Socialism And Stock Market Meet At Social Stock Exchange

“It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion.”

National Stock Exchange has released a FAQ on Social Stock Exchange which explains Social Stock Exchange as :

“Social Stock Exchange (SSE) is a separate segment of the existing Stock Exchange, that can help Social Enterprise(s) (Please see Qs.2 for further details on Social Enterprise) to raise funds from public through the stock exchange mechanism. SSE will act as a medium between Social Enterprises and fund providers and that can help them to select those entities that are creating measurable social impact and reporting such impact. Certain type of Social Enterprises i.e. Not-for-profit organizations (NPOs) that meet the registration criteria (Please see Qs. 9 for details on registration criteria) can register on SSE and undertake to make continuous disclosures on their social impact. Such NPOs may or may not choose to raise funds through SSE, however, would continue to make disclosures including on social impact to stock exchanges.”

Step in the Direction

In furtherance to the Hon’ble Finance Minister proposal, in September 2019 a Working Group (“WG”) was constituted followed by a Technical Group (“TG”), which was established in September 2020. These groups were primarily set up to look into the requirements and frame guidelines with respect to governance, scope of work, eligibility criteria, regular disclosures, etc. of these social enterprises which will eventually be listed on the Social Stock Exchange.

The TG had inter alia recommended eligibility criteria for a social enterprise whether it is a Non Profit Organisation (NPO) or For Profit Enterprise (FPE) and further provided parameters that needed to be disclosed initially during registration / listing, as well as on a continuous basis. It also recommended creation of a capacity building fund and certain changes in SEBI’s Alternative Investment Funds Regulations to address the requirements.

Legislation – Circulars & notifications

First, vide notification dated July 25, 2022, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDRRegulations”), Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODRRegulations”) and Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIFRegulations”) were amended to provide a broad framework for Social Stock Exchange.

With respect to ICDR Regulation chapter X-A (Social Stock Exchange) was introduced vide the said notification, which inter alia provides for definition (Regulation 292A), access to Social Stock Exchange (Regulation 292C), Social Stock Exchange Governing Council (Regulation 292D) and an entire gamut of other provision on the registration, fund raising, disclosure of the social enterprises.

Thereafter, SEBI by its circulardated September 19, 2022 (and further to the aforementioned amendments) laid down the ‘Framework on Social Stock Exchanges (“SSE”)’.

This Circular provides for a detailed framework on Social Security Exchange. It covers issues on :

Minimum requirements to be met by a NPO for registration with Social Stock Exchanges.

For instance, the NPO entity must be registered in India as one of the below:

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

b. a charitable trust registered under the Societies Registration Act, 1860;

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

d. a company incorporated under Section 8 of the Companies Act, 2013

In order to bring about transparency to the entity, the Circular mandates disclosure as to whether such entities are owned and/or controlled by government, private body(ies) or individuals.

In terms of fund flow, the entity is required to have an annual spending in the past financial year of Rs. 50 Lakhs and funding in the past financial year of Rs. 10 lakhs.

Minimum Initial Disclosure Requirement for NPOs raising funds through the issuance of Zero Coupon Zero Principal Instruments.

The Social Stock Exchange shall operate under the guidance of Social Stock Exchange Governing Council which shall, inter alia, mandate the structure of the draft fund-raising document and final fund raising document.

Social Stock Exchanges shall be required to host such requirements on its website. The document ought to necessarily contain its vision, target segment and reach, strategy to achieve its vision, details of its governing body, details of key managerial staff at the helm of various roles & responsibilities, etc.

Annual disclosure by NPOs

To make the entities accountable, they shall be required to make annual disclosures on various aspects, viz. general aspects, governance aspects, financial aspects and the likes. Infact, the Circular at Annexure I provides for a Guidance Note on the disclosure to be made by the NPOs.

Disclosure of Annual Impact Report by all Social Enterprises.

All the Social Enterprise will be required to make annual disclosures in the form of an ‘Annual Impact Report’ which shall cover qualitative and quantitative aspects of the social impact generated by the entity.

