Executive Summary:
SEBI requires Asset Management Companies (AMCs) of mutual funds to constitute an Audit Committee, as recommended by the Mutual Fund Advisory Committee (MFAC). This circular details the role, responsibilities, membership, and other features of the Audit Committee. The guidelines come into effect on August 1, 2022.
Key Points / Main Content:
Audit Committee Role and Responsibilities:
* Oversee financial reporting, audit processes, internal controls, and compliance with laws and regulations related to the Mutual Fund business.
* Review financial reporting and internal control systems.
* Ensure rectification of issues raised by internal and external auditors.
Membership:
* Minimum of three directors as members.
* At least two-thirds of the members must be independent directors.
* Members are appointed by the AMC's Board of Directors.
* All members must understand financial statements, and at least one must have finance and accounting experience.
* The Chairperson must be an independent director with experience in finance and financial services.
Meetings:
* The Chairperson calls meetings as required, with a minimum of four meetings per financial year.
* No more than 120 days should elapse between two meetings.
* The quorum is the greater of two members or one-third of the members, with at least two independent directors.
Reporting:
* The internal auditor must submit reports to the Audit Committee of the AMC and the Board of the AMC.
* The Audit Committee of the AMC must forward observations on internal audit reports to the Trustees.
Powers and Responsibilities:
* Financial Reporting: Oversight of financial reporting, review of accounting policies, review of audit opinions, and recommending adoption of financial statements.
* Audit (Internal and Statutory) and Internal Controls: Recommend auditor appointments and fees, review the scope of internal audits, discuss audit findings, review internal investigations, regulatory inspection reports, and the adequacy of internal control systems. Interact with statutory and internal auditors annually and with the Audit Committee of the Trustees annually.
* Regulatory Compliance and Other Functions: Evaluate internal control measures related to SEBI regulations, review compliance reports, assess the independence of mutual fund scheme management, and review the Annual Compliance Report in relation to the Policy on Prohibition of Insider Trading of the AMC.
Compliance:
* The Audit Committee of the AMC must comply with these guidelines, the Companies Act, 2013, and SEBI Listing Obligations and Disclosure Requirements Regulations, 2015, as applicable.
Impact Analysis:
Asset Management Companies (AMCs):
Impact: Required to establish an Audit Committee with specific responsibilities, membership criteria, and meeting schedules.
Action Required: Constitute the Audit Committee, define its charter, ensure compliance with the stated requirements, and integrate its functions into the AMC's operations.
Board of Directors of AMCs:
Impact: Responsible for appointing members to the Audit Committee and considering recommendations made by the committee.
Action Required: Appoint qualified individuals to the Audit Committee, review and approve committee recommendations, and oversee the committee's performance.
Trustees of Mutual Funds:
Impact: Receive observations from the AMC's Audit Committee on internal audit reports.
Action Required: Review and consider observations from the AMC's Audit Committee and take appropriate action.
Internal and Statutory Auditors:
Impact: The internal auditor must submit reports to the Audit Committees of AMC and the Board of AMC. The Audit Committee will make recommendations for the appointment, reappointment, or removal of statutory and internal auditors, and also on the fixation of fees for audit.
Action Required: Interact with the Audit Committee, provide necessary information and reports, and address any findings or concerns raised by the committee.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory body issuing the circular, responsible for regulating the securities market in India.
Mutual Funds (MFs): Investment vehicles subject to the regulations outlined in the circular.
Asset Management Companies (AMCs): Companies that manage the assets of mutual funds and are the primary subject of the circular's requirements regarding audit committees.
Audit Committee of Asset Management Companies (AMC): The main subject of the circular, detailing its role, responsibilities, membership, and other features.
SEBI Mutual Funds Regulations, 1996: The regulations governing mutual funds in India, which are being revamped as mentioned in the circular.
Mutual Fund Advisory Committee (MFAC): A committee that provided recommendations regarding the constitution of an Audit Committee at the AMC level.
Board of Directors of AMC: The governing body of the Asset Management Company responsible for appointing members to the Audit Committee.
The Companies Act, 2013: Indian legislation that the Audit Committee of AMC must comply with, in addition to the guidelines in the SEBI circular.
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Securities and Exchange Board of India
CIRCULAR
SEBI/HO/IMD/IMD-I DOF2/P/CIR/2022/17 February 09, 2022
All Mutual Funds (MFs)/
Asset Management Companies (AMCs)/
Trustee Companies/ Board of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)
Sir / Madam,
Subject: Audit Committee of Asset Management Companies (AMCs)
1. Currently, the requirement for an Audit Committee is at the level of trustees of Mutual
Funds. The working group constituted for the purpose of the regulatory revamp exercise
of SEBI (Mutual Funds) Regulations, 1996 and various circulars issued thereunder
suggested that an Audit Committee may be constituted at AMC level. The agenda was
discussed in the Mutual Fund Advisory Committee (MFAC) and it was recommended
that the AMC of mutual fund should constitute an Audit Committee.
2. In this regard, taking into account the recommendation of MFAC and the feedback
received from the industry, it has been decided that the AMCs of mutual funds shall be
required to constitute an Audit Committee. The role, responsibility, membership and
other features of the Audit Committee of AMC are detailed in this circular.
