Module: | SEBI LODR & Corporate Governance Frameworks
Q29: Consider the following statements regarding the Internal Audit Mechanism for Market Infrastructure Institutions (MIIs) mandated by SEBI in May 2025:
1. Market Infrastructure Institutions (MIIs) are exempt from constituting an independent internal audit mechanism due to their legal empowerment as first-line regulators.
2. SEBI mandates that MIIs must maintain the highest standards of governance and risk management to identify, assess, and mitigate risks that could impact their operations.
3. The internal audit function within an MII must report directly to the executive commercial management rather than the Audit Committee to ensure rapid operational adjustments.
Which of the above statements is/are incorrect?
2. SEBI mandates that MIIs must maintain the highest standards of governance and risk management to identify, assess, and mitigate risks that could impact their operations.
3. The internal audit function within an MII must report directly to the executive commercial management rather than the Audit Committee to ensure rapid operational adjustments.
Which of the above statements is/are incorrect?
✅ Correct Answer: B
🎯 Quick Answer:
B. Only 1 and 3 are incorrect.They act as public utility infrastructure and frontline regulators of the capital markets.
Structural Breakdown: Statement 1 is incorrect; precisely because they are systemically vital, SEBI strictly mandates a robust internal audit mechanism for MIIs.
Statement 2 is correct; their unique dual role requires unimpeachable governance and risk mitigation.
Statement 3 is incorrect; to maintain independence, the internal audit function must report directly to the Audit Committee, not the executive management whose actions they are auditing.
Historical/Related Context: Historical technical glitches at major exchanges (like the 2021 NSE outage) underscored the catastrophic systemic risks posed by MII failures.
The May 2025 circular fortified internal audit norms to prevent structural oversights.
Causal Reasoning: MIIs operate as both commercial entities seeking profit and regulatory utilities managing public trust.
A strong, independent internal audit reporting to the Audit Committee ensures that commercial goals do not override critical risk and compliance safeguards.