Samagrata – December, 2022
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Open in new tab As social stock exchanges seem imminent, auditors get ready with social audit standards
ICAI and ICSI issue social audit standards
– Sharon Pinto & Kaushal Shah (corplaw@vinodkothari.com)
Background
As we understand, the concept of Social Stock Exchanges (‘SSEs’) have been brought under the regulatory purview of Securities and Exchange Board of India (‘SEBI’) for listing and raising of capital by Social Enterprises, the details of which can be read in our article Social stock exchanges: philanthropy on the bourses as well as our other resources linked with the concept of SSEs and social sectors.
Social Enterprises are defined under regulation 292A (h) of the SEBI (ICDR) Regulations, 2018 (‘ICDR Regulations’) and are expected to be engaged in the specified activities provided therein. With the objective to assess the impact created by such social activities by the Social Enterprises, Self Regulatory Organisations (‘SRO’s) recognised under ICAI, ICSI and such other bodies as may be prescribed by SEBI have been considered to be eligible to act as platforms to register Social Auditors. ICAI has approved the formation of an SRO named ‘Institute of Social Auditors of India’ while ‘ICSI Institute of Social Auditors’ is the recognsied SRO under ICSI. Such auditors are also required to undergo a certification program conducted by National Institute of Securities Market (‘NISM’).
ICAI has recently sought interest for the initial empanelment of Social Auditors.[1] The eligibility criteria for empanelment as a Social Audit firm requires having a track record of minimum three years of conducting social impact assessment. Further, average annual grants or expenditure of social enterprise of the last 3 financial years should be atleast Rs. 50 lakhs and the firm should have suitable human resources in the field of social development having experience of usage of relevant methodology of social audit. The disqualifications includes any individual or any of the partner/director of an entity being convicted for an offence of moral turpitude or declared as an undischarged insolvent/bankrupt or has been debarred by SEBI.
To put it in simple terms, Social Auditors are required to conduct Social Audit of the activities carried on by Social Enterprises. To aid the Social Auditors in carrying out the Social Audit, both the SROs being ICAI and ICSI have rolled out the Social Audit Standards (‘SAS’) to assist and guide their empanelled auditors for the purpose of carrying out the audit in accordance with the SAS Framework. Looking at the imminence of SSEs to come into reality with SEBI granting in-principle approval to both BSE and NSE in December, 2022, SROs have rolled out SAS for the quick reference and guidance for their registered auditors.
In this write-up, we have covered the key takeaways from the SAS and its relevance, applicability as well as mapping with the global principles on social audit.
Read more →Analysing Current Issues in Liquidation under IBC & Future Reforms
– Sikha Bansal & Barsha Dikshit, Partner | resolution@vinodkothari.com
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LODR amended – Senior Management redefined | Material Subsidiaries details to be disclosed in CG report | CG norms ‘NA’ to REITs & InvITs |
– Aisha Begum Ansari & Lovish Jain | corplaw@vinodkothari.com
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Annual Transparency Report by statutory auditors of Large public Interest Entities
– Burhanuddin Kholiya | corplaw@vinodkothari.com
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Read our more detailed discussion on the said topic here
NFRA proposes copious financial information disclosures by auditors of large listed companies
An Annual Transparency Report to be published on the websites of the auditors
– Burhanuddin Kholiya and Payal Agarwal | corplaw@vinodkothari.com
In a major step to ensure transparency of audit and non-audit services, and internal protocols, quality checks, etc being maintained by auditors or large listed entities, the National Financial Reporting Authority (NFRA), vide a letter dated 16th January, 2023 (hereinafter referred to as “Proposal”), has proposed publication of an Annual Transparency Report (ATR) by the auditors of top 1000 listed companies. The ATR contains copious data, and interestingly, requires financial information about the audit firm, as well as its network entities. NFRA indicates that this proposal is in line with global practices, citing examples of regulations in the European Union (EU) and Australia.
The Proposal is said to be in terms of Rule 8(2) of the NFRA Rules, 2018 which empowers NFRA to require an auditor to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risks including the risk of failure of the auditor and may take such action on the report as may be necessary, is proposed to be implemented for FY23 to begin with.
A quick snapshot of the same can be referred here.
