In the year 2020 on recommendation of Ministry of Finance SEBI has constituted a Technical Group under the chairmanship of Dr. Harsh Kumar Bhanwala (ex-Chairman, NABARD) to draft framework of Social Stock Exchange which is very novel and necessity of society like Indian where NPO is already working for development of society.
The Working Group (WG) Report on Social Stock Exchange, released on June 01, 2020 had provided a form and content to the Hon’ble Finance Minister’s vision. The WG report had made high level recommendations for SSE, which included participation of Non-profit organizations (NPOs) and For-profit enterprises (FPEs) on SSE subject to committing to minimum reporting requirements. The WG report also made recommendations outlining the modalities for creating a Social Stock Exchange that will serve as a platform for fundraising and, also incorporate a set of procedures by which social impact of NPOs and FPEs will be measured and reported.
In view of above transformation SEBI also amended ICDR regulation in July 2022 and issued SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) (THIRD AMENDMENT) REGULATIONS, 2022 and added the concept of Social Stock Exchange in ICDR regulation.
What is Social Stock Exchange?
Social Stock Exchange means a separate segment of a recognized stock exchange having nationwide trading terminals permitted to register Not for Profit Organizations and / or list the securities issued by Not for Profit Organizations in accordance with provisions of these regulations.
1. “draft fund raising document” means the draft fund raising document filed with a Social Stock Exchange in relation to a public issue of Zero Coupon Zero Principal Instruments by a Not for Profit Organization registered with the Social Stock Exchange;
2. “final fund raising document” means the final fund raising document filed with the Social Stock Exchange pursuant to incorporation of observations issued in respect of the draft fund raising document by the Social Stock Exchange;
3. “For Profit Social Enterprise” means a company or a body corporate operating for profit, which is a Social Enterprise for the purposes of these regulations and does not include a company incorporated under section 8 of the Companies Act, 2013 (18 of 2013);
4. “fund raising document” means the draft fund raising document and the final fund raising document;
5. “Not for Profit Organization” means a Social Enterprise which is any of the following entities:
6. a charitable trust registered under the Indian Trusts Act, 1882 (2 of 1882);
7. a charitable trust registered under the public trust statute of the relevant state;
8. a charitable society registered under the Societies Registration Act, 1860 (21 of 1860);
9. a company incorporated under section 8 of the Companies Act, 2013 (18 of 2013);
10. any other entity as may be specified by the Board;
11. “Social Auditor” means an individual registered with a self-regulatory organization under the Institute of Chartered Accountants of India or such other agency, as may be specified by the Board, who has qualified a certification program conducted by National Institute of Securities Market and holds a valid certificate;
12. “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;
13. “Social Enterprise” means either a Not for Profit Organization or a For Profit Social Enterprise that meets the eligibility criteria specified in this Chapter;
List of eligible activities for demonstrating primacy of social impact
1. Eradicating hunger, poverty malnutrition and inequality; promoting health care (including mental health) and sanitation; and making available safe drinking water
2. Promoting education, employability and livelihoods
3. Promoting gender equality, empowerment of women and LGBTQIA+ communities
4. Ensuring environmental sustainability, addressing climate change (mitigation and adaptation), forest and wildlife conservation
5. Protection of national heritage, art and culture
6. Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports
7. Supporting incubators of social enterprises
8. Supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building
9. Promoting livelihoods for rural and urban poor, including enhancing income of small and marginal farmers and workers in the non-farm sector
10. Slum area development, affordable housing3, and other interventions to build sustainable and resilient cities
11. Disaster management4, including relief, rehabilitation and reconstruction activities
12. Promotion of financial inclusion
13. Facilitating access to land and property assets for disadvantaged communities
14. Bridging the digital divide5 in internet and mobile phone access, addressing issues of misinformation and data protection
15. Promoting welfare of migrants and displaced persons
The above list was drawn up using the items in Schedule VII of Companies Act 2013 as a foundation, and then further refinements were made based on the imperatives of the Sustainable Development Goals (SDGs) and the priority areas identified by Niti Aayog.
It is not enough that an SE establish that the objectives for its activities pass the test for social intent/impact and that it is channeling these activities to members of a certain section of target population or region, but also that such activities form a significant portion of its overall activities as a matter of strategy. To establish this, the TG recommends that the SE shall have at least 67% of its activities qualifying as eligible activities to the target population. This it to be established through one or more of the following:
- Revenue – At least 67% of the immediately preceeding 3-year average of the SE’s revenues comes from providing the eligible activities to members of the target population.
- Expenditure – At least 67% of the immediately preceeding 3-year average of the SE’s expenditure has been incurred for providing the eligible activities to members of the target population.
