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Social Stock Exchange: The Regulatory Framework


Though Social enterprises (SEs) comprise a very large part of the ecosystem in the country, being unlisted entities they are unable to tap the capital market. There are investors interested in contributing towards social causes in such entities, but due to information about these entities being in the oblivion, such noble intentions often do not see the light of the day. The novel concept of Social Stock Exchange (SSE) is intended to benefit the private and non-profit sectors by directing more capital to them.


Timeline

The following is a timeline of development of the concept of SSE in India and the relevant regulatory framework so far:


July 2019: In her Budget speech for the fiscal year 2019–20, Finance Minister Smt. Nirmala Sitharaman proposed the setting up of SSE in India.


September 2019: SEBI constituted a working group on Social Stock Exchanges to review and recommend the possible structures and mechanisms to facilitate the raising of funds by social enterprises and the associated regulatory framework.


May 2020: The Working Group on SSE came up with its detailed report and recommendations.


September 2020: Technical Group on Social Stock Exchanges was formed by SEBI based on the recommendation of the Working Group


May 2021: The Technical Group on SSE submitted its report


September 2021: SEBI took a major decision by approving the creation of Social Stock Exchange under its regulatory ambit.


July 16, 2022: A Govt. notification introduced a new instrument called ‘zero coupon zero principal instrument’ under the definition of securities under the Securities Contracts (Regulation) Act, 1956.


July 25, 2022: SEBI notified Social Stock Exchange (SSE) Rules providing social entities with an additional avenue of raising funds. SEBI notification made amendments to the SEBI (LODR) Regulations 2015 providing for eligibility of entities in order to be classified as ‘Not for Profit organisation’ and ‘For profit Social Enterprise’. Certain amendments were also made by the SEBI (Issue of Capital And Disclosure Requirements) (Third Amendment) Regulations, 2022 to the provisions of the SEBI (Issue of Capital And Disclosure Requirements) Regulations, 2018.


September 19, 2022: SEBI came out with a detailed framework for Social Stock Exchange. SEBI’s framework for SSEs was made based on the suggestions of a working group and technical group formed earlier by the regulator. Among other things the framework specified the minimum pre-requirements for a Not-for-Profit Organisation (NPO) in order to be registered as an SSE with the social stock exchange.


October 2022: The Bombay Stock Exchange (BSE) received an in-principle approval from the Securities Exchange Board of India (SEBI) to set-up a Social Stock Exchange (SSE) as a separate segment.


December 19, 2022: The National Stock Exchange (NSE) received an in-principle approval from SEBI to set-up a Social Stock Exchange as a separate segment.


December 27, 2022: SEBI granted its final approval for setting up of an SSE by BSE.



What is a Social Stock Exchange (SSE)?

Though Social enterprises (SE) comprise a very large part of the ecosystem in the country, being unlisted entities they are unable to tap the capital market. There are investors interested in contributing towards social causes in such entities, but due to information about these entities being in the oblivion, such noble intentions often do not see the light of the day. To fill this gap, SEBI has come up with the concept of Social Stock Exchanges (SSE). The #SSEs will operate like other stock exchanges and SEs will be allowed to list their securities in this exchange. These securities can then be traded by the public and investors interested in investing in social entities will have the information and clarity about them.


SSE Framework

SEBI has, vide its notification dated 25th July, 2022, made amendments in the SEBI (LODR) Regulations, 2015 that come into effect immediately. These amendments are called the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022. These amendments lay down the framework for SSEs and mainly provide for the eligibility of organizations to raise funds and the eligibility of entities to be classified as ‘Not for Profit Organization’ and as ‘For Profit Social Enterprise’.


Under the new framework released by SEBI, an SSE will function as a separate division of the existing stock exchanges. The framework specifies the following:


i. pre-requirements to be met by an NPO for registration with a Social Stock Exchange,

ii. disclosure requirements for NPOs raising funds through the issuance of zero-coupon zero principal instruments

iii. annual disclosure requirements on social stock exchanges for NPOs.


In addition to the above, SEBI has mandated the listed NPO to submit a statement of utilisation of funds to the SSE within 45 days from the end of quarter. Further, the social enterprises raising funds using SSE also has to disclose an Annual Impact Report (AIR) within 90 days from the end of financial year, capturing the qualitative and quantitative aspects of the social impact generated by the entity and where applicable, the impact that is generated by the project or solution for which funds have been raised through the Social Stock Exchange.


