Annual compliance audit is a critical regulatory requirement for portfolio managers. This article explains who can conduct the audit and the eligibility criteria.
The Regulatory Mandate
Legal Basis
SEBI's Portfolio Managers Regulations 2020, together with the master circular for portfolio managers, mandates that all registered portfolio managers submit annual compliance reports, net worth confirmations, corporate governance reports and performance audit reports within specified timelines.
Audit Requirement
Portfolio managers must conduct an annual audit in respect of compliance with the regulations from a member of the Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), or Institute of Cost Accountants of India (ICMAI).
Who Can Conduct the Audit
Institute of Chartered Accountants of India (ICAI)
Members of ICAI are eligible to conduct annual compliance audits for portfolio managers. Chartered Accountants must:
- Hold a valid certificate of practice
- Be in good standing with the Institute
- Have the requisite expertise in regulatory compliance
Institute of Company Secretaries of India (ICSI)
Members of ICSI are eligible to conduct annual compliance audits. Company Secretaries must:
- Hold a valid certificate of practice
- Be in good standing with the Institute
- Have expertise in corporate and regulatory compliance
Institute of Cost Accountants of India (ICMAI)
Members of ICMAI are eligible to conduct annual compliance audits. Cost Accountants must:
- Hold a valid certificate of practice
- Be in good standing with the Institute
- Have the requisite expertise
Clarification on ICMAI Eligibility
SEBI has issued a clarification regarding the eligibility of members of the Institute of Cost Accountants of India to conduct annual audits. Portfolio managers are required to conduct an annual audit through ICAI, ICSI, or ICMAI members within six months from the end of the financial year and submit the audit report, along with any adverse findings and corrective actions.
Audit Scope
Compliance Verification
The audit must verify compliance with:
- SEBI (Portfolio Managers) Regulations, 2020
- Circulars and guidelines issued thereunder
- SEBI Act and rules
- Any other applicable regulations
Client-Level Segregation
The auditor must confirm compliance with client-level segregation requirements. Portfolio managers must maintain on record an annual certificate from a member of ICAI/ICSI/ICMAI or from an auditor confirming compliance with client-level segregation requirements.
Performance Data Audit
The audit must also cover firm-level performance data, including verification of TWRR calculations and performance reporting.
Audit Timeline
Completion Deadline
The audit must be completed within six months from the end of each financial year.
Report Submission
After completion, the audit report must be submitted to SEBI within one month, and no later than October 31 for the preceding financial year.
Consequences of Non-Compliance
Regulatory Action
Failure to conduct the annual compliance audit or submit the audit report can result in enforcement action by SEBI, including monetary penalties and suspension of registration.
Operational Restrictions
Non-compliance may result in restrictions on onboarding new clients.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on annual compliance audit requirements for portfolio managers. Our securities law experts help clients select appropriate auditors, ensure comprehensive audit coverage, and meet submission deadlines. Contact us for guidance on annual compliance audit and other regulatory matters.