On May 19, 2025, SEBI issued Circular SEBI/HO/MRD/POD 3/P/CIR/2025/69, laying down new norms for the internal audit mechanism and the composition of audit committees at Market Infrastructure Institutions (MIIs), which include stock exchanges, clearing corporations, and depositories.
Role of MIIs
MIIs provide core capital market infrastructure such as trading, clearing and settlement, and securities record-keeping. They act both as public utilities and as first-line regulators of their members (trading members, clearing members, depository participants). Because of this dual role, SEBI emphasizes that MIIs must function transparently, maintain high governance standards, and prioritize investor protection.
Internal Audit Mechanism
The circular establishes comprehensive requirements for internal audits:
- Annual Audit Coverage: Every MII must conduct an internal audit of all functions and activities—across critical operations, regulatory compliance, risk management, investor grievances, and business development—at least once every financial year.
- Independent Auditor: Internal auditors must be independent audit firms appointed through policies approved by both the Audit Committee and the governing board of the MII.
- Direct Reporting: The internal auditor reports exclusively to the Audit Committee, not to management, ensuring independence.
- Scope of Audit: Covers all functions and may be standardized across MIIs in consultation with the Industry Standards Forum (ISF).
- Audit Observations: Initial observations are sent to department heads for comments. Final reports must include all observations, even those dropped after clarifications, with clear justifications.
- Timelines: The Audit Committee sets audit timelines. The auditor must present to the Audit Committee at least twice annually—by the 60th day after September and March—on critical issues, and these presentations occur without management present.
This structured audit approach strengthens risk management and regulatory compliance while ensuring accountability.
Audit Committee Composition
To enhance independence and oversight, SEBI has redefined the composition of MIIs’ audit committees:
- Exclusion of Executives: No executive director, including the managing director, can be a member of the audit committee.
- Auditor & KMP Rights: Auditors and key management personnel (KMPs) can be heard during committee meetings but have no voting rights.
- Special Invites: KMPs, including the MD, may attend meetings only with the chairman’s permission and cannot vote.
These provisions aim to prevent conflicts of interest and ensure objective evaluation of management decisions.
Applicability and Implementation
The circular’s provisions become effective 90 days from issuance. All MIIs must:
- Implement necessary systems to comply with the framework.
- Amend bye-laws, rules, and regulations where required.
- Disseminate the circular’s provisions to market participants and publish them on their websites.
Regulatory Basis
The circular is issued under SEBI’s powers derived from the SEBI Act, 1992, SECC Regulations, 2018, and Depositories and Participants Regulations, 2018, reinforcing SEBI’s mandate to protect investors and strengthen market infrastructure governance.
Conclusion
This circular represents a significant strengthening of corporate governance in MIIs. By mandating independent, comprehensive internal audits and restricting management participation in audit committees, SEBI aims to bolster transparency, risk oversight, and investor confidence in India’s capital markets.
