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Social stock exchange: Unique funding proposition for a noble cause

 

A separate section of a well-known stock exchange known as a “Social Stock Exchange” (SSE) is allowed to register non-profit organizations (NPOs) and/or list securities issued by NPOs in accordance with the “ICDR” Regulations in order to raise capital and open the market to social welfare organizations. to facilitate their fundraising efforts.

The NPO will list its securities with the SSE as part of the social project, activity, or program it is implementing, and the subscriber will pay the NPO for the securities.

global scenario

The Social Environmental Investment Exchange (SSE) concept was first introduced in Brazil in 2003. Six additional nations followed, but only three of them are currently operating (Jamia Social Stock Exchange in Jamaica, Impact Investment Exchange in Singapore, and Social Venture Connection in Canada), and their various approaches to funding are listed below:

Country Description

Jamaica (JSIM)

only allows donations
Brazil and Portugal crowd funding platform
Canada (SVX) Provides loans, preference shares and private equity
Singapore -IIX Recently Launched Bonds (Women Livelihood Bonds)

indian frame

1. SEBI amended the following regulations to provide the Social Stock Exchange with a comprehensive framework:

a) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations of 2018 (collectively referred to as the “ICDR Regulations”).

b) The Listing Obligations and Disclosure Requirements Regulations of 2015 of the Securities and Exchange Board of India (the “LODR Regulations”).

c) The 2012 Alternate Investment Funds Regulations of the Securities and Exchange Board of India (AIF Regulations).

2. The Securities Exchange Board of India (Board) has granted final approval to the two largest stock exchanges in India, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), to operate SSEs.

3. Individuals, government agencies, corporations, and others, as well as non-institutional investors, will be able to invest in SSE. The Board may grant access to SSEs to additional types of investors in the future.

4. To ensure the smooth operation of the SSE, an SSE Governing Council must be established by each stock exchange.

5. There are four major components to the specific SSE framework outlined in the September 19, 2022 circular.

a) Base prerequisites to be satisfied by a Non Benefit Association (NPO) for enrollment with SSE.

b) A minimum initial disclosure requirement for non-profit organizations that raise funds by issuing principal instruments with no coupon.

c) NPOs that have registered with SSE or raised funds through SSE and make annual disclosures on SSE

d) All social enterprises that have registered or raised funds through the SSE are required to provide annual impact reports.

6. The non-profit organization will seek registration before using SSE to raise funds (they can register but cannot raise funds).

7. Eligibility Requirements: One of the following types of entities must be registered in India: a Charitable Trust that is registered under the Public Trust Act of the State in question.

b) A charitable trust that is officially recognized by the Societies Registration Act of 1860.

c) Charitable Trust that was established by the Indian Trust Act of 1882.

d) A business established in accordance with section 8 of the Companies Act of 2013.

8. Tools for Fundraising:

a) By providing the investor with a Zero Coupon Zero Principal (ZCZP) instrument.

b) By making a contribution through a scheme for mutual funds established by the Board, such as the HDFC Cancer Fund or other socially responsible funds.

c) by any means the Board may specify.

9. Additional conditions and compliance requirements: a) A registration certificate that is valid for at least the next year when you apply for SSE registration.

b) The NPO ought to be enrolled for somewhere around 3 years.

c) In the previous fiscal year, the annual expenditure should have been at least 50 lakhs.

d) In the previous fiscal year, the funding should have been at least 10 lakhs.

e) Various conditions are included in the issued detailed framework, such as the issuance of a Draft Fund Raising Document (DFRD) similar to an IPO prospectus.

f) The NPO is obligated to comply with the Listing Agreement’s requirements, such as submitting an Annual Activity Report that has been audited by a Social Auditor, among other things.

Concept of Social Auditor and Initiatives taken by ICAI

A) The term “social auditor” refers to a person who is registered with the Self-Regulatory Organization (SRO) of the Institute of Chartered Accountants of India (ICAI) or any other agency that the Securities and Exchange Board of India (SEBI) may specify. Any company that has hired social auditors and has conducted social impact assessments for at least three years is considered a “social audit firm.”

b) The Annual Activity Report, which the NPO is required to submit to the SSE, will be audited by the social audit firm appointing the social auditor.

C) The Sustainability Reporting Standards Board (SRSB), established by the ICAI, is an important part of the professional development of social auditors and established the framework for social audit standards.

D) A primer on the idea of a social stock exchange has just been published by the ICAI to help people learn more about it and become more aware of it.

Opportunities Challenges and the way forward

Listing non-profit organizations would necessitate a significant shift in the mindset of the trustees—those in charge of running the trust—in light of the increased disclosure requirements.

It remains to be seen whether an Ind AS will be extended to a trust that is not a company—currently, it only applies to companies, including section 8 companies—or not. For listed NPOs, ICAI might think about issuing specific guidelines or technical guides on the accounting framework and disclosures. The preparation and presentation of non-profit organizations’ financial statements will be consistent thanks to these guidelines. Further lucidity might be expected concerning charge treatment of gifts made through SSE and common exchange of instruments.

SSE will create a separate market for impact investments by assisting non-profits in commercializing their funding, allowing them to expand operations and end their reliance on grant funds. Corporate social responsibility will benefit greatly from this. SSE has a lot of room to put money into social development, innovation, and the creation of a sustainable ecosystem.

SSE will raise corporate governance standards in non-profits and increase transparency in the process of raising money for them. It will also open up more one-of-a-kind opportunities for professionals who want to learn how to carry out social audits.

Because it is a novel idea, it will come with its own set of difficulties that need to be overcome along the way. In order to answer questions and resolve problems in the beginning, additional regulatory guidelines will emerge.

Innovation and technology should be used to take additional actions to ensure that SSE is successful, fuels social causes, and contributes to society’s overall improvement.

Written by Partner Prashant Daftary and Qualified Associate Sachin Yadav of NA Shah Associates.

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