Regulatory updates

The Government of India, vide its budget speech for FY 2019-20 had proposed to initiate steps towards creating a Social Stock Exchange⁹, under the regulatory ambit of the Securities and Exchange Board of India (SEBI).

Accordingly, in September 2019, SEBI constituted a Working Group (WG) to inter alia make recommendations with respect to possible structures and mechanism of an SSE within the securities market domain. Subsequently, in September 2020, SEBI constituted a Technical Group (TG)¹⁰ to recommend on matters related to the scope of work, eligibility criteria and regulation of social auditors.

Based on the recommendations of the WG and the TG, and the public comments received on the recommendations of the WG and the TG, on 25 July 2022, SEBI introduced regulations pertaining to SSE by making amendments to the following regulations:

• The SEBI (Issue of Capital and Disclosure Requirements ) Regulations, 2018 (ICDR Regulations)¹¹ by inserting a chapter on ‘Social Stock Exchange’
• The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)¹² by adding a chapter on ‘Obligations of a Social Enterprise’, and
• The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations)^>13

The key amendments have been discussed below:

A. Amendments to ICDR Regulations

The ICDR Amendment Regulations have inserted a new chapter, ‘Chapter X-A, Social Stock Exchange’ in the ICDR Regulations, which deals with various aspects of an SSE and introduces the concept of a Zero Coupon Zero Principal Instrument (ZCZP), which can be issued by Not for Profit Organisations (NPOs). Some of the key aspects pertaining to the SSE and ZCZP are as follows:

• Meaning and Applicability: According to the ICDR Amendment Regulations, a ‘Social Stock Exchange’ means a separate segment of a recognised stock exchange having nationwide trading terminals, permitted to register NPOs¹⁴ and/or list the securities issued by NPOs in accordance with the provisions of the ICDR Regulations. The provisions of Chapter X-A would apply to:
  ‐ NPOs seeking to only get registered with an SSE,
  ‐ NPOs seeking to get registered and raise funds through an SSE, and
  ‐ For Profit Social Enterprises¹⁵ seeking to be identified as a Social Enterprise (SE)¹⁶ under the provisions of Chapter X-A of the ICDR Regulations.
• Access to SSE: An SSE would be accessible only to institutional and non-institutional investors. Other classes of investors, as SEBI deems fit may also be permitted to access the SSE.
• Governance of SSE: Every SSE should constitute an SSE Governing Council to have an oversight on its functioning. The composition and terms of reference of the Governing Council would be specified by SEBI from time to time.
  
• Eligibility conditions for being identified as a social enterprise¹⁷ : An NPO or a For Profit Social Enterprise (FPSE), in order to be identified as a social enterprise, must establish primacy of its social intent by engaging in activities such as eradicating hunger, poverty, malnutrition and inequality, promoting health care including mental healthcare, sanitation and making available safe drinking water, promoting education, employability and livelihoods, protection of national heritage, art and culture and so on. It should target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state governments.
  Such an enterprise should have at least 67 per cent of its activities, qualifying as eligible activities through one or more of the following:
  ‐ at least 67 per cent of the immediately preceding three-year average of revenues comes from providing eligible activities to members of the target population,
  ‐ at least 67 per cent of the immediately preceding three-year average of expenditure has been incurred for providing eligible activities to members of the target population, and
  ‐ members of the target population to whom the eligible activities have been provided constitute at least 67 per cent of the immediately preceding three-year average of the total customer base and/or total number of beneficiaries.
  
• Registration with SSE: An NPO that seeks to raise funds through an SSE should mandatorily register with an SSE¹⁸. The minimum requirements for registration would be specified by SEBI, the SSE may specify additional eligibility requirements.
• Fund raising by social enterprises¹⁹: A social enterprise may raise funds through the following means:
  a.   A NPO may raise funds on an SSE through:
  ‐ Issuance of ZCZP instruments²⁰ to institutional investors and/or non-institutional investors,
  ‐ Donations through Mutual Fund schemes as specified by SEBI, or
  ‐ Any other means as specified by SEBI from time to time.
  b.  A FPSE may raise funds through:
  ‐ Issuance of equity shares on the main board, Small and Medium Enterprises (SME) platform or innovators growth platform or equity shares issued to an AIF including a Social Impact Fund,
  ‐ Issuance of debt securities, or
  ‐ Any other means as specified by SEBI from time to time.
• Other provisions: In addition to the above provisions, Chapter X-A of the ICDR Regulations stipulates regulations for the following:
  ‐ Cases when a social enterprise is not eligible to register or raise funds through a SSE or stock exchange
  ‐ Eligibility for issuance of ZCZP instruments
  ‐ Procedure for public and private issuance of ZCZP instruments
  ‐ Contents of a fund-raising document
  ‐ Other conditions relating to issuance of ZCZP instruments
  ‐ Termination of listing of ZCZP instruments from SSE

B.   Amendments to LODR Regulations
Some of the key amendments specified in the LODR Amendment Regulations are as follows:

• Applicability: The LODR Amendment Regulations inserted a chapter ‐ 'Chapter IX-A, Obligations of social enterprises'. The provisions of this chapter apply to:
  ‐ A FPSE whose designated securities are listed on the applicable segment of the Stock Exchange(s), and
  ‐ An NPO that is registered on the SSE(s).
• Issuer of ZCZP instruments would be considered as a ‘listed entity’: The LODR Amendment Regulations have added ZCZP instruments in the definition of ‘designated securities’, accordingly, an entity that issues a ZCZP instrument would be considered as a listed entity²¹ within the meaning of the LODR Regulations.
• Disclosure requirements - applicable to FPSE: A FPSE whose designated securities are listed on the Stock Exchange(s) should comply with the disclosure requirements contained in the LODR Regulations with respect to issuers whose specified securities are listed on the Main Board or the SME Exchange or the Innovators Growth Platform, as the case may be.
• Disclosure requirements – applicable to NPO: An NPO registered on the SSE(s), should make annual disclosures to the SSE(s) on matters specified by SEBI, within 60 days from the end of the financial year or within such period as may be prescribed.
  Additionally, the SSE(s) may specify other matters that need to be disclosed by the NPO on an annual basis.
• Intimations and disclosures by social enterprise to SSEs or stock exchanges:

