## Report on SEBI Circular SEBI/HO/MRD/POD/3/CIR/2025/69: Norms for Internal Audit Mechanism and Composition of the Audit Committee of Market Infrastructure Institutions
**1. Executive Summary:**
This report analyzes SEBI Circular SEBI/HO/MRD/POD/3/CIR/2025/69, issued on May 19, 2025. This is a new policy establishing norms for the internal audit mechanism and composition of the Audit Committee of Market Infrastructure Institutions (MIIs). The core purpose is to strengthen the governance mechanism at MIIs. Key provisions include mandatory internal audits of all MII functions, requirements for auditor independence and reporting lines, and restrictions on the composition of the Audit Committee.
**2. Introduction:**
This report aims to provide a comprehensive overview of SEBI Circular SEBI/HO/MRD/POD/3/CIR/2025/69, based solely on the information contained within the provided policy text. The report focuses on the policy's objectives, key provisions, affected stakeholders, implementation aspects, and expected outcomes.
**3. Policy Overview:**
* **Core Objective(s):**
* To strengthen the governance mechanism at Market Infrastructure Institutions (MIIs).
* To ensure MIIs operate efficiently and transparently.
* To ensure MIIs are accountable for their actions.
* To maintain the highest standards of governance and risk management at MIIs.
* To improve the internal audit function.
**4. Background and Rationale:**
This new policy likely addresses a perceived need to improve governance and oversight within MIIs. The policy explicitly states that it is based on feedback from various stakeholders and recommendations from the Secondary Market Advisory Committee of SEBI (SMAC), suggesting prior concerns regarding the effectiveness of the internal audit processes and audit committee structures within MIIs. Given the critical role MIIs play in the securities market, strengthening their governance structure is crucial for maintaining market integrity and investor confidence.
**5. Key Provisions:**
The policy establishes the following key provisions:
* **Mandatory Internal Audit:** Every MII must conduct an internal audit of all functions and activities (Vertical 1: Critical operations, Vertical 2: Regulatory, compliance, risk management, and investor grievances, Vertical 3: Other functions including business development) at least once in a Financial Year.
* **Independent Auditor:** The internal auditor must be an independent audit firm. MIIs are required to have a policy approved by the Audit Committee and governing board for the appointment of internal auditors.
* **Reporting Line:** The internal auditor must report directly to the Audit Committee of the MII.
* **Audit Scope:** The scope of the internal audit must include all functions and activities of the MIIs and needs approval by the Audit Committee. To standardize the terms of reference, the MIIs may consult with the Industry Standards Forum of MIIs (ISF).
* **Observation and Reporting Process:** The internal auditor's observations must be sent to the respective Heads of Departments (HoDs) for their comments in a time-bound manner. The final report, including comments from HoDs and rationale for any dropped observations, must be shared with the Audit Committee in a time-bound manner. The Audit Committee can seek views of other Statutory Committees.
* **Timelines:** Timelines for internal audits will be prescribed by the Audit Committee.
* **Regular Appraisal:** The internal auditor must appraise the Audit Committee at least once 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.
* **Audit Committee Composition:** The Audit Committee cannot include any Executive Director, including the Managing Director, of the MII.
* **Auditor and KMP Rights:** Auditors and Key Management Personnel (KMPs) have the right to be heard in Audit Committee meetings when the auditor's report is considered but do not have the right to vote.
* **KMP Attendance:** KMPs, including the MD, can be invited to attend the Audit Committee meetings with the Chairman's permission but do not have the right to vote.
**6. Target Audience and Stakeholders:**
The primary target audience and stakeholders directly affected by this policy are:
* Stock Exchanges
* Clearing Corporations
* Depositories (collectively referred to as Market Infrastructure Institutions - MIIs)
* Audit Committees of MIIs
* Internal Auditors of MIIs
* Heads of Departments (HoDs) within MIIs
* Key Management Personnel (KMPs) of MIIs, including the Managing Director
* Trading Members, Clearing Members, Depository Participants
**7. Implementation Aspects (Inferred):**
* **Responsible Agency/Bodies:** The Securities and Exchange Board of India (SEBI) is the issuing and enforcing authority. The Audit Committees and governing boards of MIIs are responsible for implementing the policy. The Industry Standards Forum of MIIs (ISF) may be consulted to standardize the terms of reference of the internal auditor.
* **Timelines:** The provisions of the circular are applicable from the 90th day of issuance of the circular. The Audit Committee is responsible for prescribing various timelines for internal audit. Internal auditors must appraise the Audit Committee every six months (within 60 days from the end of September and March).
* **Procedures:** MIIs need to take necessary steps, put in place necessary systems for implementation, and make necessary amendments to their byelaws, rules, and regulations. They must also bring the provisions of the circular to the notice of market participants, including investors, and disseminate the same on their website.
**8. Expected Outcomes / Impact of Changes:**
The likely intended outcomes of this policy are:
* Enhanced governance and transparency within MIIs.
* Improved risk management and internal controls.
* More effective internal audit processes and oversight.
* Increased independence and objectivity of the Audit Committee.
* Greater investor confidence in the securities market.
* Standardized internal audit procedures across MIIs.
**9. Conclusion:**
SEBI Circular SEBI/HO/MRD/POD/3/CIR/2025/69 introduces significant changes to the internal audit mechanism and composition of the Audit Committee of Market Infrastructure Institutions. The policy aims to strengthen governance, improve transparency, and enhance risk management within these critical institutions. The provisions related to auditor independence, reporting lines, and Audit Committee composition are particularly noteworthy. Successful implementation of this policy is expected to lead to a more robust and reliable securities market.
