[Opinion] Social Audits Boost Transparency & Accountability in India

Faizur Rehman & Pancham Prabhune – [2025] 174 taxmann.com 403 (Article)

1. Introduction

India has wrestled with the problem of multifaceted inequalities long before we gained our independence. Irradiating this problem has been the foremost task taken up by our founding fathers, leading to our nation’s formation as a welfare state. Over time, we have made major strides in this direction, like introducing various welfare schemes for different groups of people. Along the way, it was realised that an effective long-term solution to this issue would require the inclusion of people most affected in the decision-making machinery. In this regard, the introduction of panchayat raj via the 73rd constitutional amendment has been one of the most significant ones. Now, people living in the most remote areas of the country, voiceless people, gained a platform to raise awareness about their condition and propose solutions that work best for them.

Extending this effort of decentralisation of power, the government has introduced the mechanism of social audits in various schemes and policies. A social audit is a way of measuring, understanding, reporting and ultimately improving an organisation’s social and ethical performance. A social audit helps to narrow gaps between vision/goal and reality, between efficiency and effectiveness. It is a technique to understand, measure, verify, report on and improve the social performance of the organisation. In the context of government schemes, a social audit is an accountability tool that measures, evaluates, and identifies gaps in service delivery and elicits promises to rectify these gaps with the direct participation of intended beneficiaries in this process. It empowers citizens to not only keep track of the utilisation of funds but, most importantly, gauge the effectiveness of a scheme by looking at its impact, and whether the scheme has been beneficial for its target audience, and allows an organisation to evaluate the sustainable rollout of a scheme.

Corruption is one of the serious issues in South Asia, especially in India. It has become an everyday culture and is quite normal to discuss corruption in India. In the absence of social accountability and the sole emphasis on traditional vertical accountability, it observed a significant negative effect was observed in the implementation of social welfare programmes. The rising concepts of ‘transparency and accountability’ are playing a vital role in achieving good governance, empowering the citizens and justice in the new public management system. The tool of the social audit has emerged as a hope for democratic accountability that provides a platform for people, especially the marginalised ones, to raise their grievances fearlessly.

This article attempts to explore various social audit policies instituted by the government and other organisations. Establishment of social stock exchange by SEBI to channel requisite funding towards Non-profit organisations and implementation of social audits as a check and balance mechanism. Lastly, the article analyses the impact of these programs in promoting the growth of transparency and accountability on a grassroots level.

2. Social Audits in Governmental Policies

One of the largest social audits is conducted in the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). MGNREGS is a unique and unprecedented effort in strengthening grassroots democracy in India. For the first time, the Indian state has legally mandated the implementation of a mechanism that strengthens transparency and accountability at every step of the delivery chain, by creating a platform for citizens to articulate their voices and directly engage with the state. This legal mandate has been the catalyst for state governments across the country to innovate with different tools to strengthen accountability.

The aim of this is the verification of number of jobs the government claims to have created. Under section 17, sub-sections 1, 2 and 3 of the MGNREG Act, the main responsibility of Social Audit has been provided to the Gram Sabha. Social Audit in the initial period of MGNREGS was conducted with the initiatives of Gram Panchayats with the help of ‘Social Audit Forum’ or ‘Social Audit Team’. Different studies revealed that the result of such Social Audit did not get much attention in most cases. In the early stages of these audits, it was found that they were being conducted only to satisfy the guidelines. What started the chain reaction of actual change was the enthusiasm displayed by auditors in Andhra Pradesh. Since May 2009, the Society for Social Audits, Accountability and Transparency (SSAAT), an autonomous body, has been responsible for the conduct of social audits in the state. While the director of the SPIU was a civil servant, the director of SSAAT is an activist. In January 2011, Andhra Pradesh introduced a separate vigilance cell in the Rural Development Department to ensure follow-up and enforcement of social audit findings.

To assess the effectiveness of the mass social audits on NREGA works in Andhra Pradesh, a World Bank study investigated the effect of the social audit on the level of public awareness about NREGA, its effect on the NREGA implementation, and its efficacy as a grievance redressal mechanism. The study found that public awareness of the NREGA increased from about 30 per cent before the social audit to about 99 per cent after the social audit. Further, the efficacy of NREGA implementation increased from an average of about 60 per cent to about 97 per cent. Finally, the effectiveness of the social audit as a grievance redressal mechanism was measured to be around 80 per cent.

Additionally, Mazdoor Kisan Shakti Sangathan (MKSS), a grassroots organisation formed in 1990 and working in rural Rajasthan, is the leading NGO that experimented with Social Audit in the country in a public welfare programme. MKSS initiated a Social Audit on the public drought relief works through the process of cross verification of official data with the field reality and a Public Hearing, where a number of discrepancies and corruption of a million rupees were found. In the Public Hearings, the entire community, along with the lawyers, journalists, academicians, and government officials, took part. These mass Public Hearings conducted in a few districts in Rajasthan led to a countrywide demand for the Right to Information (RTI) Act for accessing information of public utility from the government departments. This was the first step to bring transparency in government departments, followed by Social Auditing.

