Background

SSEs were mentioned in the Union Budget speech for the financial year 2019-20 with the objective of creating a SEBI-regulated electronic fund-raising platform for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.[1] Accordingly, SEBI prescribed the regulatory framework that governed SSEs through its circular dated September 19, 2022 (“Circular”).[2] An NOP may raise funds on SSE through (i) issuance of Zero Coupon Zero Principal Instruments (“ZCZP”); (ii) donations through mutual fund schemes; or (iii) any other means that SEBI may specify in future.[3] ZCZPs are issued to NPOs registered with SSEs, without any coupon and no principal amount is payable on its maturity.[4] At its core, the SSE is a specialized platform that connects conscientious investors with organizations dedicated to effecting positive social and environmental change.

The Existing Framework: Key Issues

The framework prescribed under the Circular had certain challenges, including the following: –

• the minimum issue size and minimum application size for NPOs INR 1,00,00,000 and INR 2,00,000 were found to be quite high and deterred investors likely to subscribe to ZCZPs of more NPOs or who donate on a regular basis;
• education institutions established under Section 10 (23C) of the Income Tax Act 1961, or institutes established or constituted by the Central or State government with the object of regulating or administrating any activity for the benefit of the general public under Section 10 (46) of the Income Tax Act 1961 may not be registered under Section 80G of the Income Tax Act 1961, and therefore could not register as an SSE under the existing framework;
• SSE registrations required NPOs to not have any pending notice or ongoing income tax scrutiny, which could potentially block registration even for relatively minor income tax issues;
• in terms of Section 292K(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 read with paragraph D(5) of the Circular, an NPO is required to file a fundraising document with the SSE and should include details of social impact in terms of parameters which cover aspects prescribed under the AIR such as “Strategic Intent and Planning”, “Approach” and “Impact Score Card”. However, since most of the NPOs have carried out social impact assessments in the past, and in a format different from that prescribed by SEBI, duplicating the same in the SEBI-specified format would be a costly and time-consuming affair.

Changes Proposed under the Consultation Paper

Given the above, the Social Stock Exchange Advisory Committee (“SSEAC”), constituted by SEBI proposed the following measures: –

• to reduce the minimum issue size and minimum application size to INR 50,00,000 and INR 10,000, respectively;
• entities registered under Section 10(23C) and Section 10(46) of the Income Tax Act, 1961 may be considered eligible for registration as NPOs with SSE;
• NPOs that received income tax notices or were subject to income tax scrutiny could still be considered for registration if such details were disclosed during the application process (along with any penalties being disclosed as paid or appealed within 7 days). However, an SSE could reject applications from NPOs if the disclosed income tax notices had grave implications; and
• to enable time and cost efficiencies, NPOs should be allowed to provide the social impact assessment carried out by them in the past.

Conclusion

The changes proposed for discussion under the Consultation Paper (for which comments can be provided up to September 19, 2023) appear to be progressive and should open up more routes for the growth of SSEs in India, increased participation of a wider category of investors and provide an impetus to NPOs registering with SSEs.