NFRA issues purchase of 93,27,125 equity shares of Gujarat Road & Infrastructure Company controversy

Delhi, 17 AUG 2020
The National Financial Reporting Authority (NFRA) has issued the Audit Quality Review Report (AQRR) of the Statutory Audit for the year 2017-18 of IL&FS Financial Services Limited (IFIN). The statutory auditor for this engagement was BSR & Associates LLP (BSR).

2.11.1 NFRA sought the following clarifications from the Audit Firm vide letter dated 23rdOctober, 2019, with regard to sale/purchase of Investments during the FY 2017-18:
a) Whether the Audit Firm had examined the purchase of 93,27,125 equity shares of Gujarat Road & Infrastructure Company Limited (GRICL) and 1,20,00,000 shares of Pipavav Railway Corporation Limited (PRCL) for a consideration of ₹147.18 Crores and ₹54
Crores respectively from a Related Party?
b) Whether the Audit Firm had examined other sale/purchase transactions of investments
to/from related parties?
c) Whether any evidence was collected for verifying the sale/purchase of investments,
including agreements and basis for valuation for (a) and (b) above?
d) Whether any evidence was collected for the verification of the arm’s length nature of the
transactions with related parties?
e) Whether any evidence was obtained/collected for verification of transfer of ownership of
shares, and completion of transactions at agreed price?
f) Whether the Audit Firm had examined the list of related parties to ensure the inclusion of
all the related parties, as disclosed by the Management?

The AQR was conducted pursuant to Section 132(2)(b) of the Companies Act, 2013, and NFRA Rules, 2018, which require the NFRA to, inter-alia, monitor and enforce the compliance with accounting standards and auditing standards.

NFRA has concluded in this AQRR that the appointment of BSR as the statutory auditors of IFIN was ab initio illegal and void. The instances of failure to comply with the requirements of the Standards of Auditing (SAs) by BSR are significant and BSR did not have adequate justification for issuing the Audit Report asserting that the audit was conducted in accordance with SAs. The failure to comply deals with Material Misstatements of major magnitude and fundamental importance, Going Concern assumption by the management, the complete absence of the required communication with Those Charged With Governance, determination of Materiality amounts on the basis of non-relevant factors, etc. Further, NFRA found that the IT processes/platform used by BSR have deficiencies that are systemic and structural in nature.

Separately, NFRA will examine whether disciplinary proceedings under Section 132(4) of the Companies Act, 2013 needs to be initiated in connection with the AQRR.