Markets regulator Sebi on Wednesday asked asset management companies (AMCs) to form audit committees which will be responsible for oversight of financial reporting process, audit process and compliance with laws and regulations, among others. The circular will come into force with effect from August 1, 2022. Currently, audit committee exists at the level of trustees of mutual funds.

Sebi said the decision has been taken after taking into account the recommendation of Mutual Fund Advisory Committee and the feedback received from the industry and has come out with detailed outline for role, responsibility, membership and other features of the Audit Committee of AMC.

Mandate of the committee is to review the financial reporting processes, the system of internal controls and the audit processes for the mutual fund operations of the AMC.

Besides, it would be required to ensure that the rectifications, if any, suggested by internal and external auditors, among others, are acted upon.

"The Audit Committee of the AMC shall 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," Sebi said in its circular.

The regulator has laid down detailed powers and responsibilities of the committee with respect to financial reporting, audit (internal and statutory) and internal controls, regulatory compliance and other functions.

The internal auditor has to submit its report to the audit committees of AMC and the board of AMC, Sebi said.

The committee shall forward their observations on internal audit report, if any, to the trustees, it added.

The chairperson is mandated to conduct atleast four meetings in a financial year and there should not be a gap of over 120 days between two meetings.

The meeting can also be called by the chairperson as and when required and Sebi has also mentioned about the quorum for meeting. The members of the audit committee will be appointed by the Board of Directors of AMC, as per Sebi.

On composition of the committee, Sebi said it shall have minimum three directors as members and at least two-third members of the committee shall be independent directors of AMC.

If two-third of the total strength results into fraction, then higher number after rounding up shall be considered.

"The Chairperson of the Committee shall be an independent director, with adequate experience in the areas of finance and financial services," Sebi said.