The Working Group on Social Stock Exchange constituted by the Securities and Exchange Board of India (“SEBI”) in September, 2019 – pursuant to the proposal of the Finance Minister of India in her FY 2019 Budget Speech to create a ‘social stock exchange’ (“SSE”) for listing social enterprises and voluntary organizations[1] – has submitted its report (“Report”) on June 1, 2020[2]. In light of the extensive socio-economic damage wrought by the COVID-19 crisis, and the amelioration of which requires transcending conventional modes of raising patient capital and expectations of quick financial returns, the imperative for SSE that can unlock hitherto restricted access to myriad avenues of social finance, becomes especially urgent.

Key recommendations

Some key recommendations of the Report are as follows:

· Minimum reporting and disclosure standard (“MRDS”) – Recognizing the lack of consensus in defining social enterprises, the Report prescribes a self-declaration approach for both for-profit social enterprises (“FPEs”) and non-profit social enterprises (“NPOs”), with FPEs being required to additionally prove their track record of “creating positive social impact”. The MRDS requires reporting and disclosure of the entity’s objectives, risk-mitigation measures, outreach metrics, depth and inclusion of beneficiaries, governance, financials and legal/statutory filings. With evolving maturity of the SSE ecosystem, the Report eventually envisages independent verification through social auditing, rigorous outcome-oriented measurement and regulatory supervision. It also recommends constitution of a self-regulatory organization to facilitate collaboration amongst information repositories[3] in providing greater access to data regarding NPOs,[4] and a capacity-building fund (“CBF”) to augment NPOs’ capabilities in meeting the MRDS.

· Rationalizing and expanding fund-raising avenues, and concomitant regulatory frameworks – Noting the extant legal limitations on NPOs to raise equity and debt ­– for instance, bonds issued by NPOs registered as societies, which are not bodies corporate under the Companies Act, 2013 (“CA 2013”), do not qualify as securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) – the Report recommends a host of statutory reforms to enable the SSE to standardize and innovate funding structures. Thus, it proposes that NPOs can issue ‘zero coupon zero principal bonds’ (“ZCZPBs”) to raise funds from investors who expect social over financial returns; however such bonds will first have to be notified as securities under SCRA. The Report also examines Social Venture Funds (“SVFs”)[5], mutual funds, grants-in, grants-out structures and pay-for-success models such as social/development impact bonds, as potential routes for channelizing capital from investors/outcome-funders to NPOs and FPEs through designated intermediaries. Further, it suggests amendments in applicable regulatory frameworks, to, inter alia, render funding to listed NPOs as eligible CSR contributions[6] and enable foreign entities to invest in listed SVFs[7].

· Tax sops – To encourage investors and galvanize SSE’s success, the Report proposes a bevy of tax incentives such as, inter alia, exemption of securities traded on SSE from securities transaction tax, 100% tax exemption for donations to both private and government NPOs under Section 80G of the Income Tax Act, 1961, making CSR expenditure tax deductible and tax holidays to listed FPEs.

Some observations

The Report suggests the SSE goes beyond pure matchmaking models abroad such as the UK Social Stock Exchange or Canada Social Venture Connexion which typically only connect investors/outcome-providers with FPEs/NPOs and do not innovate novel fundraising mechanisms/instruments. Nonetheless, its proposals require more elucidation to take concrete shape. Clarity is required regarding modalities as well as entry and exit norms of instruments such as ZCZPBs and impact bonds, criteria for regulatory appraisal of “positive social impact” self-reported by FPEs and enforcement and penalty provisions governing the stakeholders.

Additionally, while SSE is intended to operate under the aegis of existing stock exchanges and SEBI’s supervision, it should nevertheless recognize its unique role in protecting not only investors, but also an even more vulnerable constituency, i.e., the investments’ beneficiaries. According due credence to these stakeholders should form the cornerstone of the impact assessment and grievance mechanisms institutionalized by SSE[8]. Further, the prospects of utilizing CBF for creation and training of a cohort of independent social impact assessors and auditors, in addition to its currently proposed use for easing NPOs’ compliance burdens, should be explored. Should the Government go forward with the proposal of creating SSE, the pivotal challenge to SSE’s success shall remain holistic rapprochement of social, ecological and financial goals of investors, FPEs/NPOs, investment managers and beneficiaries, whilst ensuring compliance with robust reporting and disclosure norms.

Author:
Aratrika Choudhuri, Associate

Footnotes:
[1] https://www.indiabudget.gov.in/doc/bspeech/bs201920.pdf.
[2] https://www.sebi.gov.in/reports-and-statistics/reports/jun-2020/report-of-the-working-group-on-social-stock exchange_46751.html.
[3] E.g., DARPAN, GuideStar India.
[4] which is often scarce/disaggregated in the public domain
[5] Registered under SEBI (Alternative Investment Funds) Regulations, 2012.
[6] The Draft Companies (CSR Policy) Amendment Rules, 2020 propose to limit these to CSR contributions to Section 8 companies under CA 2013.
[7] Rule 4 of the Foreign Contribution (Regulation) Rules, 2011, which prohibits, inter alia, investments in mutual funds/shares, should be clarified in this regard.
[8]https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://scholar.google.com/&httpsredir=1&article=1906&context=jil.