Regulatory updates

On 25 July 2022, SEBI had introduced regulations pertaining to the Social Stock Exchange (SSE) by making amendments to the following regulations:

• The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations)² by inserting a chapter on ‘Social Stock Exchange’,
• The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)³ by adding a chapter on ‘Obligations of Social Enterprises’, and
• The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations)⁴ by introducing changes in relation to social impact fund.

According to the ICDR Amendment Regulations, an SSE means a separate segment of a recognised stock exchange having nationwide trading terminals, permitted to register Non-Profit Organisations (NPOs⁵) and/or list the securities issued by NPOs in accordance with the provisions of the ICDR Regulations. The provisions would apply to:

• NPOs seeking to only get registered with an SSE,
• NPOs seeking to get registered and raise funds through an SSE, and
• For Profit Social Enterprises (FPSE)⁶ seeking to be identified as a Social Enterprise (SE)⁷ under the provisions of the ICDR Regulations.

As per the amendments an SE, which is either registered with or has raised funds through an SSE, should submit an annual impact report to the SSE (the format would be specified by SEBI). The annual impact report must be audited by a social audit firm⁸, employing social auditor(s)⁹.

In this regard, ICAI has been entrusted with the responsibility of being the self-regulatory organisation for regulating the profession of social auditors. Consequently, on 5 August 2022, ICAI released an Exposure Draft (ED) on Compendium of Social Audit Standards (SAS).

Some of the key requirements of the SAS framework discussed in the ED are as follows:

• Applicability: The SAS would apply whenever an independent social audit of an SE is carried out. The framework specifies five elements of a social audit engagement. These are:

1. A three-party relationship involving a social auditor, a responsible party (generally SE), and the intended user
2. Project/programme/intervention to be covered
3. Project monitoring framework
4. Evidence
5. A written report

• Quality control for social auditor: A social auditor/audit firm must establish a system of quality control, including policies and procedures addressing each of the following elements:

1. Leadership responsibilities for quality within the firm
2. Ethical requirements
3. Acceptance and continuance of client relationships and specific engagements
4. Human resources
5. Engagement performance, and
6. Monitoring.

The quality control policies and procedures should be documented and communicated to the firm’s personnel on a timely basis.

• Understanding the entity and its environment: For establishing an SE’s primacy of social intent, a social auditor should conduct a preliminary review of the entity and its environment. Such a review may include information such as the stated objectives of the project/programme, project monitoring framework¹⁰, programme specific baseline¹¹, mid-line and end-line¹² assessment reports, fund utilisation certificate, alignment of the project outcomes to National/State priorities, NITI Aayog’s Sustainable Development Goals (SDG) India Index Indicators and so on.
• Collection and analysis of data: A social auditor should use various methods such as interviews, questionnaires, Focussed Group Discussion (FGD)¹³ etc. for collecting data on different quantitative and qualitative parameters.The respondents would be the stakeholders of an SE which affect or are affected by the project. Based on the data collected, the social auditor should analyse and interpret it as per the ‘Theory of change and logic model’, explaining the process of intended social impact of the project. The review process should answer the following questions:
  
  1. What was the situation before and what would have happened in the absence of the project?
  2. How much has the project contributed to the changes that are evidenced as compared to pre project interventions?
  3. How much unintended impacts (positive and negative) happened due to the project?
• Materiality: A social auditor should consider materiality while assessing the overall impact of the project/programme. Different quantitative and qualitative factors, such as relative magnitude, the nature and extent of the effect of these factors on the evaluation or measurement of the subject matter, the interests of different stakeholders involved, etc. should be taken into consideration while assessing the materiality threshold.
• Using the work of field level research agency/subject matter experts: In certain cases, a social auditor may need to use the work of assistants/field level research agencies and/or other social auditors and subject matter experts. In such situations, the social auditor should perform relevant procedures to evaluate the appropriateness and adequacy of the work performed and consider their significant findings/assessments, if any, in the context of the specific social audit. A social auditor would continue to be responsible for the overall social audit report of an SE.
• Use of technology: A social auditor should determine the usage and acceptability of technology for meeting the objectives, collecting and verifying evidence as well as validating impact measurements and assessments in case of social audit engagements. The social auditor should consider the extent of usage of IT tools to be deployed for:
  
