The concept of a social enterprise started evolving in India even before the Indian markets were globalized in 1991. The Tata Group, which started as a trading firm in 1868, was setting up trusts to promote education, health, culture and livelihood initiatives in India. Today, Tata Group claims that 66% of Tata Sons, its principal holding company, is owned by such trusts. This structure allows the Tata Group to use its profits for achieving social objectives. Apart from the Tata Group, many other vintage business houses and brands (like Amul, SWEA and Lijjat) seem to have chartered into the territory of social enterprise.
For a very long time after globalization, the concept of social enterprise was not legally recognized. The Indian legislations pigeon holed entities as 'for-profits' or 'not-for-profits' and ensured that the two operate at an arms' length. The funding opportunities for a social enterprise were also limited by the legal structure it chose to embody. Typically, the 'for-profit' social enterprises raised capital funding by issuing equity, quasi-equity and debt instruments; and the 'not-for-profit' social enterprises raised funding through grants and donations.
In 2019 the (Indian) Finance Minister, Smt. Nirmala Sitharaman, acknowledged in her budget speech, "It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion." With this backdrop, creation of Social Stock Exchange (SSE) was suggested. SSE was proposed to be an electronic fundraising platform for listing social enterprises (both, for-profit and not-for-profit) so that they raise social capital. Securities and Exchange Board of India (SEBI) was proposed to be the regulator and the social capital was proposed to be raised as equity, debt or units like a mutual fund.
After the Finance Minister's speech, the Indian Government took various strategic steps to study the feasibility of SSE in the Indian context. Finally on July 25, 2022, SEBI amended the following regulations:
- the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations") were amended to insert "Chapter X-A: Social Stock Exchange";
- the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations") were amended to insert "Chapter IX-A: Obligations of Social Enterprises"; and
- the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations") were amended to align investments by Social Venture Funds ("SVFs") with the SSE.
The ICDR Regulations deal with the requirements for 'listing' entities on a recognized stock exchange in India; and the LODR Regulations deal with the requirements for 'listed' entities on a recognized stock exchange in India. The AIF Regulations provide for different types of pooling vehicles for making sector specific investments, including the social sector. In this article we will be discussing some important provisions of the updated ICDR regulations.
The updated ICDR Regulations define certain important terms including 'Social Enterprise', 'Social Stock Exchange', and 'Social Audit Firm'. Any 'for-profit' or 'not-for-profit' entity can be a Social Enterprise provided it (a) can establish primacy of its social intent; and (b) does not fall under the express exceptions (like trade associations, infrastructure companies etc.). A Social Stock Exchange is a segment of an existing recognized stock exchange (like NSE and BSE) permitted to register and list not-for-profit and for-profit entities. A Social Audit Firm refers to any entity which employs 'social auditors' and has a track record of a minimum of 3 years for conducting social impact assessment.
The Nature of a Social Enterprise
It is pertinent to note that 'Social Enterprise' is not a new legal structure for an organization, but an additional feature for an organization existing as a 'for-profit' or 'not-for-profit'. This means that any for-profit corporate body which satisfies the requirements of Chapter X-A of ICDR Regulations is a For- Profit Social Enterprise ("FPSE"). Similarly, any non-profit organization which satisfies the requirements of Chapter X-A of ICDR Regulations is also a Social Enterprise ("NPO").
Every Social Enterprise, whether FPSE or NPO, is required to establish the primacy of its social intent. This can be established by satisfying all of the following 3 criteria:
(1) Undertaking Permitted Activities
The ICDR Regulations provide an exhaustive list of 17 activities which a Social Enterprise can undertake. While the list is exhaustive, prima facie it seems to cover most social activities that organizations seem to undertake in the country. The list provides for 'enterprise to beneficiary' (E to B) activities (like eradicating poverty, promoting healthcare, empowerment of women, and addressing climate change) as well as 'enterprise to enterprise' (E to E) activities (like supporting incubators of Social Enterprises, and supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building). The list also contains a residuary clause allowing SEBI to identify any other areas as may be required to be added from time to time.
