Fostering Flexibility in the Social Stock Exchange Framework

Introduction

The Social Stock Exchange (SSE) was created as a platform for not-for-profit organizations (NPOs) to raise funds. Regulatory guidelines have been established by the Securities and Exchange Board of India (SEBI) to govern SSE operations. In this blog, we explore the need for flexibility within the SSE framework and propose recommendations to address the challenges faced.

Current State of SSE

Both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have set up the SSE segment. As of August 2023, there are 31 registered NPOs, and a certification program for Social Auditors has been launched by the National Institute of Securities Markets (NISM). Moreover, a capacity building fund (CBF) with Rs. 10 crores has been established to support NPOs and stakeholders navigating the SSE processes.

Key Challenges and Issues

Through consultations with investors, NPOs, the SSE Advisory Committee (SSEAC), and SEBI officials, several challenges faced by NPOs in raising funds on the SSE have been identified. Recommendations from the SSEAC and Exchanges highlight the following concerns:

1. Minimum issue size for NPOs issuing Zero Coupon Zero Principal Instruments (ZCZP): The current threshold of Rs. 1 crore may discourage NPOs from utilizing the SSE platform.
2. Minimum application size for NPOs issuing ZCZP: The existing limit of Rs. 2 lakhs might hinder regular donors from participating.
3. Eligibility criteria for NPOs: Considering the registration of entities under Section 10(23C) and 10(46) of the Income Tax Act, even without a valid 80G certificate, to apply for SSE registration.
4. Requirement of no pending notice or ongoing scrutiny by Income Tax: Allowing NPOs with pending notices or ongoing scrutiny to participate, subject to proper disclosure and potential refusal based on the severity of the issue.
5. Substitution of the term “Social Auditor” with “Social Impact Assessor”: To provide a more positive connotation that aligns with the SSE’s objective.
6. Format of past social impact disclosure: Allowing NPOs to provide social impact reports based on their own previous assessments instead of restating them in SEBI’s prescribed format.

Seeking Public Consultation

To ensure a comprehensive review and gather feedback, SEBI invites public comments on the following queries:

1. Reduction of the minimum issue size for NPOs issuing ZCZP from Rs. 1 crore to Rs. 50 lakhs.
2. Reduction of the minimum application size for NPOs issuing ZCZP from Rs. 2 lakhs to Rs. 10,000.
3. Inclusion of entities registered under Section 10(23C) and 10(46) without a valid 80G certificate as eligible for SSE registration.
4. Considering exemptions for NPOs with pending notices or ongoing scrutiny by Income Tax, subject to appropriate disclosure and appeal processes.
5. Replacement of the term “Social Auditor” with “Social Impact Assessor” for a more positive and inclusive approach.
6. Acceptance of past social impact reports based on NPOs’ own assessments in the fundraising documents, rather than using SEBI’s prescribed format.
7. Granting SEBI the power to relax provisions of Chapter X-A (Social Stock Exchange) in support of SSE development, with potential exemptions in ICDR Regulations.

Conclusion

Flexibility within the SSE framework is crucial to encourage active participation from NPOs and investors. SEBI’s call for public comments on the proposed recommendations reflects their commitment to achieving a well-rounded SSE ecosystem.