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Ecosystem for social investing: Structure laid for listing social entities on SSEs

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Social impact funds have been included as part of category-I AIFs, replacing existing social venture funds.

The government has brought in a slew of measures to create an ecosystem for social investing in the country. On Monday, the Securities and Exchange Board of India (Sebi) notified a framework for social stock exchanges (SSEs) and included social impact funds (SIFs) as part of category-I AIFs, replacing the existing social venture funds. SSEs will facilitate raising funds for non-profit organisations (NPOs) and for-profit social enterprises (FPEs) and help standardise social impact reporting and disclosures.

The amendments follow recommendations of the Sebi’s technical group on SSEs, headed by Harsh Kumar Bhanwala. SSEs were first mooted in the FY20 Budget with an aim to list social enterprise and voluntary organisations.

“Social impact is being viewed as an important domain by organisations in most jurisdictions. Business leaders are also contributing significantly towards philanthropy. In this context, Sebi’s framework governing social stock exchanges, social enterprises and social impact funds adds an interesting regulatory dimension to it. It presents to not-for-profit organizations a new structured and formalised avenue for raising funds,” said Saurabh Tiwari, partner, DSK Legal.

The new norms come with requisite checks and balances such as disclosing the purpose for raising funds and providing a timeline for their utilisation. The requirement to submit annual impact reports audited by social audit firms will add to the element of transparency, said experts.

The framework for SIFs will help align the social impact initiatives of the venture capital industry with that of the stock exchanges and provide further relaxations to social funds in terms of the minimum corpus, receipt of grants and investment norms. The amendments also permit retail funding by SIFs in social enterprises recognised and listed on SSEs by allowing issue of social units for Rs 2 lakh per investor (against the earlier limit of Rs 25 crore).

“The social impact fund can, with the help of other variables, support social enterprises (both NPOs and FPEs), large donors like CSR contributors and retail philanthropic donors by providing a scaled-up avenue to galvanize funding to credible social impact creating opportunities”, said Yashesh Ashar, partner, Bhuta Shah & Co.

The relaxed norms on fundraising and investments can help SIFs gain traction in India, said Ashar. Also, aligning the SIF with the SSE could lead to inter-dependencies on growth for both. “This will benefit all the not-for-profit organizations and also lead to the emergence of for-profit social enterprises with the objective of social impact. The standardisation of social impact reporting, disclosures and reporting would go a long way in building trust in the systems and various stakeholders,” Ashar said.

Earlier this month, the government declared zero coupon zero principal instruments (ZCZP) as securities under the Securities Contracts (Regulation) Act, 1956. Such bonds will allow organisations to raise money through donations from corporates or individuals. Entities borrowing money through such bonds do not have to pay interest or return the principal. The additional disclosures before and after issuance of these bonds will also improve the accountability of NPOs.

There are gaps in various regulations that may need to be plugged. “The FDI policy at present does not allow investment in ZCZP bonds. The FCRA regulations will need to be relaxed for the purpose of the issue of social units by SIF and issue of ZCZP bonds by social enterprises. Putting the necessary infrastructure in place in terms of social auditors, framing of social audit standards and information repositories may take some time,” said Ashar.

“The enabling amendments are small but welcome steps towards achieving sustainable development goals by 2030 and net-zero carbon emissions by 2070. Challenges with respect to mission drift by entities raising funds and increased compliance will need consideration while operationalising these frameworks,” said Sumit Agrawal, founder, Regstreet Law Advisors.