(2) Targeting Specific Population or Region
The Social Enterprises are expected to target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state Governments. It is pertinent to note that one of the two – 'specific population' or 'people in a specific region', criteria is required to be fulfilled. This requirement may evolve as the measure for 'performance', 'deservedness' and 'privilege' evolve.
(3) Satisfying the 67% Rule
A minimum of 67% of the permitted activities of a Social Enterprise should cater to the target population. This means that amongst the activities undertaken by an organization as per the list (as discussed in (1) above), at least 67% should cater to target beneficiaries (as discussed in (2) above). This shall be measured by establishing that:
- at least 67% of the immediately preceding 3-year average of revenues comes from providing eligible activities to members of the target population;
- at least 67% of the immediately preceding 3-year average of expenditure has been incurred for providing eligible activities to members of the target population;
- members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of the total customer base and/or total number of beneficiaries.
To understand the SSE listing requirements, it is important to reinstate that SSE is not itself a recognized stock exchange. It is a segment within the existing recognized exchanges like NSE, BSE, SME etc. Thus, FPSEs are required to (a) satisfy the listing criteria of the stock exchange on whose SSE segment they wish to list; and (b) satisfy the additional criteria elaborated under Chapter X-A for listing of a Social Enterprise on the SSE segment.
Before amendment of the ICDR Regulations in July 2022, there were no pre-existing listing requirements for NPOs. Traditional stock exchanges have been designed to cater only to for-profit organizations. Thus, NPOs are required to (a) register themselves on the SSE segment of the specific stock exchange where they intend to list; and (b) satisfy the additional criteria elaborated under Chapter X-A for listing of a Social Enterprise on the SSE segment.
It seems obvious that in order to raise funds through a stock exchange, a Social Enterprise will need to issue some form of instrument to the investor. Since FPSEs are essentially for-profit entities, they can raise funds on the SSE through (a) issuance of equity shares; (b) issuance of debt securities; or (c) any other means that SEBI may specify from time to time. The security instruments issued by FPSEs are required to be listed and traded on SSE with an identifier stating that the scrip is that of a FPSE.
Typically, NPOs do not issue securities to raise funds. They receive funds as grants and donations; and may (or may not) issue utilization certificates against such grants and donations. However, 10 days before the July 2022 amendment of ICDR Regulations, another notification was issued on July 15, 2022. This preceding notification expressly included Zero Coupon Zero Principal instruments ("ZCZPs") in the definition of 'securities' under the Securities Contracts (Regulation) Act, 1956. The said notification also explained that ZCZPs may be be issued by NPOs which are registered with SSEs. Pursuant to the ICDR Regulations, NPOs may now raise funds on SSE through (a) issuance of ZCZPs; or (b) donations through mutual fund schemes specified by SEBI; or (c) any other means that SEBI may specify from time to time. It is pertinent to note that the ICDR Regulations also expressly allow for private issue of ZCZPs to SVFs (i.e., Alternate Investment Funds registered as Social Venture Funds). Such issue can be done by any NPO which is registered (may or may not be listed) on the SSE.
Once a Social Enterprise has met the requirements under the ICDR Regulations, it can be registered/ listed on the SSE segment. The complete registration/ listing process also requires the Social Enterprise to submit certain documents, undertakings and contracts to the applicable stock exchange. Once registered/ listed, a Social Enterprise may raise funds through private placement or public offer, as applicable. Registered/ listed Social Enterprises are subject to obligations and disclosure requirements under the updated LODR Regulations.
A little less than 50 NPOs are registered on the SSE segments of NSE and BSE. None of the NPOs seem to have raised funds thorough a public offer on the SSE. A few FPSEs seem to have uploaded the draft documents required for listing on the SSE, however, none of them seem to have uploaded the final documents. As multiple Social Enterprises start registering/ listing and raising funds through the SSE, the norms of this industry may gain clarity. The current legislation concerning Social Enterprise and SSE seems like a typical case of 'building the bike while riding it'.
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