‐ Materiality assessment: A social enterprise whose designated securities are listed on the SSE(s) should disclose to the SSE(s) its policy for determination of materiality, duly approved by its board or management, as the case may be, as well as any event²² that may have a material impact on the planned achievement of outputs or outcomes. All such events should also be disclosed on the social enterprise’s website.

‐ Details of Key Managerial Personnel: The board and management of a social enterprise would authorise one or more of its KMP for determining materiality of an event or information for the purpose of making disclosures to the SSE or the stock exchange as the case may be. Details of such KMP should be communicated to the SSE or to the stock exchange.

‐Annual impact report: A social enterprise, which is either registered with or has raised funds through an SSE should submit an annual impact report to the SSE in the format specified by SEBI²³. The annual impact report must be audited by a social audit firm employing social auditor(s)²⁴.

‐ Statement of utilisation of funds: A listed NPO should submit to the SSE(s) the following statement in respect of utilisation of the funds raised, on a quarterly basis:

1. Category-wise amount of monies raised,
2. Category-wise amount of monies utilised, and
3. Balance amount remaining unutilised²⁵.

The statement of utilization of funds should be given till the time the issue proceeds have been fully utilised or the purpose for which they were raised, has been achieved.

C. Amendments to AIF Regulations
The AIF Amendment Regulations have specified provisions with regard to raising of funds by an AIF by way of a ‘social impact fund’²⁶. Social impact fund has been defined as an AIF which invests primarily in securities, units or partnership interest of social ventures or securities of social enterprises and satisfies the social performance norms laid down by the fund. It issues “social units” to investors who agree to receive only social returns or benefits and no financial returns against their contribution. Some of the key amendments with respect to a social impact fund are given below:

• Each scheme of a social impact fund should have a corpus of at least five crore rupees,
• In case of a social impact fund which invests only in securities of NPOs registered or listed on a SSE, the minimum value of investment by an individual investor should be INR 2 lakh,
• Minimum grant that can be accepted for specific purpose from any person has reduced to INR10 lakh (instead of the existing INR 20 lakh)
• A social impact fund launched exclusively for a NPO registered or listed on an SSE, would be permitted to deploy or invest 100 per cent of the investable funds in the securities of such NPOs

The above amendments are effective from the date of publication in the Official Gazette (i.e., 25 July 2022).

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To access the text of the ICDR Amendment Regulations, please click here

To access the text of the AIF Amendment Regulations, please click here

To access the text of the LODR Amendment Regulations, please click here

9. The rationale for setting up the SSE is to enhance transparency and make available information about for-profit social enterprises or non-profit organisations in public domain, which would augment the flow of funds in favor of such enterprises.
10. The technical group was built upon the recommendations of the WG
11. The amendments have been issued by the SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022 (ICDR Amendment Regulations)
12. The amendments have been issued by the SEBI LODR (Fifth Amendment) Regulations, 2022 (LODR Amendment Regulations)
13. The amendments have been issued by the SEBI AIF (Third Amendment) Regulations, 2022 (AIF Amendment Regulations)
14. An NPO means a social enterprise, which is any of the following entities:
    • A charitable trust registered under the Indian Trusts Act, 1882
    • A charitable trust registered under the public trust statute of the relevant state
    • A charitable society registered under the Societies Registration Act, 1860
    • A company incorporated under section 8 of the Companies Act, 2013
    • Any other entity as may be specified by SEBI
15. ‘For Profit Social Enterprise’ means a company or a body corporate operating for profit, which is a social enterprise for the purposes of the ICDR Regulations and does not include a company incorporated under section 8 of the Companies Act, 2013
16. A social enterprise means either a NPO or a For Profit Social Enterprise that meets the eligibility criteria specified in Chapter X-A;
17. Corporate foundations, political or religious organizations or activities, professional or trade associations, infrastructure and housing companies, except affordable housing, are not eligible to be identified as a social enterprise.
18. A NPO may choose to register with a SSE and not raise funds through it.
19. A social enterprise would be eligible to register or raise funds through a Social Stock Exchange, subject to the restrictions specified in Para 292H of the Regulations.
20. ZCZP instruments would have a specific tenure, they would be issued without any coupon and no principal amount would be payable on its maturity. Further, the public issuance of ZCZP instruments by a registered NPO in accordance with the ICDR Regulations would be deemed to be in compliance with Rule 19 of the Securities Contracts (Regulation) Rules, 1957.
21. ‘listed entity’ means an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s).
22. The disclosure should be made not later than seven days or within such period as may be specified by SEBI, from the occurrence of the event and should comprise details of the event, including the potential impact of the event and the steps being taken by the social enterprise to address the same. Updates on this event should continue to be provided to the SSE on a regular basis till the time the event remains material.
23. The SSE may prescribe additional parameters, on which a social enterprise needs to report on an annual basis.
24. ‘Social Auditor’ means an individual registered with a self-regulatory organisation under ICAI or such other agency, as may be specified by SEBI, who has qualified a certification program conducted by the National Institute of Securities Market and holds a valid certificate.
25. The unutilised amount should be kept in a separate bank account.
26. This was earlier referred to as a social venture fund, it has now been renamed as a social impact fund