- Customer base/ beneficiaries – Members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceeding 3-year average of the SE’s customer base/ beneficiaries.
Ineligible organisations and activities:
While the TG has laid out a clear set of guidelines to ascertain whether an SE is eligible to raise funds through the SSE, it also recognizes the need to state the kinds of objectives and activities and the kinds of entities that must necessarily fall outside the ambit of the SSE. Accordingly, the TG has recommended that the following shall not be eligible to raise funds using the SSE’s mechanisms:
- Corporate foundations, that are primarily funded by a parent corporate entity or a group of corporate entities.
- Political or religious organisations or activities.
- Professional or trade associations.
- Infrastructure companies and housing companies (other than affordable housing companies).
Mandatory Qualification Criteria for NPO Registration Process:
| Legal Requirements | |||
| Entity is legally registered as an NPO | Registration certificate valid at least for next 12 months | Entities must be registered in India as one of the below:
a. Public charitable trusts with a deed registered with Charity Commissioner/ Sub-Registrar as applicable b. Societies under Societies Registration Act c. Not for profit companies under the Companies Act |
|
| Ownership and control | Governing document (MoA & AoA/ Trust Deed/ Bye-laws/ Constitution) | Disclose if NPO is owned and/or controlled by government or private. | |
| Tax exempt under Income Tax Act | Registration Certificate under 12A/12AA/12AB under Income Tax | Valid 12A/12AA/12B for at least the next 12 months. Does not have a notice or ongoing scrutiny by Income Tax regarding any conditions for tax exemption under 12A/12AA/12AB. | |
| Registration with Income Tax as an NPO | IT PAN | Valid IT PAN | |
| Age of the NPO | Registration certificate | Minimum 3 years | |
| Tax deduction under Income Tax | Valid 80G registration under Income-Tax. | Ensure registration declares whether tax deduction is available or not to investors. | |
| Minimum Fund Flows | |||
| Annual Spending in the past financial year | Receipts or Payments from Audited accounts/ Fund Flow Statement | Must be at least Rs. 50 lakhs | |
| Funding in the past financial year | Receipts from Audited accounts/ Fund Flow Statement | Must be at least Rs. 10 lakhs | |
Instruments for Fund-Raising in SSE
Social Stock Exchanges aim to effectively deploy fundraising instruments and structure available under specified guidelines. These instruments depend on the nature of social enterprise seeking funding. The instruments are different for NPOs and for-profit enterprises
Instruments for non-profit social enterprises are as follows:
1. Zero coupon zero principal bonds: Allowing NPOs to directly list on the SSE through issuance of bonds in the form of zero coupon or zero principal bonds. This is a feasible option to unlock funds from donors, philanthropic foundations and CSR spenders. These bonds would carry a tenure equal to the duration of the project that is being funded, and at tenure, they would be written off the investor’s books.
2. Social Venture Funds (SVF):An SVF is a category 1 Alternative Investment Fund (AIF)that is already allowed by SEBI to issue securities or units of social ventures to investors.
3. Mutual funds: An asset management company could offer closed-end mutual fund units to investors. The units could be redeemable in principal terms, but all of the returns could be channelled towards suitably chosen NPOs by the fund which acts as the intermediary.
4. Pay-for-success models: Pay-for-success models through lending partners or through grants are highlighted as effective mechanisms to ensure a more efficient and accountable deployment of capital.
For for-profit social enterprises (FPEs):
1. Equity listing: FPEs would list equity on the SSE subject to a set of listing requirements, including operating practices (financial reporting and governance) and social impact reporting.
2. Social Venture Funds (SVFs): AIFs and SVFs already exist for FPEs but do not require social impact reporting.
Advantage of Social Stock Exchange :
Building an ecosystem that will enable the SSE to thrive and flourish in India will give the following benefits:
1. Social impact reporting: Common minimum standards for reporting on social impact have been suggested for both classifications (FPEs and NPOs), to reduce information asymmetry. The working group also suggests operating a “capacity building fund” for enhancing reporting capabilities by NPOs. Over time, it is also envisaged that a new category of auditors—social auditors—will perform an independent verification of NPOs’ impact reporting.
2. Tax benefits: To increase the reception of these funding models amongst various classes of investors, the committee has also recommended several tax exemptions, benefits and other supportive regulatory clarifications.
3. Rigorous regulatory scrutiny: Listing of FPEs on the SSE must not be based only on self-reporting social impact. To ensure that only bonafide FPEs are able to associate with SSE, SEBI, in consultation with the existing specialist entities, should work out a mechanism for assessing credentials of the social impact dimensions self-declared by the FPEs.
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