The Securities and Exchange Board of India (“SEBI”) by way of its circular dated February 9, 2022 (“Circular”) has specified that the asset management companies (“AMCs”) of mutual funds will be required to constitute an audit committee.
With regard to the above, SEBI vide the Circular has specified the following roles, responsibilities, membership and features of the audit committee of an AMC:
The audit committee of the AMC will 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 Mutual Fund business. In this regard, the audit committee will, inter-alia, have the following mandates:
- To review the financial reporting processes, the system of internal controls and the audit processes for the Mutual Fund operations of the AMC.
- To ensure that the rectifications, if any, suggested by internal and external auditors, etc. are acted upon.
- The audit committee of AMC will have minimum 3 (three) directors as members.
- At least 2/3rd (two-third) members of the audit committee will be independent directors of AMC. If 2/3rd (two-third) of the total strength results into fraction, then higher number after rounding up will be considered.
- The members of the audit committee will be appointed by the board of directors of AMC.
- All members of audit committee will be persons with ability to read and understand the financial statement and at least 1 (one) member will have experience and background in finance and accounts.
- The chairperson of the audit committee will be an independent director, with adequate experience in the areas of finance and financial services.
- The chairperson of the audit committee will call the meeting as and when required. However, at least four meetings will be called in a financial year and not more than 120 (one hundred and twenty) days will elapse between 2 (two) meetings.
- The quorum for meeting will either be 2 (two) members or one third of the members of the audit committee, whichever is greater, with at least 2 (two) independent director. If one-third of the total strength results into fraction, then higher number after rounding up will be considered for the quorum
- The internal auditor will submit its report to the audit committees of AMC and the board of AMC;
- The audit committee of AMC will forward their observations on internal audit report, if any, to the trustees.
5) Financial Reporting:
- Oversight of the mutual fund schemes’ and AMC’s financial reporting process.
- 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.
- Review of audit opinion issued by the statutory auditors.
- 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.
- Any other relevant matters.
6) Audit (internal and Statutory) and internal Controls:
- 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 fixation of fees for audit and any other services rendered by the statutory auditors with respect to the mutual fund.
- Reviewing the scope of internal auditors and recommending for approval of the board of the AMC.
- 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.).
- Discussions with internal and statutory auditors on any significant findings and follow up there on.
- 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.
- Reviewing regulatory inspection reports.
- Reviewing implementation status of all outstanding action points arising out of internal audit reports, statutory audit reports, systems audit reports, inspection reports etc.
- 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.
- 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.
- The audit committee of the AMC should interact with the audit committee of the trustees at least once annually.
7) Regulatory Compliance and other Functions:
- Evaluating various internal control measures in terms of applicable SEBI (Mutual Funds) Regulations and various circulars issued thereunder.
- Reviewing periodic report on compliance with applicable laws and regulations, including the details of non-compliance along with the corrective actions, as applicable.
- Reviewing the annual compliance report in relation to the “Policy on Prohibition of Insider Trading” of the AMC.
- 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.
8) The audit committee of AMC will comply with the guidelines under the Circular in addition to the requirements of the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as applicable.
9) The provisions of the Circular will come into effect from August 1, 2022.
Please find a copy of the Circular here.
This update has been contributed by Nidhi Arya (Partner) and Swaraj Narula (Senior Associate).
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