Internal Audit for Broker Dealers in GIFT IFSC: An Explainer for NSE IX & India INX Members

Introduction: Why Internal Audit Matters in GIFT IFSC

GIFT IFSC has rapidly evolved into a globally competitive financial centre with internationally active exchanges—NSE International Exchange (NSE IX) and India International Exchange (India INX)—offering multi-asset cross-border products.
To maintain regulatory integrity and investor confidence, both exchanges mandate a robust half-yearly internal audit for all registered broker-dealers, regardless of whether they remained active or inactive during the period.

The internal audit framework is not a mere compliance formality—it is a core governance requirement under the IFSCA regulations. It ensures disciplined controls around client onboarding, trading operations, funds and securities management, PMLA compliance, technology controls, and exchange-specific rules.

Half-Yearly Internal Audit Requirement (NSE IX & India INX)

Both international exchanges in GIFT IFSC follow a structured internal audit cycle, requiring broker-dealers to undergo independent audits every half year.

As per NSEIFSC/REG/2336 dated 20 October 2025, all broker dealers must:

• Conduct internal audits for each half-year ending March 31 and September 30.
• Appoint an independent CA/CS/CMA (or foreign equivalent) with no conflict of interest.
• Submit the internal audit report through the ENIT portal by the prescribed deadline.
• Maintain audit working papers for exchange verification.
• Ensure compliance with actions prescribed under the earlier circular NSEIFSC/REG/2296 dated 17 September 2025. 

Sample Size: Minimum sample sizes depend on the number of active/registered clients, ranging between 15–75 clients, and additional samples for margin, turnover and risk-based selections. (Detailed methodology is prescribed in Annexure-III). 

Scope of Internal Audit for IFSC Broker-Dealers

The audit framework mirrors global brokerage audit standards and covers four broad compliance pillars:

1. Client Onboarding, KYC & AML

Auditors verify whether:

• All onboarding documents comply with IFSCA’s CMI Regulations and AML/CFT guidelines.
• UCC details are correctly uploaded.
• IPV/online KYC norms are followed.
• Risk-profiling, beneficial ownership verification, PEP controls, and periodic KYC reviews are in place.
• CSCs (Clients of Special Category) are properly identified.

2. Order Management & Risk Management

Critical aspects include:

• Proper risk-management policy and margin framework.
• No unauthorized or third-party funding of clients.
• Adequate controls for order placement—telephone recording, client identification, dormant account reactivation, limit controls, and prevention of non-genuine trades.
• Monitoring of MTM losses, debit balances, and recovery mechanisms.

3. Contract Notes, Statements & Reporting

The auditor examines whether:

• Contract notes and margin statements are issued within timelines.
• Prescribed disclosures appear on all client communications.
• Bounce-mail protocols and physical reissuance (if needed) are followed.
• Quarterly statements of accounts are accurate and complete.

4. Handling of Client Funds & Securities

Key checks include:

• Segregation of client and proprietary funds.
• No use of client funds for proprietary obligations.
• Timely settlement and payout.
• Proper running-account authorisations.
• Correct computation of statutory levies and avoidance of excess charges.

Key Thematic Areas Based on Internal Audit Format (Annexure-II)

The internal audit report format issued by the exchanges broadly evaluates:

1. Client Registration & AML Compliance
2. Order Management & Risk Management
3. Contract Notes & Client Statements
4. Funds and Securities Handling
5. Banking and Demat Operations
6. Terminal Operations & System Controls
7. Authorised Persons & Internal Controls
8. Investor Grievance Redressal
9. Books of Accounts Compliance
10. PMLA Systems & AML Checks
11. Client Code Modifications & Trade Transfers
12. Proprietary Trading Controls
13. Internet Trading Compliance
14. Power of Attorney Controls
15. Direct Market Access / Sponsored Access Compliance
16. Clearing Operations (where applicable)
17. Status of Previous Inspection Observations

These sections ensure that internal auditors examine all areas relevant to operational, compliance, and financial risks of an IFSC broker-dealer.

Exchange-Specific Compliance Requirements

The circular NSEIFSC/REG/2336 outlines a clear audit submission framework:

• Mandatory half-year audit for all broker-dealers.
• Use of structured annexures (Internal Audit Certificate, Audit Report Format, Sample Size, Checklist, User Manual).
• Submission on ENIT portal by 30 November or 31 May, depending on the half-year.
• Obligations apply irrespective of active or inactive membership.
• Audit findings are subject to enforcement action under NSEIFSC/REG/2296 for non-compliance. 

Both exchanges:

• Require adherence to identical internal-audit themes.
• Impose similar enforcement mechanisms for non-compliance.
• Mandate sample-based verification of client accounts, margin reporting, fund flows, and contract notes.

Thus, broker-dealers operating on both exchanges must align processes to one unified compliance framework, simplifying but strengthening governance.

Conclusion: Internal Audit as a Governance Advantage

The internal audit requirement for broker-dealers in GIFT IFSC—across NSE IX and India INX—is more than a compliance activity. It is a structured governance mechanism ensuring that entities maintain international best practices, robust systems, and a strong compliance culture.

With clear frameworks prescribed by the exchanges and IFSCA, broker-dealers must treat internal audit as a strategic tool to strengthen transparency, client trust, and operational resilience.

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