Profit

The new SEBI framework will allow non-profit social enterprises to list on the Social Exchange: the rules

A few years after Union Finance Minister Nirmala Sitharaman first launched the concept of Social Stock Exchanges (SSEs) in the country, SEBI highlighted the minimum requirements in terms of registration and disclosure that social enterprises must follow to be listed on the SSE. This includes participating in certain types of activities, registering as a charitable trust for 3 years, disclosing the top 5 donors to the company, and much more.

But first, what is a Social Stock Exchange (SSE)? SSE is a new concept introduced by FM Sitharaman in his speech on the Union budget for the financial year 2019-20. This type of scholarship is intended to serve social enterprises, philanthropic organizations, and voluntary organizations working towards a social welfare goal. The idea is that by listing these organizations, these companies can raise a lot of money through equity, debt, and even mutual funds.

Finance Minister Nirmala Sitharaman announced the new concept of SSE in 2019-20. (Photo: Getty Images)

So, in July 2022, the Securities and Exchange Board of India (SEBI) notified the rules of the Social Stock Exchange (SSE) so that non-profit companies can list on the SSE and raise funds. Recently, SEBI released a detailed framework that outlines the minimum requirements a non-profit organization (NPO) must follow regarding:

  • Registration with the Social Exchange,
  • Disclosure requirements whether NPOs raise funds by issuing zero-coupon principal instruments once listed on the Social Exchange, and
  • Annual disclosure requirements that must be made by NPOs on these exchanges
  • Social Stock Exchange or SSE will be a separate segment from existing stock exchanges viz. NSE and BSE.
  • Although the NSE and BSE only list “for-profit” companies, the SSE will be able to list both non-profit and for profit social enterprises.
  • The primary goal of both types of businesses should be to have social intent and impact. Social intent must be demonstrated through the company’s social goals for underserved or less privileged populations or regions.

What types of activities can these social enterprises engage in? To be referenced on the ESS, social enterprises can engage in one social activity among 16 major activities. Some of these activities include:

  1. eradicate hunger, poverty, malnutrition and inequality;
  2. promote health care, support education, employability and livelihoods;
  3. empowerment of women and LGBTQIA+ communities for gender equality; and
  4. support social business incubators.

What makes you ineligible to be listed on the SSE?

The organizations below will not be recognized as “social enterprises”. Therefore, they cannot be SSE rated.

  • a corporate foundation,
  • a political or religious organization,
  • a professional or trade association, and
  • infrastructure and housing corporations, except affordable housing corporations.

What are the registration conditions to be respected?

  • An NPO must be registered as a charitable trust and must be registered for at least 3 years.
  • The NPO must have spent at least Rs 50 lakh per year in the last financial year and must have received funding of at least Rs 10 lakh in the last financial year.
  • The NPO should also mention details of its governing body, composition, dates of board meetings and details of key management personnel, etc.

What are the information obligations to be complied with before and after registration?

  • The NPO must disclose its vision, its target segment (those affected by the issue and how are they affected) and how it plans to approach and accomplish its planned activities.
  • Listed NPOs will be required to submit a declaration of ‘use of funds‘ to the ESS within 45 days of the end of the term.
  • NPOs must also disclose financial statements for the last 3 years.
  • Registered NPOs will be required to submit the Annual impact report (AIR) within 90 days of the end of the financial year. This report will disclose the social impact in qualitative and quantitative terms.
  • Entities will also have to disclose the projects for which funds have been raised on the stock market and the impact generated by the project or solution. NPOs will also need to separately mention details of the social impact they have had in the past, the risks they face today and how they plan to mitigate them.
  • To comply with annual disclosure requirements, NPOs will have to disclose details of Top 5 donors or investors. These top 5 investors can be in terms of contribution to budget, scale of operations, strength of staff and volunteers, governance structure, financial statements, use of funds by program for the year and according to the auditors’ report.