Statement of utilisation of funds in terms of 91F of the LODR Regulations

In order to ensure proper utilisation of the funds, the Circular mandates that listed NPO shall be required to submit statement of utilisation of funds to Social Stock Exchange, as mandated under Regulation 91F of the LODR Regulations, within 45 days from the end of quarter.

The above are only a few instances of the checks and balance prescribed for such entities to ensure that, whilst monies are being raised for a social cause, but to ensure accountability their governance is kept at par with any other entity raising capital.

With respect to For Profit Social Enterprise, Regulation 292G(b) of the ICDR Regulations provides for modes of fund raising and they are as follows :

• issuance of equity shares on the main board, SME platform or innovators growth platform or equity shares issued to an Alternative Investment Fund including a Social Impact Fund;
• issuance of debt securities;
• any other means as specified by the Board from time to time.

SEBI vide its Circular October 13, 2022, in detail provides for the composition, terms of reference, etc. for the Governing Council of the Social Stock Exchange.

In terms of Regulation 292D of the ICDR Regulations, every Social Stock Exchange shall be required to have a Social Stock Exchange Governing Council to have an oversight on its functioning.

The Governing Council shall have a balanced representation and shall comprise of individuals with expertise in the field of Social Stock Exchanges and those who can augment and give a fillip to the development of Social Stock Exchanges, such as :

1. Philanthropic and social sectors including public / private sector donors
2. Non-profit organizations
3. Information Repositories
4. Social Impact Investors
5. Social Audit Profession / self-regulatory organization for social auditors,
6. Capacity Building Fund
7. Stock Exchange

The role of the Governing Council shall be to :

1. Provide expertise towards development of the Social Stock Exchange including growth of registration/ listing of social enterprises and number of investors.
2. Oversee the listing function of the Social Stock Exchange and provide guidance in laying down procedures for on-boarding and listing of Social Enterprises.
3. Facilitate effective oversight on the adequacy of disclosures made by Social Enterprises and guide development of necessary systems and processes towards the same.
4. Review the functioning of the Social Stock Exchange, including feedback received from stakeholders.
5. Any other matter related to governance and development of Social Stock Exchange.

Objective behind Social Stock Exchanges

SEBI has accorded in principle approval to BSE Ltd. and the National Stock Exchange of India to set up a Social Stock Exchange as a separate segment on its platform. This will enable the Social Stock Exchanges to gain advantage from the already established exchanges in terms of systems, governance, infrastructure and pool of investors.

Also, by being under SEBI’s umbrage, it will ensure more credibility to the Social Stock Exchanges and in turn to the Social Enterprises, thereby creating an environment of trust for investors and donors.

Social Enterprises and voluntary organisations by listing themselves on Social Stock Exchange will have the access to opportunities to raise capital in the form of debt, equity or mutual fund like units. Social Stock Exchanges thus aim to effectively deploy fundraising instruments and structure available under specified guidelines. These instruments will depend on the nature of social enterprise seeking funding.

The introduction of Social Stock Exchanges undeniably is a welcome step in the field of philanthropy and securities market. This step will give an impetus and structure to the world of charity, philanthropy and social efforts being taken in this direction. This initiative will also bring about a transparency within organisation raising monies / funds to address the cause. This will also give confidence to donors that the monies are being effectively used for the cause for which it was intended and raised.

The road ahead

As per an article by the Indian Development Review only three out of the seven Social Stock Exchanges set up across the world—Canada, Singapore and Jamaica—are still active. In the days ahead, one will now have to see the fate Indian Social Stock Exchange meet.

Today, Social Enterprises are largely dependent on the financial aid received via Corporate Social Responsibility (CSR), philanthropic donations, crowdfunding activities etc. Presently investors do not have enough information about such Social Enterprises and this lack of knowledge holds back donors and thereby hampers the fund flow.

It is hoped that the registration, regularisation, disclosures, etc. will bring about transparency in such organisation thereby instilling confidence within the donors / investors to donate / invest in such Social Enterprises, leading to the latter’s success and the success of the cause of the Social Enterprise - thereby creating a win win ecosystem for the donor / investor and the beneficiary.

The author is an Advocate at Mumbai. Views are personal.