This piece was originally published on Chambers and Partners at: https://chambers.com/legal-trends/new-laws-empower-impact-investors-in-india

Introduction

Traditionally, social welfare initiatives have been spearheaded by the State, but there has been increasing participation from private players in such initiatives over the years. Unfortunately, more often than not, such players face roadblocks due to the non-availability of ready capital to fund their initiatives.

In recent years, social stock exchanges (SSEs) have proved to be an important lifeline for such players, garnering attention as a transformative mechanism for channelling investments into social initiatives. Introduced for the first time in Brazil in 2003, SSEs have since been launched in several countries, including the United Kingdom and Canada.

In 2023, SSEs were launched in India by the National Stock Exchange of India Limited (NSE) and BSE Limited (BSE), allowing institutional and non-institutional investors to contribute to social enterprises (SEs) working for the realisation of social welfare objectives.

In December 2023, Unnati – a not-for-profit organisation (NPO) providing training to graduates from government colleges and assisting them in seeking employment – became the first entity to be listed on the newly launched SSEs, raising INR1.8 crores. About 65 more NPOs have since registered with NSE, nine of which have opted for public issue. Similarly, 56 more NPOs have registered with BSE, one of which has been listed.

Given India’s growing population demands and complex social challenges, SSEs present a novel solution for securing funds and boosting social initiatives, acting as a bridge between SEs striving to address critical issues and investors seeking to make impact investments.

This article explores the concept of SSEs, the entities that can opt for this route in India and the benefits thereof.

What are SSEs?

SSEs are essentially platforms that connect SEs with donors and investors. Unlike traditional stock exchanges that focus on financial returns, SSEs prioritise social value created by enterprises. They serve as a marketplace where impact investors can find, evaluate and invest in SEs tackling social and environmental challenges.

Moreover, unlike traditional exchanges where financial metrics dominate, SSEs require entities to disclose detailed reports regarding the social/environmental outcomes of their activities, including the number of beneficiaries, improvements in quality of life, environmental benefits, etc.

In India, SSEs are regulated by the Securities and Exchange Board of India (SEBI) and defined as “a separate segment of a recognized stock exchange having nationwide trading terminals permitted to register Not for Profit Organizations and / or list the securities issued by Not for Profit Organizations”.

The genesis of these exchanges in India can be traced to the Union Budget of 2019-2020. As part of this budget, the Finance Minister proposed the creation of an electronic fundraising platform to enable SEs and voluntary organisations to raise capital. This proposal ultimately led to the formulation of an SSE framework.

On 25 July 2022, this framework was introduced through various amendments to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR), the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

Who Can Register and List Securities on SSEs in India?

An SE – ie, an NPO or “For Profit Social Enterprise” meeting the ICDR’s requirements – can register and list securities on SSEs to raise funds. NPOs can also opt to only register with SSEs and not list any securities. The ICDR further identifies and restricts the types of securities that may be listed on SSEs. For instance, NPOs can issue Zero Coupon Zero Principal Instruments (ZCZP) to raise funds against which no principal amount is payable on maturity. On the other hand, for-profit SEs do not have the option of issuing ZCZPs and have to issue equity/debt securities.

To be eligible, SEs must establish primacy of social intent by showing that a minimum of 67% of their activities relate to at least one of the activities identified in the ICDR. This includes ensuring environmental sustainability and promoting healthcare, education, employability, gender equality, slum area development, disaster management, etc. However, corporate foundations, political/religious organisations/activities, professional/trade associations, infrastructure and housing companies (except affordable housing) are expressly barred.

SEs must further establish that they target underserved/less privileged population segments/regions recording lower performance in the development priorities of Central/State governments, by showing that:

NPOs have further qualifying criteria, including a mandatory age of three years. The ICDR also lists the instances wherein an SE would be barred from registering/listing on the SSE, including if SEs or its promoters/directors/trustees are barred from accessing securities market or are declared wilful defaulters, fraudulent borrowers or fugitive economic offenders.

Benefits of Dedicated Social Exchanges

The creation of these specialised exchange segments marks a significant step forward in the evolution of the impact investment space in India. Undoubtedly, SSEs give SEs enhanced visibility and accessibility to a wider donor base. Once registered, the likelihood of an SE securing funds increases manifold in contrast to traditional funding channels.

To ensure the credibility of SEs registered and listed on SSEs and drive greater accountability, SEBI prescribes strict disclosure and reporting requirements relating to their management, operations, governance, compliance, proposed strategy and finances, among other matters. For instance, these SEs have to file audited annual impact reports capturing the qualitative and quantitative aspects of the social impact generated by them as well as the impact of the project/solution for which funds have been raised on an SSE. For NPOs that have opted for registration only, the report is required to cover the NPO’s significant activities during the year and to explain the methodology for the determination of significance.

From an investor perspective, the regulation of these SSEs by SEBI and the operation thereof by established stock exchanges, coupled with the above disclosure requirements, increase the credibility of SEs registered and listed therein. These also give investors the necessary means to measure the impact of such SEs and to monitor the utilisation of the funds donated to such SEs.

On a macro level, SSEs have immense potential, boosting social initiatives through private ventures that have traditionally been the sole responsibility of the State.

Conclusion

With a robust mechanism for registration, listing and reporting, SSEs are all set to revolutionise the social sector in India, offering investors/donors a regulated and monitored platform to connect with SEs. Unnati serves as a promising example of their potential.

To ensure the success of such platforms, however, it is essential for all stakeholders – such as the regulators, SEs and investors – to work collaboratively to maximise the reach and impact thereof. Focused efforts should be made to educate investors who may not be familiar with the concept and benefits of SSEs. The government should also incentivise investors to invest through such platforms. For instance, until recently, investors investing in ZCZPs did not receive any tax benefits. However, the Central Board of Direct Taxes’ recent move to extend tax benefits to investors purchasing ZCZPs is a welcome step in this direction. Similarly, investments in ZCZPs are not currently considered compliance with Corporate Social Responsibility obligations. SEBI is making efforts to secure this, and it is hoped that these efforts will increase the popularity of SSEs, which in turn will help to boost the infusion of much-needed funds in the social sector.