India’s New Social Stock Exchange – A New Fundraising Opportunity

The Securities and Exchange Board of India’s (SEBI) Notification of 25^th July 2022 brings new hope for both, ‘for-profit’ as well as ‘non-profit’ ‘Social Enterprises’ to mobilize financial resources. In this Blog Post we shall try to simplify and demystify SEBI’s Notification and some technical terms.

The Gazette Notification can be read at: https://www.sebi.gov.in/legal/regulations/jul-2022/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-july-25-2022-_61405.html

Social Stock Exchange

Social Stock Exchange (SSE) shall be a separate segment of a recognized stock exchange (e.g., National Stock Exchange or Bombay Stock Exchange) having nationwide trading terminals permitted to register Not-for-Profit Organizations (NPO) and / or list the securities issued by Not-for-Profit Organizations.

The SSE will list only securities that raise money for ‘non-for-profit’ or ‘for-profit’ ‘social enterprises.’

Also, a NPO may simply want to register itself on the SSE in order to be recognized as a ‘Social Enterprise’ or register on the SSE to raise funds by means of issuing “Zero Coupon Zero Principal Instruments”

What is ‘Zero Coupon Zero Principal Instrument’

Zero Coupon Zero Principal Instruments are financial instruments that any not-for-profit organisation can use to raise funds.

Generally, NPOs raise funds through donations from individuals by appealing to them for their philanthropic support or write grant proposals to grant-making foundations or companies to support specific projects and programs. In like manner, now on the SSE the NPO may issue a ‘zero-coupon zero-principal security’ (like Bonds) and those willing to provide grant support could buy (as social investment) these securities or bonds.

The ‘zero-coupon, zero-principal’ structure resembles a debt security like a bond. In the business sector when an entity borrows money (as a loan) by issuing regular debt security (like a bond), it has to make interest payments and pay back the principal when the bond matures. However, with this new financial instrument, when an entity issues these securities and raises money, it is not exactly a loan but a donation/grant for a social project of the social enterprise. So, the borrowing entity (NPO) does not have to pay interest (i.e., zero coupon) and it does not have to pay the principal (i.e., zero principal) either.

In other words when a philanthropic individual or company buys a ‘Zero Coupon Zero Principal Instrument’ on the SSE it is essentially a grant for a specific social project or program. The individual or corporate social investor does not receive any financial return by way of interest or the principal amount. It would be in the nature of a ‘Social Investment’ without any ‘financial return’, making it a gift/donation/grant.

The Instrument as fundraising tool

The Social Enterprise will be required to first file a “draft fund-raising document” with the SSE. Pursuant to incorporation of observations issued in respect of the draft fundraising document by the SSE the “final fund-raising document” may to be filed, on approval of which the social enterprise may issue a Zero Coupon Zero Principal Instrument or Bonds.

Any individual or corporate would be able to buy the security through any of the social security exchanges, once they are open for business.

Of course, like any other debt instrument, it will come with a time duration depending on the nature of the project. As of now we are not sure if the security will be transferable.

Potential Benefits of listing on SSE

Getting listed on the SSE would entail going through a vigorous due-diligence process. However, once listed, it would be seen as a recognition and enhance credibility of the social enterprise.

Social enterprises listed on the SSE will also be subject to regular audits to measure social impact and the reports shall be disclosed to all stakeholders just the way it is done by for-profit entities (listed companies) on regular stock exchanges.

Social Audits shall be carried out by ‘Social Auditors’ (who have qualified a certification program conducted by National Institute of Securities Market and hold a valid certificate) and ‘Social Audit Firms’ (employing Social Auditors and having a track record of minimum three years for conducting social impact assessment).

The bigger attraction for donors to buy these securities would be the earlier promised incentive of one hundred per cent tax deduction u/s 80G as opposed to a mere fifty percent tax deduction on making a regular donation or grant.  This will be possible once the Ministry of Finance amends Section 80G of the Income tax Act 1961, making investment in ‘zero-coupon, zero-principal’ instruments/bonds issued by Not-for-profit social enterprises listed on the SSE, eligible for one hundred per cent tax deductions

Social Enterprise

“Social Enterprise” means either a ‘Not-for-Profit Organization’ or a ‘For Profit Social Enterprise’ that meets the eligibility criteria specified by SEBI.