Chapter IX-A of SEBI LODR Regulations

The amendments have inserted ‘Zero Coupon Zero Principal Instruments’ in the definition of Securities and notified a new chapter IX-A which deals with obligations of social enterprises. Chapter IX-A of SEBI (LODR) contains the new regulations 91B, 91C, 91D, 91E and 91F and these new regulations provide as under:

Regulation

Obligation of

What should be disclosed

Regulation # 91B

For Profit Social Enterprise.

Disclosure requirements mentioned in SEBI LODR regulations as would apply to issuers whose specified securities are listed on the Main Board or the SME Exchange or the Innovators Growth Platform, as the case may be

Regulation # 91C

Not-for-Profit Organization.

Annual disclosures shall be made to the Social Stock Exchange(s) on matters specified by SEBI, within 60 days from the end of the financial year or such other time specified by SEBI

Regulation # 91D

Both For Profit Social Enterprise and Not for profit Organizations

1. Shall frame a materiality policy for making intimation and disclosures to Stock Exchanges 2. A Key Managerial Personnel shall be identified for determining materiality and his contact details shall be disclosed to the Stock Exchange 3. Disclosure of events which affect the achievement of planned outcomes shall be made not later than 7 days 4. Disclosure concerning such events shall be placed on the website of the Social Enterprise

Regulation # 91E

Both For Profit Social Enterprise and Not for profit Organizations in respect of social impact

A Social Enterprise, which is either registered with or has raised funds through a Social Stock Exchange shall furnish an annual impact report to the Social Stock Exchange in the prescribed format. The annual impact report shall be audited by a Social Audit Firm employing Social Auditor.

Regulation # 91F

Not-for-Profit Organization

A listed Not for Profit Organization shall submit on a Quarterly basis to the Social Stock Exchange(s) a statement regarding utilization of funds raised till the time the issue proceeds have been fully utilised or the purpose for which they were raised, has been achieved

Zero Coupon Zero Principal (ZCZP)

A subscription to the new instrument ZCZP is like a philanthropic donation. ZCZP can be publicly or privately issued by a Not-for Profit Organisation (NPO) upon registering with the Social Stock Exchange to raise funds, subject to the fulfilment of eligibility criteria. Currently, the proposed minimum issue size of ZCZP is at Rs 1 crore and the minimum subscription application size is at Rs 2 lakhs.

Eligible SEs

The following two types of entities are eligible for raising funds through Social Stock Exchange (SSE)

  1. A For Profit Social Enterprise whose designated securities are listed on the applicable segment of the Stock Exchange.

  2. A Not-for-Profit Organization that is registered on the Social Stock Exchange.

A For Profit Social Enterprise is a company or body corporate operating for profit but having social intent and impact as their primary goal and indulging in at least one of the following activities:


(i). Eradicating hunger, poverty, malnutrition and inequality;

(ii). Promoting health care including mental healthcare, sanitation and making available safe drinking water;

(iii). Promoting education, employability and livelihoods;

(iv). Promoting gender equality, empowerment of women and LGBTQIA+ communities;

(v). Ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation;

(vi). Protection of national heritage, art and culture;

(vii). Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports;

(viii). Supporting incubators of Social Enterprises;

(ix). Supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building;

(x). Promoting livelihoods for rural and urban poor including enhancing income of small and marginal farmers and workers in the non-farm sector;

(xi). Slum area development, affordable housing and other interventions to build sustainable and resilient cities;

(xii). Disaster management, including relief, rehabilitation and reconstruction activities;

(xiii). Promotion of financial inclusion;

(xiv). Facilitating access to land and property assets for disadvantaged communities;

(xv). Bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection.

(xvi). Promoting welfare of migrants and displaced persons;

(xvii).Any other area as identified by the Board or Government of India from time to time


A Not-for-Profit Organization is a social enterprise covered within any of the following:

  1. a charitable trust registered under the Indian Trusts Act, 1882;

  2. a charitable trust registered under the public trust statute of the relevant state;

  3. a charitable society registered under the Societies Registration Act, 1860;

  4. a company incorporated under section 8 of the Companies Act, 2013;

  5. any other entity as may be specified by the Board


Which entities are not eligible as SE?

