An Analysis of Social Stock Exchange Framework notified by SEBI

Vaibhav Gupta and Varun Matlani are 4th year students at Gujarat National Law University

Introduction

SEBI vide its notification notified the framework for social stock exchange which shall be a path-breaking development in terms of inter-play between Capital Markets and Social Enterprises (for profit as well as not for profit). In furtherance of this, there were several significant amendments made on July 25^th, 2022 in SEBI (Issue of Capital and Disclosure Requirements), 2018, SEBI (Listing Obligations and Disclosure Requirements) 2015, SEBI Alternative Investment Funds Regulations, 2012 and the definition of Zero Coupon-Zero Principal (ZCZP) being added to Section 2 (h) of Securities Contract Regulation Act, 1956, thereby creating a foreground for operation of Social Stock Exchanges in India.

The article analyses the model of Social Stock Exchange in India for Social Enterprises (For Profit and Not for Profit) to raise funds from public, alongside increasing the accountability and transparency in social funding across sectors. For effective raising of funds by non-profit(s), Zero Coupon Zero Principal bond(s) have been notified as instruments, and shall act as effective donation instruments enabling transfer as well as accountability.

Bird’s Eye View of Frameworks’ Operation

The model of Social Stock Exchanges shall consist of three parties namely; the bourse, eligible social enterprises, and investors (effectively donors). The said enterprises shall issue Zero-coupon Zero-Principal bonds that shall be listed on Social Stock Exchanges, though the transferability may not have a significant relevance, but can incorporate CSR mandate amount trading, for instance company X requiring to spend Rs. 1 Crore in CSR subscribes to ZCZP worth Rs. 1.5 Crore, it may be able to sell the excess Rs. 0.5 Crores of Bond to another company which has CSR mandate.

These subscriptions to ZCZP shall effectively be donations for these enterprises and would not be needed to be repaid, the effectiveness of ZCZP can be accountability and transferability. With the model in force, social audit and impact assessment would to an extent drive social enterprises towards efficiency and better utilisation of fund as well as eliminating misutilization by bringing in more transparency and regulations.

Zero Coupon Zero Principal Bonds

ZCZPs are effectively donations receipts (issuable only by Not-for-Profit organizations), wherein the issuing enterprise issues an instrument, wherein the coupon rate i.e., interest rate is zero and the principal mentioned in the bond for repayment is also zero (effectively making company liable for Rs. 0) in return of the amount of subscription by the subscribers. These instruments are issued for a specific period and/or an objective and get terminated by two ways – either when objective is achieved or tenure is completed.

Such an instrument may enable a facilitation for CSR trading similar to that of carbon footprint trading and effectively brings transparency as it creates liability on social enterprises for authenticity, social audit and impact assessment with trackable utilisation of funds. In case of transferability, it can also assist in tracking the transaction thereby accurate assessment of tax rebates and rebate reversals.

Eligibility Criteria

A registered NPO (or For-Profit Organization, to establish primacy of social intent in accordance with Section 292E) with validity of certificate for at least next 12 months which has been registered for at least 3 years and the annual spending in past financial year is a minimum of Rs. 50 lakhs and funding in previous financial year at least 10 lakhs shall be eligible to raise finds through ZCZP instrument via a recognised SSE, wherein the minimum issue size shall be 1 crore and minimum application size of Rs. 2 crores.

What is a Social Enterprise?

A registered NPO or for-profit organisation with primacy of social intent under section 292 E (2).
Having at least 67% of activities targeted towards the target population, whereas the qualification shall be assisted on the basis of 67% of either revenue, expenditure or average of total customer/beneficiaries targeted towards the target population.
Except affordable housing, corporate foundations, political or religious organisations, infrastructure and housing companies shall not be identified as social enterprises.

Difference between operations of a non-profit organisation and for-profit organisation on SSEs.

The structure of legal framework under which these two kinds of entities operate have a stark difference. Therefore, the mode of fundraising includes different instruments as per the relevant structure in terms of equity and non-equity offerings. For Profit Organisations (FPEs), which includes a set-up of companies registered under the Companies Act, Partnership firms or HUFs and LLPs would be allowed to raise funding through social venture funds and equity, whereby owners of these instruments may expect some financial gains and prima-facie be objected towards ESG and Social Entrepreneurship over general charitable purpose. On the other hand, not-for profit organisations could raise funds through ZCZPs, Social Venture Funds, Pay for Success Structures, Equity and Debt but shall not have residual claim over excess of income, since the legal framework does not provide for payments of any kind of dividends.

Disclosure Requirements for Social Enterprises

As a part of draft fund-raising document, NPOs would be required to disclose financial statements and annual accounts along with social impact assessment.
Raising funds through Social Stock Exchange would enhance transparency – whilst the enterprises would be required for detailed annual disclosure with respect to financials and governance within 60 days of end of Financial Year.
Disclosure would also increase effective reporting and analysis of work done by these Social Enterprises by submission of Annual Impact Report covering qualitative and quantitative aspects of social impact generated by entity along with statement of utilisation of funds in quarterly manner.

Global Outlook and Way Forward for Indian SSE Framework

Brazil in 2003 launched the first SSE ‘BOVESPA SSE’ and since then seven more SSEs have been established by U.K., Canada, Singapore, South Africa and Jamaica but merely three of them (Singapore, Jamaica and Canada) being operational, this shows that SSEs may not have a huge sustainable advantage or a need that is being unfulfilled. This inference can be drawn from the fact that the social enterprises listed on these exchanges have not been able to raise sufficient capital to meet their needs and for the operation of the same the exchange fees and other expenses would have been a hole in the pocket of these SSEs which have a very narrow margin and since the demand has not been high in terms of Social Enterprises raising capital through SSEs, thereby these SSEs being unable to cover their costs and being financially unviable.

The Indian SSEs are coming at a time when a world is witnessing more socially responsible corporate citizens in a wave of focus towards ESG and rise in social entrepreneurship with relevant legal framework for mandatory CSR which can lead to viability of funding and economies of scale which can make the idea of SSEs viable in the Indian context, especially where the nation has two global capital market mammoth bourses, whereby they already have a structure in place with many fixed costs already stable which allows them to profitably explore the new ideas and innovations in Capital Markets on the side lines of their main activities.