The concept of corporate social responsibility is not novel to the business world. Economic enterprises are coming to the realization that merely focusing on self-interest would not be sufficient in the long run if they wish to survive and flourish in this increasingly politically correct marketplace. Hence, corporate citizens are now going over and beyond the bare minimum regulatory compliances and adopting a more holistic and philanthropic approach.
Being conscientious towards the social, economic and environmental realities of the age and era is extremely important not just for natural beings but also for corporate citizens. This is where the concept of Social Stock Exchange, a platform designed to channel capital to uses that are not just economically viable but also socially beneficial, becomes relevant.
The fruits of capitalism are vastly evident when we look at the history of our planet and statistics on poverty, the standard of living and the overall happiness index across nations. Capitalism and the free market have made possible things that we never could have fathomed a few centuries ago and have elevated human civilization to profound greatness and prosperity. However, it is no secret that unchecked Capitalism can result in the accumulation and concentration of wealth in an elite minority and create a huge disparity in economic power, which although may reflect well on gross economic growth but certainly isn’t ideal for society as a whole. Not to mention the catastrophic environmental impacts it can cause to the planet. Hence, it is necessary to incentivize if not urge corporates to care beyond their own self-interest and give back something to society.
ESG, an acronym for “environment, social and governance” is a concept that values the ethical concerns of a commercial enterprise as much as its profit-making motive. It is an evaluation of how a company gives back to the community. In India, ESG Investing is a relatively new concept but it is growing rapidly. At a time when our nation is faced with various socio-economic factors like population explosion, acute poverty, massive unemployment, low per capita income, lack of basic amenities and sanitation, healthcare, illiteracy etc, and catastrophic climate concerns, it is the turn of corporate citizens step in to take up the pioneering role to make the country, and ultimately, the world a better and more habitable place.
Social Stock Exchange
The idea of a Social Stock Exchange was floated by the Hon’ble Finance Minister Nirmala Sitharaman in her Budget speech for the financial year 2019-20. In July 2022, SEBI notified the rules for Social Stock Exchange (SSE) to provide social enterprises with an additional avenue to raise funds. Thereafter SEBI came out with a detailed framework for SSE specifying minimum requirements for organisations, based on the suggestions of a working group and technical group. Thereafter, SEBI granted its approval for introducing SSE as a separate segment of BSE and NSE.
Social Stock Exchange[1] means 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 in accordance with provisions of these regulations. It is a stock exchange intended to benefit the private and non-profit sectors by directing more capital to them. Social Stock Exchanges provide a unified funding channel to listed Social Enterprises[2] that are at the bottom of the socioeconomic pyramid.
It functions as an e-platform for listing Non-Profit Organizations[3] and For-Profit Social Enterprises[4] on stock exchanges and provides them with an alternative fund-raising structure. These organisations can raise capital from public equity or debt instruments via the stock exchange mechanism. It will enable fund providers to filter entities or non-profit organisations that are creating a noticeable social impact and contribute more effectively to sustainable development goals.
Legislative Framework
The new Social Stock Exchange regime has been implemented through major amendments in three Regulations issued by SEBI. As a result, the following three Regulations stand amended:
1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[5]
2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018[6]
3. SEBI (Alternative Investment Funds) Regulations, 2012[7]
The SSE will be a distinct division of the current stock exchanges under the new regulations. Not-for-profit organisations (NPOs) and for-profit social enterprises (FPSEs) with social intent and impact as their primary goal will be eligible to participate in the SSE. Such an intent should be shown by its emphasis on social goals that are appropriate for under-served or less privileged populations or areas.
To enable fundraising for not-for-profit organisations, the government announced a new security called “zero coupon zero principal” under the Securities Contracts Regulations Act. This instrument can be publicly or privately issued by these organisations upon registering with SSE to raise funds. Currently, the regulations allow a minimum issue size of Rs 1 crore and a minimum application size for subscriptions of Rs 2 lakh.
The social enterprises will have to engage in a social activity out of the 16 broad eligible activities listed by the regulator. Corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure companies, and housing companies will not be eligible to be identified as social enterprises. The Enterprise shall target underserved or less privileged population segments or regions recording lower performance in the development priorities of governments. The Social Enterprise shall have at least 67% of its activities, qualifying as eligible activities to the target population. The Enterprise shall get mandatory registration with the SSE by complying with the minimum requirements for registration specified by the Board, and the additional eligibility requirements specified by the SSE.
The Social Enterprises may raise funds through various sources like issuance of Zero Coupon Zero Principal Instruments (“ZCZPI”) to institutional or non-institutional investors or donations through Mutual Fund schemes in the case of NPOs, and the issue of equity shares on the main board, SME platform or innovators growth platform, equity shares to an AIF including a Social Impact Fund, or issuance of debt securities, in case of an FPSE.
Under the new regime, Social Enterprises are bestowed with various disclosure requirements like framing and disclosing a policy for determination of materiality, events that may have a material impact on outcomes, fund utilisation etc. Additionally, Social Enterprises are required to submit an annual impact report, audited by a Social Audit Firm employing Social Auditor, to the SSE, and a quarterly Statement of category-wise amounts of monies raised, utilized and the balance amount remaining unutilized. The Enterprise shall also provide an adequate reply to all queries raised by the SSE or the Stock Exchange with respect to any events or information and shall disclose on its website all such events or information which have been disclosed to the Exchange.
