SEBI- Social Stock Exchanges and the Future

Introduction:

Pursuant to an announcement made by the Hon’ble Union Minister of Finance and Corporate Affairs, Smt, Nirmala Sitharaman while presenting the union budget 2019-20 regarding social stock exchanges[1], SEBI had constituted a working group on social stock exchanges in September 2019 under the chairmanship of Shri. Ishaat Hussain (“Working Group”). The announcement was made keeping in mind the need to take the Indian capital market closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. The purpose is to create an electronic fund raising platform- a social stock-exchange- under the regulatory ambit of SEBI for listing social enterprises and voluntary organization working for the realization of a social welfare objective so that they can raise capital as equity or debt. The broad terms of reference to the Working Group was to review possible structures and mechanisms, to facilitate raising of funds by social enterprises and voluntary organizations and to recommend an associated regulatory framework inter-alia, covering the issues relating to eligibility norms for participation, disclosures, listing, trading, oversight, etc. Based upon the meeting with various stakeholders, the Working Group submitted its report wherein it made recommendations; however, a need was felt for expert advice on certain critical operational issues. Accordingly, a technical group was constituted by SEBI on September 21, 2020 (“Technical Group”) basis the recommendations made earlier by the Working Group and subsequently vide press release dated May 6, 2021[2], SEBI sought public comments on the recommendations made by the technical group in relation the social stock exchanges.

Recommendations by the Technical Group:

The Technical Group upon several interactions with various stakeholders has made various recommendations for development of social stock exchanges which are briefly discussed below:

• Eligibility of social enterprises for social stock exchange: A social enterprise, including both For Profit Enterprises (“FPEs”) and Non-Profit Organizations (“NPOs”), in order to qualify for the social stock exchange, should be able to demonstrate that social intent and impact are its primary goals. The Technical Group has proposed that a combination of the following three (3) filters be used to establish the primacy of social impact objective of the social enterprise:

1. The following fifteen (15) broad eligible activities identified by the Technical Group to be used to demonstrate the primacy of social impactalong with sustainable development goals and priority areas identified by Niti Aayog.

• Eradicating hunger, poverty, malnutrition and inequality; promoting health care and sanitation; and making available safe drinking water
• Promoting education, employability and livelihoods
• Promoting gender equality, empowerment of women and LGBTQIA+ communities
• Ensuring sustainability, addressing climate change (mitigation and adaptation), forest and wildlife conservation
• Protection of national heritage, art and culture
• Training to promote rural sports, nationally recognised sports, Paralympicsports and Olympic sports
• Supporting incubators of social enterprises
• Supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building
• Promoting rural livelihoods including enhancing income of small and marginal farmers and workers in the non-farm sector
• Slum area development, affordable housing, and other interventions to build sustainable and resilient cities
• Disaster management, including relief, rehabilitation and reconstruction activities
• Promotion of financial inclusion
• Facilitating access to land and property assets for disadvantaged communities
• Bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection; and
• Promoting welfare of migrants and displaced persons.

2. Activities of the social enterprise to target underserved or less privileged population segments or regions recorded lower performance in the development priorities of national/state governments.
3. Social enterprises to have at least 67% of its activities qualifying as eligible activities to the target population, which shall be established through one or more of the following: a. Revenue b. Expenditure c. Customer base.

Corporate foundations, political or religious organizations/ activities, professional or trade associations, infrastructure and housing companies not to be permitted on social stock exchange.

• Requirement of registration for NPOs: The Technical Group has recommended that the NPOs be registered with social stock exchange prior to raising funds. The entity shall be registered as an NPO and atleast two (2) years old, valid registration under Income Tax Act, registration with income tax as an NPO, valid 80G registration under income tax, minimum annual spending in past financial year must be alteast ₹50 Lakhs, minimum funds raised in past financial year must be alteast ₹10 Lakhs.
• Instruments available for NPOs: Equity, zero coupon zero principal bonds, development impact bonds, social impact fund with 100% grants-in grants out provision, and donations by investors through mutual funds to be the modes available for fund raising for NPOs.

• Instruments available for FPEs: Equity, debt, development impact bonds and social impact fund to be the modes available for fund raising for FPEs.

