Social Audit Under the Social Stock Exchange

Social Stock Exchange

The Social Stock Exchange (“SSE”) was created as a platform to enable social enterprises to access a variety of funds and funding organizations discover social enterprises that require funding. The SSE is governed by Securities and Exchange Board of India (“SEBI”). Entities that are eligible to get listed on the SSE are called Social Enterprises.

Prerequisites to become a Social Enterprise 

These prerequisites are listed under SEBI (Issue of Capital and Disclosure Requirements), (“SEBI (ICDR)”)2018:

1. A Social Enterprise can be a for profit or a not for profit entity. ANY of the following entities are eligible for listing on the SSE:

a. A Company or Body Corporate operating for profit 

b. A Section 8 Company

c. A Charitable Society under Societies Registration Act

d. A Charitable Trust under Indian Trust Act/ any State’s public trust legislation.

2. Entities that are not eligible to become a social enterprise are those that engage in the following activities: 

a. political or religious organizations or activities,  

b. professional or trade associations,  

c. infrastructure and housing companies, except affordable housing.

3. Eligible entities can choose to engage in one or more of 16 activities mentioned under the SEBI (ICDR) 2018 to qualify for listing under the SSE. Examples of activities enumerated are - eradicating hunger, poverty, malnutrition, and inequality, promoting education,employability, and livelihoods, and bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection.

4. To be eligible for listing on the SSE, entities must also show that at least 67% (average of the immediately preceding three years) of their revenue and/or expenditure and/or customer base comes from under-deserved or less privileged segments of development priorities under the Central and State governments.

Social Audit

After listing on the SSE, the Social Enterprise is expected to make certain disclosures which are listed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, (“SEBI (LODR)”)2015. This includes getting

their annual impact report audited by a Social Auditor(SEBI (LODR), 2015: Regulation 91 E. 

Additional disclosures of fund utilization are also required on a quarterly basis from Social Enterprises who are not for profit entities (SEBI (LODR), 2015: Regulation 91 F.

Social Auditors 

1. Social Auditors (for auditing the annual impact report under Regulation 91 E above) are required to be registered with the ICAI (Institute of Chartered Accountants of India) or any other agency specified by SEBI and hold a valid certificate of qualification from National Institute of Securities Management.
2. In the interim period till the certification exams are conducted, the ICAI has appointed Social Auditors through a public call for applications on January 13, 2023. 
3. The job description for the position emphasized that applicants must have at least three years of experience in social impact assessment. This initial empanelment of Social Auditors will be valid for six months or till the certification exam is conducted whichever is later.
4. The ICAI has also notified a Framework for Social Audit Standards for each sector.
5. It is unclear whether SEBI has specifically notified ICSI (Institute of Company Secretaries of India) as an agency for empaneling social auditors. The ICSI has set-up the ICSI Institute of Social Auditors which has released the draft ICSI Social Audit Standards.

Impact of Social Audit on the Social Sector

Impact measurement is a means for social enterprises to demonstrate palpable, measurable impact of their work. This helps to foster the credibility of the social sector and keeps it accountable to the outcomes social enterprises often adopt in their mission and vision statements. The social audit standards are likely to transcend the context of the SSE and percolate to being adopted by the social sector at large. Here’s how:

On Funds Raised on SSE. Though the social audit norms are intended to audit the impact reports and impact reported by social enterprises listed on the SSE, this is the first time a framework is being recommended under statute to measure impact.

On CSR. A January 2021 amendment to India’s CSR law, made it mandatory for companies with a CSR budget of INR 10 crore or more in any fiscal year and all projects with outlays of INR 1 crore or more to conduct impact assessments by an independent impact agency. However, the Companies Act or Rules did not notify any framework for social auditors or impact audit. Thus the social impact reporting norms can get easily adopted by CSR donors.

On Philanthropic Grants. Philanthropic donors usually have outcomes frameworks that are tailor made to each grantee and its programs. It is likely that philanthropies too will adopt social audit norms notified under the SSE framework, which will reduce the need to re0invent the impact assessment framework for each grantee. However this will also prejudicially affect non-profits where outcomes are relatively slower to manifest. 

Eventually, we believe that non-profits would be compelled to identify an impact measurement framework and get their impact reports audited. This will become a common requirement for eligibility towards all forms of philanthropic capital.