Role of Professionals
The professionals have a major role to play in the execution of the Social Stock Exchange regime in India. Company Secretaries shall have a crucial role in their capacity as Compliance officers. The areas include assisting the regulators, providing consultancy services to Social Enterprises seeking to list, assisting the organisations in obtaining funding etc. Thus, the SSEs will open a plethora of avenues for professionals in practice and also opportunities for employment in social enterprises.
A new concept of “Social Audit” has been introduced by virtue of these amendments which may pave way to revolutionise the career opportunities of professionals such as Chartered Accountants, and hopefully Company Secretaries and Cost Accountants as well in the near future. The audit for a social enterprise includes two aspects. First, a financial audit and second, a non-financial audit which will include an analysis of the social impact caused by the organisation through their projects and activities.
A “Social Auditor”[8] is an individual registered with a self-regulatory organization (SRO) under the Institute of Chartered Accountants of India (ICAI) or such other agency, as may be specified by the Board, who has qualified for a certification program conducted by National Institute of Securities Market (NISM) and holds a valid certificate. A “Social Audit Firm”[9] means any entity which has employed Social Auditors and has a track record of minimum of three years for conducting social impact assessment.
The Council of ICAI recently approved the formation of SRO for the social auditors, which is proposed to be named as “Institute of Social Auditors of India” and will be set up as a Section 8 company under the Companies Act, 2013, under the supervision of ICAI. Other professional institutes such as the Institute of Company Secretaries of India (ICSI) or the Institute of Cost Accountants of India (ICAI-Cost) are also in the process of creating the SRO under their respective institutions. It is also mandatory for the Social Auditor to qualify for a certification program, which will be conducted by NISM and obtain the requisite certificate to become a Social Auditor. This opens up new opportunities for professionals.
The definition of “Social Audit Firm” refers to an entity which must employ Social Auditors. Hence, independent individual social auditors are not covered under the Regulations. Also, there is a requirement fora of a track record of minimum three years for conducting social impact assessment. The annual impact report submitted to the SSE or the Stock Exchange by the Social Enterprise shall be audited by a Social Audit firm employing a Social Auditor.
Challenges
The self-declaratory approach adopted for determining Social Enterprises, although apparently a progressive move, has the potential to turn out to be a recipe for mayhem. The eligibility to participate in the Social Stock Exchange must be one that needs to be earned and not granted as default. Besides, the ambiguity that persists in the definition of “social impact” also presents a loophole where FPEs are given unfettered access to the benefits of the Social Stock Exchanges. The legislators need to be wary of these factors.
The restrictive and narrow scope provided for Social Audit is also a matter of concern. Since the Social Audit is a non-financial audit, it can be best performed by other professionals like CS, CMA or even practising attorneys, in addition to Chartered Accountants. Since a mandatory certification course is required, there need not be a concern for deterioration in quality. The exclusion of individual persons from the scope of Social Auditors also seems unwarranted.
Conclusion
What has been sown are merely the seeds for growth. The lawmakers have only laid down a skeleton for the legal regime for Social Enterprises and their activities and it requires a lot of work from the part of the government and regulators in filling the gaps in the legal framework.
SSE can act as a connecting link between non-profit organisations and investors who are looking for transparent organisations which are devoted to the philanthropic goal of making the world a better place. ESG investment is getting attention and awareness in the corporate world as well as among the general public. SSE has the potential to lead a revolution in the financial market towards focusing more on social development goals as a whole.
It is a wonderful opportunity for our nation to demonstrate to the world that it is capable of being the world leader in peace, sustainability and good governance. We can hope that Social Stock Exchanges will act as a glimmer of light towards achieving the Sustainable Development Goals and thereby work to make this planet a better place for our children and grandchildren.
Kavya Das. R LL.B
The Author is a qualified legal professional and pursuing the final program of ICSI.
References
[1] Regulation 292A (i) of SEBI (ICDR) Regulations, 2018 [2] Regulation 292A (h) of SEBI (ICDR) Regulations, 2018 – Social Enterprise” means either a Not-for-Profit Organization or a For Profit Social Enterprise that meets the eligibility criteria specified [3] Regulation 292A (e) of SEBI (ICDR) Regulations, 2018 - “Not for Profit Organization” means a Social Enterprise which is any of the following entities: (i) a charitable trust registered under the Indian Trusts Act, 1882 (ii) a charitable trust registered under the public trust statute of the relevant state; (iii) a charitable society registered under the Societies Registration Act, 1860 (iv) a company incorporated under section 8 of the Companies Act, 2013 (v) any other entity as may be specified by the Board [4] Regulation 292A (c) of SEBI (ICDR) Regulations, 2018 - For Profit Social Enterprise” means a company or a body corporate operating for profit, which is a Social Enterprise for the purposes of these regulations and does not include a company incorporated under section 8 of the Companies Act, 2013 [5] vide the SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022 [6] vide the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022 [7] vide the Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2022 [8] Regulation 292A (f) of the ICDR Regulations [9] Regulation 292A (g) of the ICDR Regulations