• Offer document content for social enterprises: The offer document filed by the social enterprises for various modes of fund raising to make disclosure with respect to the aspects called “differentiators” which covers aspects such as vision, target segment, strategy, governance, management, operations, finance, compliance, credibility, social impact and risks.
• Recasting social venture funds (“SVFs”): In order to encourage investors and philanthropists to participate in SVFs, the Technical Group recommended reducing minimum corpus size from ₹20 Crores to ₹5 Crores, reducing minimum subscription from ₹1 Crore to ₹2 Lakhs, allowing 100% grants, grants out under SVFs, allowing corporates to invest CSR funds into SVFs with a 100% grants-in, grants out model andthe changing nomenclature of SVF to social impact funds.
• Capacity Building Fund (“CBF”):A total fund of ₹ 100 Crores called the CBF is recommended by the Technical Group to improve the ability of all stakeholders to navigate the social stock exchange, its process and instruments. Stock exchanges along with developmental agencies such as SIDBI, financial institutions and donors to contribute towards development of the CBF. Further, the CBF to be governed through an advisory board.
• Social Auditors: The Technical Group envisioned a social audit having two components: a financial audit, and a non-financial audit. The latter to include the audit of social impact. In the initial phases, only reputed firms/institutions having expertise in the area of social audit to be allowed to carry out social audits. Such institutions to employ social auditors who have qualified certification course conducted by the National Institute of Securities Market. A separate code of conduct for social auditors to be developed by the Institute of Chartered Accountants of India.
• Information Repositories: Information Repositories form an important category of participants in the social stock exchange ecosystem by functioning as an aggregator of information on NGOs and provide a searchable database in comparable form. Considering early days of the social stock exchange, the Technical Group recommended that no regulatory intervention is required for the information repositories. Based on how their role shapes up later, they can be subjected to appropriate checks and balances in the form of regulations governing their role, functions, structure and such other aspects as may be deemed appropriate.
• Disclosures on social stock exchange:To bring the social entities wanting to access the social stock exchange onto a common comparable platform, the Technical Group recommended standardised disclosures and reporting requirements. Separate disclosure requirements are recommended for both FPEs and NPOs. The NPOs to disclose vision, mission, activities sale of operations, legal form, board and management, remuneration policies, stakeholders’ redressal, balance sheet, income and cash statement, auditor’s report and auditor details. Whereas, the FPE listing equity/debt, in addition to social impact reporting, to comply with disclosure requirements as per the applicable segment such as main board, SME and investor growth platform.
• Disclosure of Impact Report:The entities intending to get listed on the social stock exchange to disclose impact of its activities seen at two levels- direct impact on the target community and the systematic impact or sector wide impact. Impact report, as prepared by the management of the audited organisation, to include qualitative performance indicators and, where feasible, quantitative performance measures with the disclosure of the key underlying methodology and/or assumptions used in the quantitative determination.

W&B View:

The Hon’ble Finance Minister’s bold vision of a social stock exchange could not have come at a more opportune time for Indiain light of the economic damage inflicted by Covid-19, especially upon the poorest Indian households and large swathes of the informal sector. While entering a post- Covid world, India shall require a significant amount of capital to repair and rebuild those livelihoods which are the bedrock of the Indian economy.The social stock exchange can prove to be a possible solution to this pressing problem and become an important component of India’s policy response to Covid-19. Further, the recommendations made by the Technical Group shall not only expand the pools of capital but also establish robust standards for social impact reporting. The social stock exchange can support social enterprises, large donors like CSR contributors and retail philanthropic donors by providing a scaled-up avenue for credible social impact creating opportunities. Pairing of NPOs with the social stock exchange shall also increase the visibility of NPOs to investors and donors. Altogether, the social stock exchange shall unlock large pools of social capital so that conventional capital can partner with social capital to address the pressing financial challenges in India.

[1]Press Release no. DSM/RM/BB/SVS/MVK/YK dated July 5, 2019 issued by the Press Information Bureau, Ministry of Finance, Government of India. Available at https://pib.gov.in/Pressreleaseshare.aspx?PRID=1577396.

[2] SEBI Press Release no. PR No.17/2021 dated May 6, 2021. Available at https://www.sebi.gov.in/media/press-releases/may-2021/sebi-seeks-public-comments-on-the-report-submitted-by-the-technical-group-on-social-stock-exchange_50072.html.