3. Social Audits by Company Secretary

Social Stock Exchange (SSE) is an electronic fund raising platform under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing For-Profit Social Enterprises (FPSEs) and Not-for-Profit organizations (NPOs) working for the social welfare to raise capital as equity, debt or as units like a Mutual Fund. The objective of SSE is to bridge the financing gap by providing an alternative fundraising instrument for achieving Socio-development goals. The Government announced the creation of a social stock exchange in the budget speech of 2019-20 to bring the capital markets closer to the masses and meeting various social welfare objectives. In this direction, Indian SSE has been set up in both the National Stock Exchange (NSE) and the BSE.

Certain types of social enterprises, like not-for-profit organisations (NPOs), can register on SSE and undertake to make continuous disclosures on their social impact. Such NPOs may or may not choose to raise funds through SSE but would continue to make disclosures, including on social impact, to stock exchanges. As of December 31st, 2024 total of 111 Not-for-Profit Organisations (NPOs) are registered on the SSE segment of both the Stock Exchanges, i.e., NSE – SSE and BSE – SSE. Further, 10 NPOs have raised funds of INR 22 crores through SSE. To ensure that the organizations listed and receiving the money are working towards social and welfare initiatives. The exchange institutes the mechanism of social audit. In this, social auditors empanelled with ICAI, ICSI, and ICMAI are responsible for auditing. The aim of the audit is to ensure that the organisation aiming to get enlisted adheres to the criteria laid out by SEBI. The audit also acts a proof of authenticity for the investors, that their capital is being utilised in the manner and scale as projected by the listed organisation.

The seventeen plausible criteria as listed under Regulations 292E of SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018 entail that enterprises must be serving to eradicate either hunger, poverty, malnutrition and inequality; promoting education, employability, equality, empowerment of women and LGBTQIA+ communities; working towards environmental sustainability; protection of national heritage and art or bridging the digital divide, among other things. At least 67% of their activities must be directed towards attaining the stated objective. This is to be established by enumerating that, in the immediately preceding three-year period, either 67% of its average revenue came from the eligible activities, expenditure (in the same proportion) was incurred towards attaining the objective, or the target population constituted 67% of the overall beneficiary base. Corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies (except affordable housing) would not be identified as an SE. Additionally, NPOs would be deemed ineligible should they be dependent on corporations for more than 50% of their funding. It can be seen that the audit places a high threshold in front of the listed entities, to ensure that the major utilisation of resources is for the intended social impact.

In January 2025, SEBI released a consultation paper inviting public comments in regards to proposed expansion by Social Stock Exchange Advisory Committee (SSEAC) in the scope of operation of the SSE and social audits. First, they proposed to expand the definition of NPOs to bring a wider range of organisations into the fold of SSE. Secondly, it was proposed that the social impact assessment firm be changed to a social impact assessment organisation. By replacing “firm” with “organisation,” the proposal aims to increase the involvement of a wider range of development sector entities in social impact assessments. This change will make it easier for more qualified organisations to join self-regulatory organisations (SROs), helping address the shortage of experienced Social Impact Assessment Organisations (SIAOs). The proposed norms will support responsible and sustainable business practices, aligning with the goals of the SSE initiative.

Additionally, a relaxation has been proposed in terms of reporting and fundraising requirements. The proposed norms aim to provide greater flexibility for NPOs by allowing them to register with the SSE for up to two years without raising funds. This change is intended to reduce the burden of annual reporting and social impact assessments, encouraging more NPOs to register without the immediate need for fundraising or listing. The current norms require Social Enterprises to ensure that at least 67% of their activities qualify as eligible activities targeting underserved populations. Compliance is measured using a three-year average of either revenue, expenditure, or total customer base directed toward these activities. However, the existing framework presents challenges for Non-Profit Organisations (NPOs). The exchange requires NPOs to provide a certificate from a Chartered Accountant confirming compliance. Moreover, data on the average of revenues is irrelevant to NPOs, and information regarding average expenditure is not easily verifiable from financial statements. Additionally, the term “target population” primarily refers to human beneficiaries, thereby excluding environmental and cultural projects. This exclusion creates a significant barrier for initiatives focusing on ecosystems or cultural heritage to qualify as Social Enterprises. The SSEAC has recommended that For-Profit Social Enterprises (FPEs) or Not-for Profit entities, where the annual audit report and IT Return for the latest Assessment Year indicate that the organisation derives more than 20% of its revenue from business income in the latest annual year, must ensure at least 67% of its activities, qualify as eligible social/environmental/cultural activities.

This bird’s eye view of the SSE and its social audit/assessment component, clears to muddy water regarding the trickling of funding from source to intended stakeholder. These rigorous thresholds materialise both transparency and accountability on the part of organisations working for the betterment of people on a grassroots level.

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