SOCIAL STOCK EXCHANGE IN INDIA – AN OVERVIEW – Eshwars
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SOCIAL STOCK EXCHANGE IN INDIA – AN OVERVIEW

Authored by Adit N Bhuva

BACKGROUND:

The Hon’ble Finance Minister as part of her budget speech for FY 2019-20 had indicated to take the capital markets closer to the masses for the purpose of meeting social welfare objectives related to inclusive growth and to this effect proposed to create an electronic fundraising platform – a social stock exchange for the listing of social enterprises and voluntary organisations (Not for profit organisations (NPO) and For profit enterprises (FPE)) working for the realisation of a social welfare objective.

NEED FOR SOCIAL STOCK EXCHANGE (SSE):

India’s economic imperative is to feed, clothe, educate and empower more than a billion people, in ways that conserve and grow its natural, cultural and social heritages. It cannot expect to accomplish this lofty objective on the strength of conventional commercial capital alone. The proof of that is that there are around 3 million non-profit organisations. One of the major hurdle these NPOs face is the lack of financial assistance to carry on their efforts, in absence of any formal structure to raise funds. On the other side, there are people who would want to donate/invest/fund NPOs or FPEs carrying on programs and projects having social impact. However many of them stop short due to lack of confidence of how the funds are utilised, due to absence of any formal structure.

This is where the Social Stock Exchange would give NPOs/FPEs with social objective, access to donors and confidence to the Donors on the impact of their donations/contributions.

CONSTITUTION OF A WORKING GROUP ON SSE:

A working Group on SSE was constituted on 19th September 2019 to recommend a broad framework on:

1. Instruments for raising of funds

2. Eligibility norms for participation in fund raising through SSE

3. Disclosures

4. Listing & trading

5. Oversight etc.

The report by the working group was provided on 1st June 2020.

CONSTITUION OF TECHNICAL GROUP ON SSE AND THEIR REPORT:

Based on the report of the working group, a technical group was constituted to build on the broad framework recommended by the working group and provide specific framework on the following matters:

1. Onboarding of NPOs and FPEs on the SSE

2. Prescribing disclosure requirements – financial, governance, operational performance, and social impact.

3. Scope of work, eligibility criteria & regulation of social auditors.

The Technical Group has on 6th May 2021 provided its detailed recommendations on the aforesaid matters for public comments.

The due date provided for receiving public comments is 20th June 2021.

OVERVIEW OF THE RECOMMENDATIONS OF THE TECHNICAL GROUP:

We provide a brief overview of the recommendations of the Technical Group:

1. LISTING FRAMEWORK:

A. Eligibility criteria for NPOs and FPEs (“collectively referred as “Entities”) provided

i. The Entities should be able to demonstrate that social intent and impact are its primary goals.

ii. Focus on eligible social objectives for the undeserved or less privileged populations or regions.

iii. 3 filters to establish the primacy of social impact objective of social enterprise:

a. Activities based filters – based on schedule VII of Companies Act, 2013, Sustainable Development Goals of UN (SDGs) and areas identified by Niti Aayog.

b. Based on recipient of activities – underserved or less privileged population segments or regions recorded lower performance in the development priorities of national/state governments.

c. NPO/FPE to contribute certain percentage of its activities toward eligible activities to the target population – by way of revenue, expenditure, or customer base.

B. Entities not to be considered as NPOs/FPEs:

Corporate foundations, political or religious organizations/ activities, professional or trade associations, infrastructure and housing companies (except affordable housing) will not be permitted on SSE.

C. NPO Registration with SSE:

1. Registration of NPO with SSE will provide confidence to the investor community.

2. Mandatory qualifying criteria for registration prescribed in detail, such as the NPO to be a legally registered NPO i.e., Public charitable Trusts with registered deed, societies under societies registration act, not for profit companies under companies act, various other indicators such as validity of registration certificate, details of ownership and control, valid registration under Income Tax, minimum annual spending in past financial year, minimum funds raised in past financial year.

D. Nature of listable securities have been recommended:

i. For NPOs – for “not for profit companies” registered under section 8 of companies act, equity can be listed. For other NPOs, Zero Coupon Zero Principal bonds, Social Venture Funds raised by AIF (Cat I) on behalf of NPOs, Development Impact Bonds, NPOs can receive grants through existing Mutual funds through AMC. Example of existing fund is HDFC Cancer Fund.

ii. For FPEs – equity and debt instruments as already existing in the SEBI regulations, Social Impact Funds.

iii. The Social Venture Funds are proposed to be renamed as Social Impact Funds.

iv. Illustrations have been provided as to the working of the aforestated instruments on SSE.

v. Outline of the Offer documents for listing of the aforestated instruments is prescribed in the report.

E. Listing guidelines for NPOs/FPEs:

NPOs:

i. NPOs to provide audited financial statements of previous 3 years and social impact statements.

ii. As part of offer documents, NPOs to provide details under the head called ‘differentiators” such as vision, target segment, strategy, governance, management, operations, finance, compliance, credibility, social impact, risks etc.

FPEs

i. Existing SEBI regulations on eligibility criteria for listing of securities such as equity, debt issued by FPEs.

ii. Additional disclosures to be provided in the offer document under the heads called “differentiators” as specified above.

2. DISCLOSURES AND REPORTING:

A. Disclosures:

1. Reporting on general, governance and financial aspects for NPOs and FPEs prescribed.

2. For NPOs registered on SSE, whether they have chosen to list securities or not, a set of minimum standards for disclosures on general, governance and financial aspects is recommended, which are listed below:

General: Vision, mission, activities, and scale of operations.

Governance: Legal form, board and management, organisational-level risks and mitigation, related party transactions and other ethical concerns, remuneration policies, stakeholder redressal, compliance, and certifications.

Financial: Balance sheet, income statement and cash statement, program-wise fund utilization for the year, auditor’s report and auditor details.

iii. The FPE listing equity/debt shall, in addition to social impact reporting requirement, comply with the disclosure requirements as per the applicable segment such as main board, SME and IGP.

B. Social Impact Report:

i. Reporting on social impact – both the FPE and the NPO, once they have their securities listed (or once the NPO has registered with an exchange but chooses not to list) – to produce an Annual Impact Report (AIR).

ii. The Annual Impact Report is to capture the qualitative and quantitative aspects of the social impact generated by the social enterprise.

iii. If SVF is listed, then the relevant AIF to prepare the report.

iv. Annual Impact Reporting will broadly be done under the following heads:

a. Strategic Intent and Planning.

b. Approach.

c. Impact Score Card.

v. Detailed guidance on AIR provided.

3. ENABLING ECOSYSTEM:

A. Capacity building fund (CBF):

i. A capacity building fund, which will be an administrative fund, will be set up to be used to do capacity building, awareness programs for the benefit of NPOs and other stakeholders such as funders/investors and social auditors.

ii. Developmental agencies such as SIDBI, entities by way of CSR may contribute to this fund.

B. Social auditors:

i. Social audit critical to provide confidence to the funders/investors.

ii. Social auditors to carry audit of social impact.

iii. Both financial and non-financial auditor can be social auditors

iv. Eligibility criteria for social audit recommended.

v. Responsibility of Self-Regulated Organisation (SRO) for social auditors recommended to be assigned to ICAI and mechanism for the constituting the SRO prescribed.

vi. Format of assurance of social impact reporting to be provided by social auditors prescribed.

C. Information Repositories (“IR”):

i. Currently Information Repositories function as aggregator of information on NGOs and provide a searchable database in a comparable form.

ii. No regulatory intervention required for IR as of now.

iii. Appropriate regulations will be prescribed as their role shapes up going forward.

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