SEBI/HO/MRD/POD 3/P/CIR/2025/69

guidelines · 1992 · State unknown

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Parent: THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (7c4c1f5343adab106c3a94cafc08a5ecf5957ae7)

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CIRCULAR SEBI/HO/MRD/POD 3/P/CIR/2025/69 May 19 , 2025 To All Recognized Stock Exchanges All Recognized Clearing Corporations All Depositories Sir/Madam, Subject: Norms for Internal Audit Mechanism and composition of the Audit Committee of Market Infrastructure Institutions Stock Exchanges, Clearing Corporations and Depositories (hereinafter referred as Market Infrastructure Institutions (MIIs)) are institutions that provide vital capital market infrastructure for trading; clearing & settlement; and holding, transfer & record keeping of securities. MIIs have a unique operating model in that they are empowered by law to regulate their members such as Trading Members, Clearing Members, Depository Participants, etc . The primary objective of an MII is to focus more towards serving as a crucial public utility infrastructure institution and a first line regulator for its constituents, while operating as efficient, innovative and competitive commercial entity. A. Norms for the Internal Audit Mechanism at MIIs 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. Internal audit helps to identify, assess, and mitigate risks that could impact the MII's operations, efficiency, financial stability, etc. Internal audit also ensures that the MII's comply with relevant laws, regulations, circulars, guidelines, industry standards, etc . MIIs being corporate entities governed by the provisions of Companies Act, 2013 are required to conduct Internal Audit. Further, in terms of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC Regulations, 2018) and Securities and Exchange Board of India (Depositories and Pa

Rule TOC

4 · 1. Every MII shall conduct internal audit of all functions and activities of the MII (i.e. functions and activities of Vertical 1 (Critical operations), Vertical 2 (Regulatory , compliance, risk management and investor grievances) and Vertical 3 (Other functions including business development)) at least once in a Financial Year .

4 · 2. The internal auditor of the MII shall be an independent audit firm(s) . The MIIs shall have a policy for appointment of internal auditors approved by the Audit Committee and governing board of the MII.

4 · 3. Internal auditor of an MII shall report only to the Audit Committee of the MII.

4 · 4. The scope of the internal auditor shall include all functions and activities of the MIIs (i.e. functions and activities of Vertical 1, Vertical 2 and Vertical 3) and shall be approved by the Audit Committee of the MII (including any other area as may be specified by the Audit Committee) . Further, in order to standardize the terms of

4 · 5. The observations of the internal auditor shall be sent to the respective Head of Departments (HoDs) for their comments in a time bound manner.

4 · 6. The internal auditor after incorporating comments of the HoDs shall share the final report with the Audit Committee in a time bound manner. Further, any initial observation(s) of the internal auditor, which have been dropped/closed subsequent to the clarifications/comments of HoDs, shall also be included in the Final Report, along with rationale/justifications for dropping such observation(s). Wherever required, the Audit Committee may seek views of other Statutory Committees of the MII on the observations of the internal auditor.

4 · 7. The various timelines for internal audit shall be prescribed by the Audit Committee of the MII.

4 · 8. The internal auditor of the MII shall appraise the Audit Committee, at least once in every six months within 60 days from the end of September and March, on critical issues concerning the MII, in the absence of the management.

6 · 1. The Audit Committee of the MII shall not consist of any Executive Director (including the Managing Director) of the MII;

6 · 2. The auditors of the MII and the Key Management Personnel (KMPs) shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor's report but shall not have the right to vote; and

6 · 3. Wherever required, the KMPs (including the MD) can be invited to attend the meeting of the Audit Committee with permission of the Chairman of the Committee but shall not have the right to vote .

10 · This circular is available on SEBI website at www.sebi.gov.in at "Legal Framework Circulars."