SEBI’s Increasing Expectations from Audit Committee

SEBI has recently issued Circular directing AMC of mutual fund to  constitute an Audit Committee based on the recommendations of the Mutual Fund Advisory Committee (MFAC). Regulations will be effect from August 01, 2022.

Since unlisted AMC’s are manging huge amount of public money, running into Lakhs of crores spread over various schemes, SEBI’s move is linked to build the safeguard for the unlisted AMC’s in line with the listed AMC for protecting investors.  Millions of new D-Mat accounts have been opened and lot of money from small investor is gushing into the market directly as well as through Mutual Fund route. SEBI measures are aimed at creating internal safeguards for keeping a check on the smooth functioning of public money by AMC’s.   

According to the Data, more than 40 AMCs are presently operating in Indian Capital Market. Large of AMC mages Lakhs of Crores of funds e.g.  ICICI Prudential Asset Management manages approx. Rs 4.91 Lakhs Crores over 277 schemes, SBI Funds manages approx. Rs 4.5 Lakhs Crores over 136 schemes, Nippon Life manages Rs 2.45 Crores spread over 220 schemes. Only handful of AMCs are listed in the market e.g., UTI AMC (Managing Rs 1.83 Lakhs Crore), Aditya Birla Sun Life AMC (Managing Rs 3.11 Laks Crore), HDFC AMC (Managing Rs 4.73 Lakhs Crore) etc.

Members of the Audit Committee will have the responsibility to review the financial reporting processes, internal controls system and the audit processes related to the Mutual Fund operations of the AMC. Audit Committee will have the responsibility to ensure that the rectifications suggested by Auditors (internal and external) are being acted upon.

Audit Committee of AMC shall have minimum of three directors as members, out of which least two-third members of the Audit Committee will be independent directors including the Chairman having requisite financial expertise.

Members will be appointed by the Board of AMC. Members must have the ability to read and understand the financial statement and at least one member shall have experience and background in finance and accounts.

Audit Committee will be responsible for the Oversight of the Mutual Fund Schemes as well as the Financial Reporting process of AMC including Accounting Policy issues and transactions with the Related Party. Any qualified opinion issued by the Auditor will have to be reviewed by the Audit Committee.

Various activities of the AMC are outsourced. This includes critical function like Custody Services, Fund Accounting, RTA activities etc. Audit Committee will have to review the Internal Audit Report of the MF schemes and also review the scope of work to be covered by Internal Audit. It will have to recommend appointment, reappointment, or removal of the Statutory and Internal Auditor of the Mutual Fund, including recommendations for fixation of the Audit Fees.

Audit Committee will have to look into action taken on the issues highlighted by Internal Audit and Statutory Auditor of the Company and discuss the significant findings with the Auditors including the matters related to suspected fraud, failure of internal control systems, issues highlighted by whistle blower etc.  

SEBI’s expectations from Audit Committee is continually increasing. Earlier Market Regulator issues circular on November 22, 2021, specifying information which needs to be placed before the Audit Committee in relation to RPT. Circular clearly communicates the expectations of Regulator from Audit Committee, in relation to vetting of information related to Related Party (RPT).

Expectation from Audit Committee is increasing at all the level. Members of Audit Committee are expected to exercise their decision in line with the business rationale, so that it best serves the interest of all the stakeholders and protect the investors.

Presently Audit Committee exist at the level of trustees of Mutual Funds but making it mandatory at the AMC level highlights the intention if Regulator to protect public money in unlisted space as well as expectations from Audit Committee to be nearer to business and protect the interest of stakeholders.   

Bureau Galactik Views

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