It may be noted that corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies, except affordable housing, will not be eligible to be identified as a social enterprise.


Which SEs are not eligible to raise fund through SSE?

The following social enterprises are not eligible to get registered or raise funds through a Social Stock Exchange –


a) if any of its promoters, promoter group or directors or selling shareholders (in case of for profit social enterprise) or trustees are debarred from accessing the securities market by SEBI


b) if any of the promoters or directors or trustees of the Social Enterprise is a promoter or director of any other company or Social Enterprise which has been debarred from accessing the securities market by SEBI;


c) if the Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower;


d) If Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower.


e) If any of its promoters or directors or trustees is a fugitive economic offender


f) if the Social Enterprise or any of its promoters or directors or trustees has been debarred from carrying out its activities or raising funds by the Ministry of Home Affairs or any other ministry of the Central Government or State Government or Charitable Commissioner or any other statutory body


Types of social enterprise w.r.t an SSE

The Social Stock Exchange framework identifies the two forms of social enterprises that engage in the activity of creating positive social impact:


a. Not-for-profit organisation

b. For-profit social enterprise


In this connection it may be noted that in order to be eligible for being identified as a Social Enterprise under any of the categories above an entity must establish the primacy of its social intent and in order to do so, such Social Enterprise shall meet the following eligibility criteria:-


(a) the Social Enterprise shall be indulged in at least one of the activities [(i) to (xvii)] mentioned above under the definition of For Profit Social Enterprises


(b) the Social Enterprise shall target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state governments;


(c) the Social Enterprise shall have at least 67% of its activities, qualifying as eligible activities to the target population, to be established through one or more of the following:


(i) at least 67% of the immediately preceding 3-year average of revenues comes from providing eligible activities to members of the target population;


(ii) at least 67% of the immediately preceding 3-year average of expenditure has been incurred for providing eligible activities to members of the target population;


(iii) members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of the total customer base and/or total number of beneficiaries.

Requirements for NPO Registration

In order to be eligible as a Social enterprise, a Not-for-Profit Organisation needs to be in operations for 3 years before registering on the Social Stock Exchange. Further, registration of the NPO on the NGO Darpan portal is mandatorily required for registering it on Social Stock Exchange. Once registered on the SSE, an NPO will have to follow all the compliances under the SEBI (LODR) Regulations, 2015 and the circulars thereof even if it does not list any instruments on the SSE. It may be noted that only Indian entities can register in Social Stock Exchange.


In order to raise funds through an SSE, an NPO must register with the Social Stock Exchange, but it may continue to raise funds through any other means permissible under the law, whether or not it is registered with the Social Stock Exchange.


SEBI, in its circular dated September 19, 2022, has prescribed certain minimum requirements for NPOs willing to register on the Social Stock Exchange. The following are the mandatory requirements:


i) The NPO should be in existence for a minimum period of 3 years

ii) It has a valid certificate u/s 12A/12AA/12AB of the Income Tax Act,

iii) It has a valid 80G registration,

iv) It has a minimum of INR 50 lakhs in annual spending and

v) It had a minimum of INR 10 lakhs in fund in the past year

vi) Any other criteria mentioned by the particular Social stock exchange in order to register on them.


Investment by investors


Under the SSE framework, only institutional investors and non-institutional investors can invest in securities issued by social enterprises. Retail investors can invest only in securities offered by for-profit social enterprises under the Main Board.


A lesson from global SSE experience

The concept of Social Stock Exchanges is not even two decades old. Globally, SSEs are still at a nascent stage, and there is a lack of detailed research and analysis on the same. Hence, as India gears up to embrace its SSE framework, it has a lot to learn from the global experience. Seven SSEs (Brazil, Portugal, South Africa, Jamaica, the UK, Singapore, and Canada) were set up around the world, of which only three are still operational (Canada, Singapore and Jamaica). One of the ways in which the Indian SSE differs majorly from the other SSEs is that here the initiative came from the government. So while most SSEs around the world failed due to lack of financial resources, in India public funds can be leveraged to fund it in addition to philanthropic contributions, government funding and listing charges.

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