Read more →Compliance Risk Assessment
Guidance for implementation by NBFCs
Subhojit Shome, Assistant Manager | subhojit@vinodkothari.com
Introduction
The RBI published the Compliance Function and Role of Chief Compliance Officer (CCO) – NBFCs[1] on April 11, 2022 (‘Compliance Circular’) that are applicable on Middle Layer (NBFC-ML) and Upper Layer NBFCs (NBFC-UL) and the deadline to put into place the framework for this function falls due on October 1, 2023 for NBFC-ML and April 1, 2023 for NBFC-UL entities.
The circular brings up the significant aspect of Compliance Risk, a concept that has been for long relevant for Banks[2] and now becomes applicable for specified NBFCs as well. The Compliance Circular define Compliance Risk as follows:
‘the risk of legal or regulatory sanctions, material financial loss or loss of reputation an NBFC may suffer, as a result of its failure to comply with laws, regulations, rules and codes of conduct, etc., applicable to its activities.’
Hence, Compliance Risk goes beyond mere fines and penalties that may arise as a result of compliance irregularities and the Compliance Function needs to consider the entire gamut of adverse events that a company may be exposed to as a result of compliance failures. These may include events with extreme impact such as suspension of business operation or loss of reputation as a result of enforcement action against senior management.
As a crucial piece of being able to anticipate such risks and to put necessary mitigation measures in place the Circular mandates putting in place an effective compliance risk assessment framework and the senior management to review such assessment annually.
Read more →Sustainability reporting: The New Normal
– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com
Readers of financial statements get to know the performance of the company in terms of its financial accomplishments, asset values, etc. However, in a world where sustainability of business models in not very long run will be impacted by environment, climate change, social factors, etc., readers of financial statements also need to be informed about the sustainability aspects of a company’s business model.
Over time, sustainability reporting, either on voluntary basis or as a part of listed company reporting, has become a widely accepted practice, at least by large companies. A KMPG Survey of 2022 states that “rates of sustainability reporting among the world’s leading 250 companies are at an impressive 96 percent”.
While there have been various voluntary sustainability reporting standards such as GRI Standards, SASB Standards, CDP Standards, IIRF, GHG protocol etc, the most recent development in the field of sustainability reporting standards is the IFRS Sustainability Standards, prepared as a consolidation of various major sustainability reporting standards around the world. Further, various countries, mostly through the stock exchanges, have formulated their own mandatory sustainability reporting requirements in full or partial adoption of such voluntary standards.
Currently, the sheer multiplicity of standards is baffling. In mid-2019, the NYSCPA ran an article titled As Sustainability Frameworks Multiply, Navigating Them Becomes a Concern. It quoted the-then chair of IASB saying: “There are simply too many standards and initiatives in the space of sustainability reporting”. The situation is seemingly leading to some consolidation, as the various standards bodies are collaborating. However, even as of now, there is no clear sense of direction, as the requirements of mandated sustainability reporting quite often differ from those of voluntary standards such as GRI.
Read more →Debenture Issuance -Recent developments & applicable compliances
– Vinita Nair, Senior Partner | vinta@vinodkothari.com
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Sustainable finance and GSS+ bonds: State of the Market and Developments
– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com
The topic of sustainable finance has become as critical as sustainable development, since finance is the prerequisite for sustainable development. “Finance can play a leading role in allocating investment to sustainable corporates and projects and thus accelerate the transition to a low carbon and more circular economy. Moreover, investors can exert influence on the corporates in which they invest. In this way, long-term investors can steer corporates towards sustainable business practices.”[1] Hence, there is momentum towards organising funds and resources to transition from low energy efficiency to high energy efficiency, or renewable energy devices.
The expression “sustainable finance” is broader, as it encompasses the use of ESG considerations in financing decisions.[2] However, sustainability bonds are capital market instruments issued with a stated end-use. The term GSS+ bonds, which has recently been much in vogue, has G, S, S and then augmented by the + sign. The components of “GSS+” are as follows:
G : Green
S: Social
S: Sustainability
+ : Other labeled bonds, particularly, transition bonds, and depending on the usage, may also include sustainability-linked bonds.
The other labeled bonds may also include blue bonds, gender bonds, climate bonds, yellow bonds etc., although the same may already be covered under one of the components of the GSS bonds. For instance, blue bonds are taken as a part of green bonds, and gender bonds are taken as a part of social bonds.
GSS+ bonds are also called “thematic” or “labeled” bonds, with the use of their proceeds linked with the respective theme represented by such bonds. These expressions may be somewhat overlapping[3].
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