Himachal Pradesh High Court Upholds NABARD Guidelines for Appointment of Statutory Auditors for Cooperative Banks

Himachal Pradesh High Court Upholds NABARD Guidelines for Appointment of Statutory Auditors for Cooperative Banks

The High Court of Himachal Pradesh by its division judge’s bench of Chief Justice M.S. Ramachandra Rao and Justice Ajay Mohan Goel, while adjudicating a writ petition which challenged the guidelines issued by the National Bank for Agriculture and Rural Development (NABARD) regarding the appointment of statutory auditors was of the view that, “the conditions imposed appear to be reasonably relevant and have a rational nexus with the functions and duties attached to the post of auditors.”

In the instant case, a petition was filed by the Chartered Accountants registered with the Institute of Chartered Accountants of India, challenged a letter issued by NABARD on 16 January, 2015. The letter instructed the Registrar of Cooperative Societies of all states to provide a panel of Chartered Accountants for conducting statutory audits of State Cooperative Banks from the financial year 2013-2014 onwards. The guidelines enclosed with the letter specified various factors for the selection of auditors, including experience, qualifications, and the need for Information System Audit certification.

The petitioners contended that certain conditions imposed by NABARD were unreasonable, discriminatory, and favored larger firms while excluding sole proprietorships and smaller firms.

The petitioners pointed out that the requirement of Information System Audit certification was not applicable to the statutory branch audits of Cooperative Banks.

While noting the facts and submissions of the case, the bench was of the view that the guidelines were issued to ensure the prevention of frequent Cooperative Bank failures.

The bench observed, “Obviously, the purpose of issuing the said letter to the Registrars of Cooperative Societies of all the State Governments by NABARD is to ensure that frequent failure of Cooperative Banks do not happen and qualified auditors conduct the audit as per regulatory provisions to protect the interest of the depositors of such banks in view of several instances of State Cooperative Banks and District Central Cooperative Banks failing due to lack of checks on their operations.”

The bench perused Article 243 ZM (1) of the Constitution which empowers state legislatures to make provisions for the maintenance and auditing of Cooperative Societies’ accounts, the Court opined that in order to assist the respective State Governments to choose the right persons to conduct statutory audits, the NABARD issued the guidelines.

With regards to the petitioners' arguments regarding their exclusion from the panel, the Court clarified that the guidelines did not lead to a total exclusion of firms falling in the relevant categories.

The bench affirmed, “More importantly, though the guidelines issued in the impugned order referred to choosing of Chartered Accountants firms falling in categories I and II, they provided that category III firms with good experience can also to be considered. So, there is no total exclusion of such category of firms.”

The Court was of the view that the categorization of Chartered Accountant firms into different categories was not arbitrary or discriminatory, as it was based on their qualifications and experience.

The bench reiterated view expressed by the Supreme Court that it is not for the Courts to consider relevance of qualification prescribed for various posts and it is not the province of the Courts to assess the comparative merit of different qualifications and decide or direct what should be the qualifications to be prescribed for a particular post.

Additionally, the Court remarked, “This Court has neither the expertise to decide whether the conditions mentioned in the guidelines issued by the NABARD are valid or not, nor does it have such qualifications, with those who possess the said qualifications. The conditions imposed appear to be reasonably relevant and have a rational nexus with the functions and duties attached to the post of auditors.”

The bench while considering the requirement of Information System Audit certification, found it reasonable, considering the increasing use of Information Systems in banking.

Lastly, the Court concluded by stating, “When data of most of the banks are now being stored in Information Systems, we fail to see why prescription of such a qualification of inclusion in the qualified list of Chartered Accountants holding such Diploma has to be faulted with.”

Accordingly, the Court dismissed the writ petition.