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Picture Courtesy: ECONOMIC TIMES

Context:

SEBI issues new internal audit norms for better governance at Market Infrastructure Institutions (MIIs).

What Are SEBI’s New Guidelines for MIIs?

Securities and Exchange Board of India (SEBI) introduces new rules to strengthen how Market Infrastructure Institutions (MIIs)—stock exchanges (like NSE and BSE), clearing corporations, and depositories (like NSDL and CDSL)—manage their internal audits and audit committees.

MIIs form the backbone of financial markets, ensure smooth trading, settlement, and safekeeping of securities. SEBI aims to make these institutions more transparent, efficient, and accountable through robust governance and risk management practices.

Key Points of the New Guidelines

SEBI mandates that every MII conducts an internal audit of all its functions at least once every financial year.

Independent Auditors

SEBI requires MIIs to hire independent audit firms to conduct the audits.

The audit committee (a group of independent members within the MII) manage the audit process. SEBI sets strict rules:

Composition => No executive directors can be members of the audit committee, to ensure the committee remains independent and isn’t influenced by the MII’s management.
Responsibilities => The committee approves related-party transactions (deals involving connected entities), reviews financial statements, and evaluates internal controls and risk management systems.
Meetings => Key Management Personnel (KMPs), like the MD, can attend meetings if invited by the committee’s chairman, but they have no voting rights. This keeps decision-making impartial.

Audit Process

The independent auditor examines the MII’s operations and identifies issues or risks.
The auditor sends observations to the Heads of Departments (HoDs) for their feedback within a set time.
After incorporating HoD comments, the auditor submits a final report to the audit committee.
Even if some issues are resolved or dropped after HoD clarifications, the auditor includes them in the report with reasons for closing them.
The audit committee may consult other MII committees to discuss the auditor’s findings.

The auditor must brief the audit committee twice a year (within 60 days after September and March) on critical issues. These briefings happen without management present to ensure honest discussions.

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Securities and Exchange Board of India (SEBI)

Source:

ECONOMIC TIMES

PRACTICE QUESTION

Q. In the question given below, there are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the codes provided:

Assertion (A): The repo rate is the rate at which the central bank lends money to commercial banks against securities.

Reason (R): The reverse repo rate is always higher than the repo rate to encourage banks to park excess liquidity with the central bank.

Which of the options given below is correct?

A) Both A and R are true, and R is the correct explanation for A.

B) Both A and R are true, but R is not the correct explanation for A.

C) A is true, but R is false.

D) A is false, but R is true.

Answer: C

Explanation:

Assertion (A) is true: Repo rate is the rate at which the central bank (like the Reserve Bank of India) lends money to commercial banks in the event of any shortfall of funds. The commercial banks provide government securities as collateral for these loans, with an agreement to repurchase them at a later date.

Reason (R) is false: Reverse repo rate is the rate at which the central bank borrows money from commercial banks. Banks willingly lend money to the central bank when they have excess liquidity, as it offers a risk-free return. The reverse repo rate is lower than the repo rate. The reason for this is to create a corridor for overnight interest rates. If the reverse repo rate were higher than the repo rate, banks would prefer to lend to the central bank at a higher rate rather than lending to other commercial banks at the repo rate, which would disrupt the money market. A lower reverse repo rate encourages banks to lend to each other before resorting to the central bank, and it provides a floor for overnight rates.