Key Entities Referenced
SEBIHOMRDPOD 3PCIR202569: Circular number issued by SEBI
May 19, 2025: Date of the circular
All Recognized Stock Exchanges: Addressees of the circular
All Recognized Clearing Corporations: Addressees of the circular
All Depositories: Addressees of the circular
Market Infrastructure Institutions: Referred to as MIIs, includes Stock Exchanges, Clearing Corporations and Depositories
MIIs: Abbreviation for Market Infrastructure Institutions
Trading Members: Members regulated by MIIs
Clearing Members: Members regulated by MIIs
Depository Participants: Members regulated by MIIs
Companies Act, 2013: Act governing corporate entities, including MIIs
Securities Contracts Regulation Stock Exchanges and Clearing Corporations Regulations, 2018: Regulations requiring governing boards of MIIs to provide for three lines of defense, including Internal Audit Function
SECC Regulations, 2018: Abbreviation for Securities Contracts Regulation Stock Exchanges and Clearing Corporations Regulations, 2018
Securities and Exchange Board of India Depositories and Participants Regulations, 2018: Regulations requiring governing boards of MIIs to provide for three lines of defense, including Internal Audit Function
DP Regulations, 2018: Abbreviation for Securities and Exchange Board of India Depositories and Participants Regulations, 2018
Secondary Market Advisory Committee of SEBI: Advisory Committee whose recommendations contributed to the guidelines for internal audit mechanism at MIIs
SMAC: Abbreviation for Secondary Market Advisory Committee of SEBI
Vertical 1: Refers to Critical operations of MII
Vertical 2: Refers to Regulatory, compliance, risk management and investor grievances of MII
Vertical 3: Refers to Other functions including business development of MII
Audit Committee: Committee to which the internal auditor of the MII shall report
Industry Standards Forum of MIIs: Forum for MIIs to consult with in order to standardize the terms of reference of the internal auditor across similar MIIs
ISF: Abbreviation for Industry Standards Forum of MIIs
Head of Departments: Referred to as HoDs, observations of internal auditor shall be sent to HoDs
HoDs: Abbreviation for Head of Departments
Audit Committee AC: Committee responsible for approval of related party transactions, scrutiny of financial statements, evaluation of internal financial controls and risk management systems
Key Management Personnel: Referred to as KMPs, shall have a right to be heard in the meetings of the Audit Committee
KMPs: Abbreviation for Key Management Personnel
MD: Abbreviation for Managing Director, 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
section 111 of the Securities and Exchange Board of India Act 1992: Legal basis for the circular
regulation 51 of the Securities Contracts Regulation Stock Exchanges and Clearing Corporations Regulations, 2018: Legal basis for the circular
section 263 of the Depositories Act, 1996: Legal basis for the circular
regulation 97 of Securities and Exchange Board of India Depositories and Participants Regulations, 2018: Legal basis for the circular
SEBI: Securities and Exchange Board of India
Hruda Ranjan Sahoo: Deputy General Manager at SEBI
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
1. 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
2. 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
Page 1 of 5impact 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.
3. 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 Participants)
Regulations, 2018 (D&P Regulations, 2018), the governing boards of the MIIs are
required to provide for three lines of defense of which the third line of defense comprises
the Internal Audit Function.
4. In order to further strengthen the governance mechanism at MIIs, based on the feedback
received from various stakeholders and recommendations of Secondary Market
Advisory Committee of SEBI (SMAC), the following guidelines for the internal audit
mechanism at MIIs have been prescribed:
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
Page 2 of 5reference of the internal auditor across similar MIIs, the MIIs may do so in
consultation with the Industry Standards Forum of MIIs (ISF).
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.
B. Composition of the Audit Committee of the MII
5. The terms of reference of the Audit Committee (AC) amongst others involves approval of
related party transactions, scrutiny of financial statements, evaluation of internal financial
controls and risk management systems, etc. which requires objective evaluation of the
functioning and decisions of the management.
6. In order to further strengthen the governance of the MII, based on the feedback received
from various stakeholders and recommendations of the SMAC, the following have been
decided:
6.1. The Audit Committee of the MII shall not consist of any Executive Director (including
the Managing Director) of the MII;
Page 3 of 56.2. 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.
7. Applicability: The provisions of the circular shall be applicable from the 90th day of
issuance of the circular.
8. All MIIs are advised to:
i. Take necessary steps and put in place necessary systems for implementation of the
above.
ii. Make necessary amendments to the relevant byelaws, rules and regulations,
wherever required, for the implementation of the above; and.
iii. Bring the provisions of this circular to the notice of the market participants (including
investors) and disseminate the same on their website.
9. This circular is issued in exercise of the powers conferred under section 11(1) of the
Securities and Exchange Board of India Act 1992 read with regulation 51 of the
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
Regulations, 2018, section 26(3) of the Depositories Act, 1996 and regulation 97 of
Securities and Exchange Board of India (Depositories and Participants) Regulations,
2018 to protect the interests of investors in securities and to promote the development
of, and to regulate the securities market.
Page 4 of 510. This circular is available on SEBI website at www.sebi.gov.in at “Legal Framework -
Circulars.”
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
Email: hrsahoo@sebi.gov.in
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