In a circular to mutual funds on Tuesday, Sebi said the audit committee would be liable for internal statutory audits in order to see that the mutual funds are in compliance with the guidelines.

"The intention is to instill good corporate governance practices in mutual funds". So far, the formation of an internal audit committee was left to the discretion of the mutual funds, and a very few of them are learnt to have formed such audit committees - but now, with this circular, the board of trustees have to comply with this compulsorily. The committee will be carved out of the trustee members themselves. At present, half of the members (of the board of trustees) are independent - that is, from outside the mutual fund industry, while the remaining members are those who are affiliated with the fund.

Last week, the securities watchdog had issued a circular enjoining mutual funds to keep a check on the valuations of their securities. According to industry sources, some funds, in order to show a steady valuation pattern without the volatilities of the market being reflected in it, often take an average over a period of time which smooths out the fluctuations.

In yet another move, the Sebi has increased the frequency of portfolio disclosures by mutual funds from once a year (in their annual reports) to twice a year - that is, on a half-yearly basis. But interestingly, the regulator has exempted the funds from mandatorily sending the portfolio details to the investors. Instead, it has given them the choice of placing advertisements in a national daily (having a wide national readership) and a regional newspaper circulated in the area where the mutual fund has its registered office.According to Sebi officials, the latter move is also to inform those who are not investors in the fund.

"Mutual funds can exercise both options," they said. Some fund managers feel that this is a retrograde step by the markets regulator, as MFs might take the easy way out and opt for advertisements which the investors might very well miss out.