NEWS – SEBI Issues Guidelines on Internal Audit Mechanisms for Market Infrastructure Institutions (MIIs)

OBJECTIVE OF THE GUIDELINES

• Strengthen governance at MIIs such as stock exchanges, clearing corporations, and depositories.
• Enhance operational efficiency, transparency, and accountability.
• Reinforce adherence to laws, regulations, and risk management standards.

KEY GUIDELINES FOR INTERNAL AUDIT

Importance of Internal Audit

• Helps identify, assess, and mitigate risks affecting:
  • Operations
  • Efficiency
  • Financial stability
• Ensures compliance with:
  • Laws and regulations
  • SEBI circulars and guidelines
  • Industry standards

Frequency and Coverage

• Internal audits must be conducted at least once per financial year.
• Coverage includes all functions under three verticals:
  • Vertical 1: Critical operations
  • Vertical 2: Regulatory compliance, risk management, investor grievances
  • Vertical 3: Other areas such as business development

APPOINTMENT AND ROLE OF INTERNAL AUDITORS

Appointment Policy

• Auditors must be from independent audit firms.
• MIIs must establish a clear policy for appointing auditors.
  • Policy approval required from both:

• The Audit Committee
• The Governing Board

Audit Reporting

• Internal auditor will report only to the Audit Committee.
• Audit scope must be approved by the Audit Committee.
• Terms of reference should be standardised in consultation with the Industry Standards Forum of MIIs (ISF).

REPORTING AND FOLLOW-UP PROCESS

Observation Handling

• Observations by auditors must be sent to relevant Heads of Departments (HoDs) for comments.
• Final report must include:
  • All observations
  • HoD comments
  • Rationale for any dropped or closed issues
• Audit committee may consult statutory committees if needed.

Audit Briefings

• Internal auditor must brief the Audit Committee twice a year:
  • Within 60 days of end of September and March
  • Briefings must occur without management to maintain objectivity.

AUDIT COMMITTEE RESPONSIBILITIES AND COMPOSITION

Functions of the Audit Committee

• Approval of related party transactions
• Scrutiny of financial statements
• Evaluation of:
  • Internal financial controls
  • Risk management systems

Composition Rules

• No executive director, including the Managing Director (MD), can be a member.
• Auditors and Key Management Personnel (KMPs):
  • May attend meetings for discussions
  • Do not have voting rights
• KMPs and MD can attend by invitation of the Chairman but also cannot vote.

ADDITIONAL PROVISIONS

Cooling-off Period Removal

• SEBI eliminated the cooling-off period for Public Interest Directors transitioning between MIIs.

Implementation Timeline

• The guidelines will take effect 90 days after the issuance of the circular.