On 26th of July, 2022, the SEBI amended the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 to add a new chapter regarding “Social Stock Exchange” (SSE) which provided for a separate division of stock exchanges, listing Non-Profit Organisations (NPOs) and For Profit Social Enterprises (PSEs) and providing for listable securities to fund these organisations such as Zero Coupon Zero Principal Bonds, equity shares for PSEs etc. The amendment is the result of recommendations of a Working Group and a Technical Group constituted for the purpose in September 2019 and September 2020 respectively. However, amidst all the fuss about the central development of SSE, there was another concept in the reports, submitted by these groups, which was overlooked but can be a growing financial structure in the coming days for the NPOs specifically, which faces the problem of lack of investment instruments due to unviability of issuing equity shares for the inability to provide financial returns or getting loans for the interest rates. The model was that of using a Social Venture Fund (SVF), renamed as a Social Impact Fund (SIF), as a “grants in/grants out” vehicle for funding non-profit activities, which has till this date only been used to fund for profit enterprises. The said structure will be dealt with in the forthcoming sections, along with the legal arena governing the same.
THE LEGAL DOMAIN –
The provisions covering the financial structure are provided under Regulations 2(1)(v), 2(1)(u), and 16(4) of Securities and Exchange Board of India (Alternate Investment Funds) Regulations, 2012 as amended in 2022.
Regulation 2(1) (v) of the guidelines provides for the definition of an SIF as “an Alternative Investment Fund which invests primarily in securities or units of social ventures and which satisfies social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns”, while Regulation 2(1) (u) deals with what exactly falls under the category of “social ventures” which includes any organisation promoting social welfare and dealing with social problems.
The provision regarding the grants falls under Regulation 16(4) of the Guidelines which empowers an SIF to accept funds of not less than 10 lacs, without the obligation to provide any returns to the provider, and even provide funds given that it supplies the adequate disclosures. This grant can be used to invest 100% of the investable funds in the securities of an NPO, listed on an SSE.
Therefore, an NPO falling under the category of “social venture”, that is involved in the purpose of social welfare, would be eligible to get grants out of an SIF, constituted specifically for this purpose, which would in turn receive grants from a combination of domestic corporates, governments or philanthropists. However, the highlight is that the grant size to an SIF must be a minimum of 10 lacs, thereby preventing small investors from providing donations to an SIF for further investment or grants.
THE FINANCIAL STRUCTURE –
Even though using an SIF for funding social ventures is not found in its rudimentary from in India, there are certain variations of the structure which have emerged in the recent years across the world. The most prominent and relatable ones is Syndicate Funding whereby the State and large philanthropic organisations or welfare organisations itself partner together to supply funds to the NPOs.
The financial model is as follows: A Social Impact Fund would be provided grants by philanthropic partnerships where co-investors would come forward and provide grants for philanthropic partnerships, without expecting any returns or muted returns for that matter, or the grants can be provided by corporates to satisfy their CSR obligations, out of the CSR funds, wherein essentially the SIF would function as a pooled investment trust. The capital, from these grants, can then be used to fund the activities or functioning of NPOs or social welfare organisations, without expecting any returns thereby differing from the Development Impact Fund. The way to analyse the success would be a successful “social returns”.
An example of this system can be seen in the Power of Nutrition, which is a UK-based foundation, established by the Children’s Investment Fund Foundation, UBS Optimus Foundation, Department for International Development (DFID), UNICEF and World Bank. It strives to find the relevant organisations involved in providing nutrition supplies to the people of Africa and Asia by a network of implementation agencies, and subsequently invites corporates to co-fund the initiative, which in turn reflects positively on their CSR charts. The program has mobilised over $540 mn, and has presence in 13 countries, thereby providing an extensive group of philanthropists in the form of investors, government donors, businesses etc. Similar is the case of Gates Philanthropy Partners (GPP), wherein the lead funder is Bill and Melinda Gates Foundation, which calls forth co-founders to participate in the fight against poverty, Covid-19, to enhance women empowerment etc. The organisation finds target projects which can have a direct impact on the said goals and has disbursed over $192 mn since 2017. It provides donations to institutions as UNICEF, OneGoal, Sewa Bharat, BRAC USA etc.
Till now, the SVFs have basically been used for profit purposes, however this can be regarded as an emerging regime to facilitate grants for charitable purposes.
As India is moving towards becoming the second largest growing economy in the world in the coming days, even in the face of a potential global depression, there is an urgent need to drive focus on social sectors to diminish any harm that might occur to them in the face of wild economic competition. The key to moderate the conditions is by increasing investments in the social welfare organisation, which have been more or less prone to a lack of investment instruments or innovative structures, given the absence of any legal foundation. However, the recent amendment by SEBI highlights the attention of the policy-makers on the field, which led to the legalisation of social stock exchanges and investment instruments such as ZCZP. On the same lines, the concept of SIF which is found extensively in foreign jurisdiction can be employed in India to increase the domain of instruments, and to provide a two-fold benefit to the corporates as well as the NPOs, thereby driving the whole machinery without any active involvement of the NPOs itself in the business sector.
 SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022, Noti. No. SEBI/LAD-NRO/GN/2022/90, dated 25-7-2022.
 Working Group Report On Social Stock Exchange, June 1, 2020, < https://taxguru.in/sebi/working-group-report-social-stock-exchange.html> accessed 15 August 2022.
 Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, LAD-NRO/GN/2012-13/04/11262.
 Technical Group Report On Social Stock Exchange, May 06, 2021, < https://taxguru.in/sebi/technical-group-report-on-social-stock-exchange-comments.html> accessed 15 August 2022.
 Supra note 2.
Author: Manvi Raj, a 4th-year law student at the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University, India.