SEBI tightens governance norms for MIIs, audit firms to report directly to committee

The Securities and Exchange Board of India (SEBI) on Monday introduced a fresh set of governance norms to strengthen the internal audit mechanism and the composition of Audit Committees at Market Infrastructure Institutions (MIIs), including stock exchanges, clearing corporations, and depositories.

"It is essential that the MIIs shall operate in an efficient and transparent manner, be accountable for their actions, maintain highest standards of governance and risk management, etc." SEBI said.

According to a the circular, all MIIs will now be required to conduct an annual internal audit across all key operational verticals, including critical operations, regulatory functions, and business development.

The audits must be undertaken by independent audit firms, which will report exclusively to the Audit Committee of the respective MII.

The move follows recommendations from SEBI's Secondary Market Advisory Committee (SMAC) and feedback from various stakeholders.

The audit process will follow a structured timeline defined by the Audit Committee.

“The observations of the internal auditor shall be sent to the respective Head of Departments (HoDs) for their comments in a time bound manner,” the circular stated.

Even observations that are dropped after clarification will have to be documented in the final report along with justification.

"Wherever required, the Audit Committee may seek views of other Statutory Committees of the MII on the observations of the internal auditor," the regulator said.

SEBI has also mandated that internal auditors must brief the Audit Committee on critical issues every six months, independent of the MII’s management.

SEBI has also barred Executive Directors, including the Managing Director, from being members of the Audit Committees of MIIs. However, key management personnel and auditors may be invited to the meetings but will not have voting rights.

The new rules will come into force 90 days from the date of issuance.