NFRA imposes a penalty of Rs.4.5 Cr on CA and CA Firm Auditors of Reliance Capital

The two auditors and joint auditor for Reliance Capital, a company formerly owned by the Anil Ambani group, Pathak HD & Associates (PHD), have been placed under investigation by the National Financial Reporting Authority (NFRA), which is the regulatory body that oversees auditors and audit firms for listed and large companies.

This action is a reaction to several shortcomings pointed out by Price Waterhouse (PW), the departing auditor, which also reported possible fraud of Rs.12,571 crore committed by the business.

Recently, Reliance Capital changed hands; the Hindujas acquired it following large concessions from lenders.

This comes after the Reserve Bank of India decided in November 2021 to replace the Anil Ambani Group company’s board because of issues with governance and payment failures.

The NFRA’s ruling found that Pathak HD & Associates and its principal employees, Parimal Kumar Jha and Vishal D Shah, had committed multiple infractions. The firm is facing a fine of Rs. 3 crore, and both chartered accountants have been prohibited from performing audit work for ten and five years, respectively. The two auditors have also been ordered to pay fines of Rs. 50 lakh and Rs. 1 crore.

The results show that Pathak HD & Associates and its partners broke ethical rules, violated sections of the Companies Act, and neglected their duties as statutory auditors. They were found to have been “grossly negligent” and to have neglected to disclose “material misstatements” in the financial records of Reliance Capital, even after Price Waterhouse had alerted them to possible fraud and irregularities in lending operations.

NFRA noted serious credit impairment among these group companies, with funds frequently being circulated among entities facing similar credit challenges without adequate explanation or assurance of recoverability. Reliance Capital, a core investment company that primarily invests in group entities, had significant bank loans and external borrowings in the financial year 2018–19.

Pathak HD & Associates came under fire from NFRA for rejecting fraud allegations on the basis of insufficient investigations and legal interpretations, which were only carried out at the audit committee’s insistence. The auditors disregarded PW’s remarks and did not follow up to confirm the validity of the loans that were disbursed, depending only on guarantees from promoter group companies instead of carrying out comprehensive investigations.

NFRA also discovered that, despite PW’s highlighted signs of circular transactions, bank statements were not examined closely enough to identify possible irregularities in lending operations. There are questions regarding the auditors’ supervision and diligence in carrying out their duties in light of this improper due diligence.