Constitution of Audit Committee in Case of Asset Management Companies of Mutual Funds

Constitution of Audit Committee in Case of Asset Management Companies of Mutual Funds

Executive Summary:

This article describes:

• • • Formation of Audit Committee of Asset Management Companies (AMCs) of Mutual Funds.
    • The role, responsibility, membership and other features of the Audit Committee of AMC of Mutual Funds.

Introduction:

An Audit Committee is a main operating committee of a company’s board of directors that monitors financial reporting and disclosure. Securities and Exchange Board of India (SEBI) published a circular on the Audit Committee of Asset Management Companies (AMCs) on February 9, 2022. Wherein, SEBI has directed the mutual fund industry to establish an audit committee at the AMC level from 1st August, 2022. The circular outlines the Audit committees of AMCs powers and responsibilities in financial reporting, audit (internal and statutory), internal controls, regulatory compliance and other functions. At the present, Audit Committees exist at the level of mutual fund trustees.

Key points of the circular:

• Role, Membership, Meetings and Reporting:
  • The Audit Committee will be responsible for reviewing the AMC’s financial reporting processes, internal control systems and audit processes for mutual fund operations, as well as ensuring that any rectifications advised by internal and external auditors are implemented.
  • Moreover, the committee will consist of at least three directors, with at least two-thirds of the members being independent AMC directors. The members will be chosen by the AMCs’ Board of Directors.
  • The Chairperson of the Committee should be an independent director with significant finance and financial services experience.
  • The Audit Committee’s Chairperson will call the meeting as and when it is needed. However, at least four meetings should be called in a financial year, and not more than 120 days should elapse between two meetings.
  • A quorum for a meeting shall consist of at least two independent directors or one-third of the members of the Audit Committee, whichever is greater. If one-third of the total strength is a fraction, the quorum will be determined by the higher number after rounding up.
  • The internal auditor should provide a report to the AMC Audit Committees and the Board of AMC.
  • The Trustees will receive the AMC Audit Committee’s observations on the internal audit report, if any.
• Powers and Responsibilities in the Case of Audits and Internal Controls:
  • Consider and recommend for approvals, appointments, re -appointments and replacement or removal of the Mutual Fund’s Statutory Auditor, Internal Auditor and other Statutory Auditors, as well as the fixation of fees for audit and other services rendered by the Statutory Auditors with respect to the Mutual Fund.
  • Reviewing the findings of any internal investigations conducted by the AMC or internal auditors into situations including suspected fraud or irregularity, a material failure of internal control systems, or issues raised or referred by whistleblower complaints, etc.
  • Reviewing Regulatory Inspection Reports.
  • Examining the status of all pending action points from Internal Audit Reports, Statutory Audit Reports, Systems Audit Reports, Inspection Reports, and other sources.
  • Examining the adequacy of internal control systems, including defining metrics for measuring internal controls, obtaining internal auditors’ comments on internal control systems, and the activities taken to improve the effectiveness of internal control systems, including through automation.
  • Interacting with the Mutual Fund’s statutory and internal auditors at least once a year without the involvement of the AMC’s management. Apart from the required necessity, such interactions may be held whenever the Audit Committee’s independent directors feel it’s necessary.
  • At least once a year, the AMC’s Audit Committee shall meet with the Trustees’ Audit Committee.
• Regulatory Compliance and other Functions:
  • Numerous internal control procedures are being evaluated in light of the SEBI (Mutual Funds) Regulations and the various circulars issued thereunder.
  • Examining a periodic report on compliance with applicable laws and regulations, including details of noncompliance and corrective actions, where needed.
  • Examining the Annual Compliance Report in light of the AMC’s “Policy on Insider Trading Prohibition.”
  • Assess whether the asset management company has been managing mutual fund schemes independently of other activities and has taken adequate steps to ensure that the interests of investors in one scheme are not compromised by the interests of investors in another scheme or by the asset management company’s other activities.

Conclusion:

The Audit Committee of Asset Management Companies of Mutual Funds will be responsible for supervising the financial reporting, auditing, and internal control systems. The capital markets regulator SEBI has mandated that AMCs form an Audit Committee from 1st August, 2022.

Regards,
Legal Team

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