The Securities and Exchange Board of India (SEBI) issued a pivotal circular aimed at reinforcing the governance structure of Market Infrastructure Institutions (MIIs) — which include Stock Exchanges, Clearing Corporations, and Depositories. These entities play a foundational role in the capital markets by enabling trading, clearing and settlement, and the safekeeping and transfer of securities.
In its latest directive, SEBI has focused on two core governance areas: the internal audit mechanism and the composition of the Audit Committee of MIIs. These changes aim to ensure transparency, risk mitigation, and effective oversight in institutions that function both as market utilities and first-line regulators.
A New Era for Internal Audits at MIIs
SEBI has made it mandatory for all MIIs to conduct internal audits annually across all their functional verticals:
Vertical 1: Critical operations like trading and settlement.
Vertical 2: Regulatory and compliance activities.
Vertical 3: Business development and other ancillary functions.
To maintain independence and objectivity, the internal audit must be conducted by independent audit firms. The internal auditor will report directly to the Audit Committee, thereby eliminating any potential management influence over audit outcomes.
A noteworthy requirement is that even dropped or resolved audit observations must be included in the final report, alongside justifications. This move promotes accountability and transparency in the resolution of issues. The Audit Committee will also determine the audit schedule and ensure that critical issues are reported biannually — specifically within 60 days from the end of March and September — and importantly, in the absence of MII management to preserve impartiality.
Reshaping the Audit Committee
In a significant structural reform, SEBI has mandated that no Executive Director (including the Managing Director) of an MII can be part of its Audit Committee. This ensures that the Committee remains free from potential conflicts of interest and is able to scrutinize management actions with full independence.
Key Management Personnel (KMPs) and auditors will retain the right to be heard but not to vote during Audit Committee deliberations, unless specifically invited. This provision strikes a balance between ensuring informed discussions and maintaining the independence of the committee’s decisions.
Implementation and Compliance
MIIs are required to implement these provisions within 90 days of the circular’s issuance. Additionally, they must revise their internal rules and regulations accordingly and communicate these changes to market participants and investors through their websites.
Conclusion
With this circular, SEBI has taken a robust step toward enhancing the internal controls and governance frameworks of MIIs. These changes not only aim to improve operational transparency and accountability but also reinforce investor confidence in India’s capital market infrastructure. As these norms come into effect, stakeholders can expect a more resilient, risk-aware, and well-regulated market environment — vital for sustaining long-term financial growth and stability.