3. Role: The Audit Committee of the AMC shall be responsible for oversight of financial
reporting process, audit process, company’s system of internal controls, compliance to
laws and regulations and other related process, with specific reference to operation of its
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Securities and Exchange Board of India
Mutual Fund business. In this regard, the Audit Committee shall, inter-alia, have the
following mandates:
3.1. To review the financial reporting processes, the system of internal controls and the
audit processes for the Mutual Fund operations of the AMC;
3.2. To ensure that the rectifications, if any, suggested by internal and external auditors,
etc. are acted upon.
4. Membership:
4.1. The Audit Committee of AMC shall have minimum three directors as members.
4.2. At least two-third members of the Audit Committee shall be independent directors
of AMC. If two-third of the total strength results into fraction, then higher number
after rounding up shall be considered.
4.3. The members of the Audit Committee will be appointed by the Board of Directors
of AMC.
4.4. All members of Audit Committee shall be persons with ability to read and
understand the financial statement and at least one member shall have experience
and background in finance and accounts.
4.5. The Chairperson of the Committee shall be an independent director, with adequate
experience in the areas of finance and financial services.
5. Meetings:
5.1. The Chairperson of the Audit Committee shall call the meeting as and when
required. However, atleast four meetings shall be called in a financial year and not
more than one hundred and twenty days shall elapse between two meetings.
5.2. The quorum for meeting shall either be two members or one third of the members
of the Audit Committee, whichever is greater, with at least two independent director.
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Securities and Exchange Board of India
If one-third of the total strength results into fraction, then higher number after
rounding up shall be considered for the quorum.
6. Reporting:
6.1. The internal auditor shall submit its report to the Audit Committees of AMC and the
Board of AMC;
6.2. The Audit Committee of AMC shall forward their observations on internal audit
report, if any, to the Trustees.
7. Powers and Responsibility:
7.1. Financial Reporting
7.1.1. Oversight of the Mutual Fund Schemes’ and AMC’s financial reporting
process.
7.1.2. Considering and recommending for approval of AMC Board, all accounting
policy issues for the Schemes and the AMC, including any proposed changes
to the accounting policies and practices for transactions with related parties, etc.
7.1.3. Review of audit opinion issued by the statutory auditors.
7.1.4. Considering and recommending to the AMC Board, adoption of financial
statements including half yearly unaudited financial results prepared for the
Scheme and the financial statements of the AMC.
7.1.5. Any other relevant matters.
7.2. Audit (Internal and Statutory) and Internal Controls
7.2.1. Considering and recommending for approval, the appointment, re-
appointment and, if required, the replacement or removal of the Statutory
Auditor of the Mutual Fund, Internal Auditor of the Mutual Fund, etc. and the
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Securities and Exchange Board of India
fixation of fees for audit and any other services rendered by the Statutory
Auditors with respect to the Mutual Fund.
7.2.2. Reviewing the scope of Internal Auditors and recommending for approval of
the Board of AMC.
7.2.3. Reviewing the Internal Audit Reports of the Schemes of Mutual Fund
(Including Internal Audit Report of critical activities outsourced by the AMC
such as Custodian, Fund Accounting, the Registrar and Transfer Agent activity,
etc.).
7.2.4. Discussions with internal and statutory auditors on any significant findings and
follow up there on.
7.2.5. Reviewing the findings of any internal investigations by the AMC / internal
auditors into matters where there is suspected fraud or irregularity or a failure
of internal control systems of a material nature or issues highlighted or referred
through whistle blower complaints, etc.
7.2.6. Reviewing Regulatory Inspection Reports.
7.2.7. Reviewing implementation status of all outstanding action points arising out
of Internal Audit Reports, Statutory Audit Reports, Systems Audit Reports,
Inspection Reports etc.
7.2.8. Reviewing the adequacy of the internal control systems, including defining
metrics for measuring internal controls, seeking comments of the internal
auditors about Internal Control Systems, etc. and the steps taken towards
improving the effectiveness of internal control system including through
automation.
7.2.9. Interacting with the statutory and internal auditors of the Mutual Fund, at least
once annually without engagement of management of the AMC. Besides the
mandatory requirement specified, such interactions may be held whenever felt
necessary by the independent directors of the Audit Committee.
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Securities and Exchange Board of India
7.2.10. The Audit Committee of the AMC should interact with the Audit Committee
of the Trustees at least once annually.
7.3. Regulatory Compliance and other Functions
7.3.1. Evaluating various internal control measures in terms of applicable SEBI
(Mutual Funds) Regulations and various circulars issued thereunder.
7.3.2. Reviewing periodic report on compliance with applicable laws and
regulations, including the details of non-compliance along with the corrective
actions, as applicable.
7.3.3. Reviewing the Annual Compliance Report in relation to the “Policy on
Prohibition of Insider Trading” of the AMC.
7.3.4. Assess that the AMC has been managing the mutual fund schemes
independently of other activities and have taken adequate steps to ensure
that the interest of investors of one scheme are not being compromised with
those of any other scheme or of other activities of the asset management
company.
7.4. In addition to the above responsibilities, AMC Board from time to time may also
assign such other responsibilities to the Audit Committee, as deemed fit.
8. The Audit Committee of AMC shall comply with these guidelines in addition to the
requirements of The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015, as applicable.
9. Applicability: This circular shall come into force with effect from August 01, 2022.
10. This circular is issued in exercise of powers conferred under Section 11 (1) of the
Securities and Exchange Board of India Act, 1992, read with the provisions of
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Securities and Exchange Board of India
Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of
investors in securities and to promote the development of, and to regulate the securities
market.
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
Email: hrsahoo@sebi.gov.in
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