  1. information database to be maintained at one place for information of all stakeholders, beneficiaries, volunteers, staff,
  2. Data collection process through online surveys, virtual interviews, satellite imagery for monitoring forestry coverage etc., and
  3. Data sorting and visualisation, data analysis, reporting.
• Documentation: Engagement documentation must be prepared on a timely basis, and it should provide a record of the basis for the social audit report, the nature, timing and extent of the audit procedures performed, evidence obtained, significant issues observed, if any, and recommendations made for future improvements. The process of assembling the final engagement file should be completed within a period of 60 days after the date of the social audit report. Also, the retention period should be seven years from the date of the social audit report.
• Reporting – Social audit report: A social auditor must issue a written social audit report containing the findings from the assessment in terms of the impact created, gaps, if any, along with the recommendations for improvement. It should address the social impact assessment covered by the project/programme that the intended users might be interested in. The framework does not require a standardised format for reporting on all social audit engagements. The social audit reports may be tailored to the area specific circumstances.

The framework identifies certain basic elements which the social audit report should include, which are given below:

The ICDR Amendment Regulations mention 16 thematic areas which would qualify as eligible activities for the purpose of establishing primacy of social intent. In this regard, ICAI has prescribed 16 SAS in the ED, each corresponding to a specific area. These are as follows:

The ED would be open for comments up to 13 September 2022.

To access the text of the ICAI ED, please click here

2. The amendments have been issued by the SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022 (ICDR Amendment Regulations)
3. The amendments have been issued by the SEBI LODR (Fifth Amendment) Regulations, 2022 (LODR Amendment Regulations)
4. The amendments have been issued by the SEBI AIF (Third Amendment) Regulations, 2022 (AIF Amendment Regulations)
5. An NPO means a social enterprise, which is any of the following entities:
   • A charitable trust registered under the Indian Trusts Act, 1882
   • A charitable trust registered under the public trust statute of the relevant state
   • A charitable society registered under the Societies Registration Act, 1860
   • A company incorporated under section 8 of the Companies Act, 2013
   • Any other entity as may be specified by SEBI
6. For Profit Social Enterprise’ means a company or a body corporate operating for profit, which is a social enterprise for the purposes of the ICDR Regulations and does not include a company incorporated under section 8 of the Companies Act, 2013
7. An NPO or a FPSE, in order to be identified as an SE, must establish primacy of its social intent. In this regard, SEBI has prescribed 16 thematic areas which would qualify as eligible activities that meets the eligibility criteria specified in the ICDR Amendment Regulations. Additionally, an SE should have at least 67 per cent of its activities, qualifying as eligible activities through one or more of the following:
   • at least 67 per cent of the immediately preceding three-year average of revenues comes from providing eligible activities to members of the target population,
   • at least 67 per cent of the immediately preceding three-year average of expenditure has been incurred for providing eligible activities to members of the target population, and
   • members of the target population to whom the eligible activities have been provided constitute at least 67 per cent of the immediately preceding three-year average of the total customer base and/or total number of beneficiaries.
8. Social audit firm means any entity which has employed social auditors and has a track record of minimum three years for conducting social impact assessment
9. Social auditor refers to an individual registered with a self-regulatory organisation under ICAI or such other agency, as may be specified by SEBI, who has qualified a certification programme conducted by the National Institute of Securities Market (NISM) and holds a valid certificate in this regard
10. Project monitoring framework details the inputs, activities, outputs, outcomes and impact that would aid an auditor’s understanding of the project. Additionally, the auditor should also consider parameters such as inclusiveness, relevance, effectiveness and efficiency, convergence and sustainability of the project for assessing its impact
11. Baseline measurement is required to establish the starting point in any project/programme/project-based activity
12. A mid-line and end-line measurement is the audit conducted respectively during the intervention phase and after the end of that intervention
13. For the purpose of this framework, the FGD constitutes subject matter experts including Non-Governmental Organisations, NPOs, working on the respective thematic areas and actively engaged in social activities as well as beneficiaries.
14. Elements provided in the illustrative social audit report are indicative.