SEBI’s notification has clarified that a “For-Profit Social Enterprise” means a company or a body corporate operating for profit, which is a Social Enterprise for the purposes of SEBI’s regulations on the SSE and does not include a company incorporated under section 8 of the Companies Act, 2013.

“Not-for-profit Social Enterprise” shall include charitable trusts, charitable societies, companies licensed under section 8 of the Indian Companies Act 2013 and any other entity as may be specified by the Board

Who would be eligible?

A ‘for-profit’ or ‘not-for-profit’ entity must first be identified as a “Social Enterprise” by establishing primacy of its social intent. In order to establish the primacy of its social intent, the Social Enterprise shall indulge in at least one of the following activities:

• eradicating hunger, poverty, malnutrition and inequality;
• promoting health care including mental healthcare, sanitation and making available safe drinking water;
• promoting education, employability and livelihoods;
• promoting gender equality, empowerment of women and LGBTQIA+ communities;
• ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation;
• protection of national heritage, art and culture;
• training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports;
• supporting incubators of Social Enterprises;
• supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building;
• promoting livelihoods for rural and urban poor 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;
• promoting welfare of migrants and displaced persons;
• any other area as identified by the Board or Government of India from time to time.

In addition to the above, the Social Enterprise shall target under-served or less privileged population segments or regions recording lower performance in the development priorities of central or state governments;

Further, the Social Enterprise shall have at least sixty-seven per cent of its activities, qualifying as eligible activities to the target population, to be established through one or more of the following:

• at least sixty-seven per cent of the immediately preceding three-year average of revenues comes for providing eligible activities to members of the target population;
• at least sixty-seven per cent of the immediately preceding three-year average of expenditure has been incurred for providing eligible activities to members of the target population;
• members of the target population to whom the eligible activities have been provided constitute at least sixty-seven per cent of the immediately preceding three-year average of the total customer base and/or total number of beneficiaries.

Entities not recognized as ‘Social Enterprise’

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.

Fundraising

A Not-for-Profit Organization may raise funds on SSE through:

• issuance of Zero Coupon Zero Principal Instruments to institutional investors and/or non-institutional investors
• donations through Mutual Fund schemes as specified by SEBI;
• any other means as specified by SEBI from time to time.

A For-Profit Social Enterprise may raise funds through:

• 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 SEBI from time to time

Securities issued by For Profit Social Enterprises shall be listed and traded under the applicable segment of the stock exchange with an identifier stating that the scrip is that of a For-Profit Social Enterprise and such For-Profit Social Enterprises shall meet the eligibility criteria for the main board, SME Platform or innovators growth platform, as applicable.

Ineligibility

A Social Enterprise shall not be eligible to register or raise funds through a Social Stock Exchange or Stock Exchange, as the case may be:

• if the Social Enterprise, any of its promoters, promoter group or directors or selling shareholders or trustees are debarred from accessing the securities market by the Board;
• 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 the Board;
• if the Social Enterprise or any of its promoters or directors or trustees is a wilful 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 Charity Commissioner or any other statutory body.

Issuing Zero Coupon Zero Principal Instruments

• shall be issued only by a Not-for-Profit Organization registered on a Social Stock Exchange and shall have a specific tenure;
• Zero Coupon Zero Principal Instruments shall be issued without any coupon and no principal amount shall be payable on its maturity;
• Zero Coupon Zero Principal Instruments shall be issued in dematerialized form only;
• The minimum issue size shall be rupees one crore;
• The minimum application size shall be rupees two lakhs;
• The minimum subscription required to be achieved shall be seventy-five per cent of the funds proposed to be raised through issuance of Zero Coupon Zero Principal Instruments;
• In case of any under subscription, the Not-for-Profit Organization shall, in the fundraising document, provide details on the following:
• manner of raising balance capital in case of such under subscription between seventy-five to one hundred per cent;
• possible impact on achieving the social objective(s) in case such under subscription is not arranged;

Provided that the funds shall be refunded in case the subscription is less than seventy five percent of the issue size

Conclusion

1. Getting listed on the SSE will enhance visibility and credibility of the social enterprise;
2. Social Investors (donors/grant-makers) may enjoy higher tax deduction and gain greater confidence in giving;
3. Not-for-profit and for-profit social enterprises will attain equal status and opportunity on the SSE

Noshir H. Dadrawala