Social Stock Exchange ("SSE"), a concept which was first mooted by the Hon'ble Finance Minister in the FY 2019-20 budget speech, witnessed its first listing on December 13, 2023. Since then, 9 not-for-profit organisations ("NPOs") have successfully listed their securities over the SSE as on the date of this article, having collectively raised Rs. 12.4 crore.1 Further, 66 and 57 NPOs have registered themselves with the SSE through the National Stock Exchange of India Limited and the BSE Limited, respectively.2 Through such developments, India's social sector is moving towards increased ease of access to funds coupled with accountability, transparency, and regulatory oversight.
SSE – An Ecosystem of Accountability
The SSE is primarily regulated by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the SEBI circulars on Framework on Social Stock Exchange dated September 19, 2022, Self-Regulatory Organizations for Social Impact Assessors, and Timelines for disclosures by Social Enterprises on Social Stock Exchange, both dated May 27, 2024, along with relevant circulars issued by the stock exchanges (inclusive of modifications thereof, the "SSE Framework"). The SSE provides an accessible mechanism through existing stock exchanges for social investors to donate to NPOs. This is achieved through the public or private issue of Zero Coupon Zero Principal Instruments ("ZCZPs"), which, as the name suggests, are securities which offer no monetary returns whether by way of interest payments or by redemption.
For NPOs to gain access to the SSE under the above regulations, they must qualify to be social enterprises by establishing the primacy of their social intent. Demonstrating such primacy requires the NPO to be involved in at least one of the prescribed eligible activities (such as eradicating hunger, poverty, malnutrition and inequality, or promoting health care including mental healthcare, sanitation and making available safe drinking water). At least 67% of the NPO's activities must be such eligible activities and must target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state governments. Importantly, corporate foundations, political or religious organizations, professional or trade associations, and infrastructure and housing companies (except for affordable housing) are excluded from being identified as NPOs. These eligibility criteria for registration with the SSE ensures a uniform standard of inclusion, fosters trust in the SSE for social investors, and grants credibility to registered NPOs.
The principal advantage of the SSE is the stress on transparency through comprehensive and recurrent disclosures. Previously, there were no standardised means of evaluating critical information pertaining to compliances and defaults by NPOs and their directors or trustees by social investors. Likewise, procuring critical information pertaining to the governance structure of the NPO, reliable information on targeted expenditure, track record of previous social impact, and related party transactions was a challenge for prospective investors. In such a scenario, there remained a wide information asymmetry between NPOs and social investors. NPOs, therefore, had to depend on personal networking to establish trustworthiness, with the cost of verifying information being primarily borne by social investors. The SSE bridges this informational gap between NPOs and social investors through recurrent disclosures following registration and through the fund-raising document filed with the SSE by an NPO. Through this thorough system of disclosures, social investors can make informed choices backed by a clear demonstration of a NPO's track record and management.
Extant disclosures for not-for-profits are of four types and cover different aspects of a NPO's operations. FIRSTLY, all registered NPOs must make annual disclosures which cover important data points such as scale of operations, details of top 5 donors, details of top 5 interventions or programs, governance related disclosures, and a financial statement along with program-wise fund utilisation statement for the year. Additionally, NPOs must also submit an Annual Impact Report ("AIR", an analogue of annual reports issued by listed companies) which is duly audited by social impact assessors in accordance with the comprehensive Social Audit Standards developed by the Institute of Chartered Accountants of India and the Unified Framework for Social Impact Assessment Standards developed by the Institute of Company Secretaries of India. Such AIR must contain an impact score card which will include metrices being monitored and beneficiary / stakeholder feedback. Secondly, when a registered NPO intends to get listed, it must issue a fund-raising document having detailed initial disclosures on the organisation's vision, target segment, risks, finances etc. Such fund-raising document is analogous to offer documents issued in cases of debt or equity issuances. Thirdly, there are quarterly disclosures to be made by all listed NPOs in the form of fund utilisation statements providing a category-wise breakdown of monies raised, utilised, and remaining unutilised monies. Fourthly, listed NPOs are mandated to have a policy on determining the materiality of events, pursuant to which the organisation must disclose any event which may have a material impact on the planned achievement of outcomes or output. Notably, the NPO's are required to provide updates on a regular basis along with relevant explanations as long as an event remains material. Thus, the extant regulation provides prospective and current social investors to have consistent, timely, and comprehensive disclosures to evaluate donations. If mainstreamed, the SSE can greatly reduce the opacity and fragmented regulation which currently permeates the non-governmental social sector.
