Listing on Social Stock Exchange – the futuristic market

By: CA. Kamal Garg

Creation of a social stock exchange (SSE) had been proposed by the Union Minister of Finance and Corporate Affairs, Smt. Nirmala Sitharaman, while presenting the Union Budget 2019-20 in the Parliament. The Finance Minister said that 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. The Minister further stated that

“I propose to initiate steps towards creating an electronic fund raising platform – a social stock exchange – under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund”.

The Finance Minister added that it is important to get retail investors to invest in treasury bills and securities issued by the Government. Efforts made by the Reserve Bank will need to be supplemented with further institutional development using stock exchanges. For this purpose, inter-operability of RBI depositories and SEBI depositories would be necessary to bring about seamless transfer of treasury bills and government securities between RBI and Depository ledgers and for enabling this. The Government will take up necessary measures in this regard in consultation with RBI and SEBI.

SEBI while keeping high spirits for SSE, Vide notification dated July 25, 2022, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018(“ICDR Regulations”), Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) were amended to provide a broad framework for Social Stock Exchange. Such Framework on Social Stock Exchange (“SSE”) was hence pronounced by SEBI on 19^th September, 2022.

The key requirements enshrined in SSE Framework are given below:

1. Social Stock Exchange: Social Stock Exchange (SSE) is a separate segment of the existing Stock Exchange, that can help Social Enterprise(s) 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 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.

2. Social Enterprises: Social Stock Exchange identifies two forms of social enterprises that are engaging in the activity of creating positive social impact and that meets primacy of their social intent, namely:

i. Not-for-profit organization;

ii. For profit social enterprise.

In order to establish primacy of social intent, any entity [be it Not-for-Profit Organization (NPO) or For-Profit Social Enterprise (FPE)] should meet all three criterions mentioned under ICDR Regulations.

SEBI vide its circular dated September 19, 2022 has prescribed certain minimum requirements in order for a not-for-profit organization to register on Social Stock Exchange. In brief, these criteria include mandatory age of NPO as 3 years, valid certificate u/s 12A/12AA/12AB of the Income Tax Act, valid 80G registration, minimum INR 50 lakhs as annual spending and minimum INR 10 lakhs of fund in the past year etc. Social Stock Exchanges are also permitted to prescribe additional requirements in order for a not-for-profit organization to register on it.

3. Identifying social enterprises: In order to be identified as a social enterprise, it shall demonstrate that 67% of its activities qualifying as eligible activities to the target population shall be demonstrated by either of the following:

at least 67% of its revenue of the immediately preceding 3-year average of revenues comes from providing eligible activities to members of the target population; or
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; or
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.

However, corporate foundations, political or religious organizations or activities, professional or trade associations, infrastructure, and housing companies, except affordable housing, shall not be eligible to be identified as a Social Enterprise.

4. Social Enterprises which are not eligible to get registered or raise funds through SSE: A Social Enterprise shall not be eligible to register or raise funds through Social Stock Exchange/Stock Exchange 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;
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;
if the Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower;
If Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower;
If any of its promoters or directors or trustees is a fugitive economic offender;
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.

5. Ways in which a Not-for-profit organization can raise funds through SSE: A Not-for-Profit organization after registering with Social Stock Exchange may raise funds on Social Stock Exchange through:

Issuance of Zero Coupon Zero Principal Instruments [through private placement or public issuance]
Donations through Mutual Fund Schemes [as shall be specified by SEBI]
Development Impact Bonds
Any other means that SEBI may specify in future

6. Social Audit: Social Audit refers social impact assessment of project/program executed by Social Enterprises through an independent examination by a certified social audit professional. Social Audit Firm is an entity which has employed Social Auditors and has a track record of minimum three years for conducting social impact assessment. An individual who is registered with a self-regulatory organization under the Institute of Chartered Accountants of India (or such other agency, as may be specified by SEBI) and who has qualified a certification program conducted by National Institute of Securities Market and holds a valid certificate can act as Social Auditor.