectivity, vicarious liability, and Article 20(1) of the Constitution of India; (ii) Whether the show-cause notices and final orders were vitiated for want of fair procedure, reasonable opportunity, and separation of functions, giving rise to bias and predetermination.

Issue (i): Whether Section 132 of the Companies Act, 2013 and the National Financial Reporting Authority Rules, 2018 were unconstitutional or otherwise invalid on grounds of retrospectivity, vicarious liability, and Article 20(1) of the Constitution of India.

Analysis: The statutory scheme did not create a new species of professional misconduct. The misconduct relied upon was already recognised under the Chartered Accountants Act, 1949, and Section 132 merely adopted that pre-existing concept for enforcement by the NFRA. The Court also held that audit firms can, in law, be subjected to liability for the acts of their partners and engagement personnel in the conduct of audit work. The challenge founded on Article 20(1) failed because the proceedings were regulatory and disciplinary in character and did not involve a criminal offence or punishment in the constitutional sense.

Conclusion: The challenge to the validity of Section 132 and the related Rules on the grounds of retrospectivity, vicarious liability, and Article 20(1) was rejected.

Issue (ii): Whether the show-cause notices and final orders were vitiated for want of fair procedure, reasonable opportunity, and separation of functions, giving rise to bias and predetermination.

Analysis: The Court held that a summary procedure is not, by itself, unfair, and that the NFRA Rules provided sufficient procedural safeguards through notice, disclosure of material, and an opportunity of hearing. However, the statutory scheme also required a real separation between the unit that conducted audit review and the unit that decided whether disciplinary proceedings should be initiated. On the facts, the same Executive Body had authored the audit quality reports and then formed the opinion to issue the show-cause notices. That overlap offended the requirement of impartiality, created a reasonable apprehension of bias, and disclosed predetermination rather than an independent threshold decision.

Conclusion: The impugned show-cause notices and final orders were vitiated and liable to be quashed for breach of the separation-of-functions requirement and reasonable apprehension of bias.

Final Conclusion: The statutory provisions were upheld, but the particular proceedings in these batch matters failed for want of structural impartiality in the decision-making process, and the impugned notices and orders could not stand.

Ratio Decidendi: Where a statute contemplates distinct functions for review and initiation of disciplinary action, the same decision-making body cannot constitutionally perform both roles on the same material; such overlap creates a reasonable apprehension of bias and vitiates the proceedings, even if the underlying statutory framework and summary procedure are otherwise valid.

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