The SSE Framework had initially recognised only the Sustainability Reporting Standards Board under the Institute of Chartered Accountants of India as a Self-Regulatory Organisation ("SRO"). However, with increased recognition of the wide range of stakeholders who contribute to India's social sector, SEBI has since expanded SROs under the SSE Framework to include the ICMAI Social Auditors Organisation under the Institute of Cost Works Accountants of India and the ICSI Institute of Social Auditors under the Institute of Company Secretaries of India. Such an expansion of SROs has led to a greater range of participants possessing diverse expertise to contribute to the regulatory process. It is expected that the SROs will evolve unified Social Impact Assessment Standards to replace the pre-existing Social Audit Standards, as also fora for effective regulatory coordination.
Additionally, SEBI has introduced three new ideas through the SSE Framework which can greatly add value to the SSE ecosystem as it matures and evolves. The first is the possibility of donations via mutual funds, for which a detailed regulation is still awaited. Secondly, regulations governing Alternative Investment Funds ("AIFs") have permitted the setting up of 'social impact funds', which are a subset of AIFs that invest primarily in securities, units or partnership interest of social ventures or social enterprises which satisfy the social performance norms laid down by such fund. Thirdly, for-profit social enterprises have been duly recognised and permitted to register with the SSE, though they are not allowed to issue ZCZPs or list on the SSE. Through voluntary registration, for-profit social enterprises can adopt the disclosure and regulatory regime which applies to registered NPOs, potentially increasing their reach, accountability, and standing with prospective social investors.
Way Forward
Three important points warrant mention:
- First, the working group report based on which the SSE Framework was issued by SEBI contained a recommendation for the creation of a Capacity Building Fund ("CBF"). As has been the experience of the Canadian and Singaporean social stock exchanges, these platforms had to assist social organisations throughout the issue process and diversify into advisory, consulting, and related service offerings. The proposed CBF was intended to provide an initial corpus for similar reasons, and its establishment may be considered in the future.
- Second, while valid and subsisting registrations under the Income Tax Act, 1961 pertaining to charitable institutions (such as registrations under sections 12A, 12AA, 12AB and/or 80G of the said Act) are necessary prerequisites for registering a social enterprise with the SSE, it is unclear as to whether subscribers of ZCZPs can avail of tax deductions under the said sections. Particularly, while the SSE Framework suggests that deductions under section 80G of the Income Tax Act, 1961 may be available to the subscribers of ZCZPs, and SEBI has made proposals to this effect to the Ministry of Finance, suitable amendments to the said Act and rules made thereunder are still awaited.3
- Third, the subscription of ZCZPs do not qualify for CSR spends as mandated under the Companies Act, 2013. This raises the peculiar possibility of donations towards the same object, such as whether donating to an organisation working on eradicating hunger and malnutrition, be counted as a company's CSR spends if done outside of the SSE, but not when such donation is made through the subscription of ZCZPs on the SSE. Considering the stringent and transparent system of disclosures in place for SSE-registered organisations, permitting eligible ZCZP subscriptions to be counted towards CSR spends will serve both, to provide additional transparency (and hence, credibility) to such spends, as well as provide an additional source of funding for NPOs intending to list on the SSE.
The greatest challenge to the SSE will be maintaining the viability of the institution. Of the seven social stock exchanges set up globally prior to India's SSE, only three (Canada, Jamaica, and Singapore) remain operational. Of these, the Jamaican social stock exchange operates more as a crowdfunding platform where no securities are issued by organisations seeking donations. Meanwhile, both the Canadian and Singaporean platforms are distinct from India's SSE in the sense that they operate as wide-spectrum platforms where a range of activities such as business development, advisory, and investor education are carried out apart from the listing of securities. Simultaneously, neither of these two stock exchanges have any direct equivalent to the ZCZPs, and instead facilitate the issue of various interest-bearing or interest-free securities permissible under their respective jurisdictions. Thus, India's SSE is an experimental evolution over social stock exchanges established globally, and consistent regulatory support will be imperative in maintaining the viability of the SSE.
Footnotes
2. Registered NGOs (nseindia.com); BSE SSE (bsesocialstockexchange.com)
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