New SEBI framework will allow non-profit social enterprises to list on Social Stock Exchange: The rules

A few years after Union Finance Minister Nirmala Sitharaman first floated the concept of Social Stock Exchanges (SSE) in the country, SEBI has brought out the minimum requirements in terms of registration and disclosures that social enterprises have to follow to get listed on the SSE. This includes engaging in certain kinds of activities, being registered as a charitable trust for 3 years, disclosing the top 5 donors to the enterprise, and much more. 

But first, what even is a Social Stock Exchange (SSE)? SSE is a new concept that was introduced by FM Sitharaman in her Union Budget speech for the financial year 2019-20. This kind of stock exchange is meant to serve social enterprises, philanthropic organisations, and voluntary organisations that are working to realise a social welfare objective. The idea is that by listing these organisations, these enterprises can raise a lot of money through equity, debt, and even mutual funds.  

So in July 2022, the Securities and Exchange Board of India (SEBI) notified the rules for Social Stock Exchange (SSE) so that not-for-profit enterprises could get listed on the SSE and raise funds. Recently, the SEBI brought out a detailed framework that specifies the minimum requirements that a not-for-profit (NPO) organisation has to follow relating to: 

• Registration with the Social Stock Exchange,
• Disclosure requirements if NPOs raise funds by issuing zero-coupon-zero principal instruments once listed on the Social Stock Exchange, and 
• Annual disclosure requirements that need to be made by NPOs on such exchanges

A general understanding:

• Social Stock Exchange or SSE will be a separate segment of the existing stock exchanges, ie. NSE and BSE. 
• Even though the NSE and the BSE list only 'for-profit' companies, the SSE will be able to list both non-profit and for-profit social enterprises.
• The primary goal of both kinds of enterprises should be to have social intent and impact. The social intent should be demonstrated through the company's social objectives for the underserved or less privileged populations or regions.

What kinds of activities can these social enterprises engage in? To get listed on the SSE, the social enterprises can engage in one social activity out of 16 broad activities. Some of these activities include:

1. eradicating hunger, poverty, malnutrition, and inequality;
2. promoting healthcare, supporting education, employability, and livelihoods;
3. gender equality empowerment of women and LGBTQIA+ communities; and
4. supporting incubators of social enterprise.

What makes you ineligible to get listed on the SSE?

The below organisations will not be recognised as 'social enterprises'. Hence, they cannot be listed on the SSE.

• a corporate foundation,
• a political or religious organisation,
• a professional or trade association, and
• infrastructure and housing companies, except affordable housing providing companies.

What are the registration requirements to be followed? 

• An NPO needs to be registered as a charitable trust and should be registered for at least 3 years.
• The NPO must have spent at least Rs 50 lakh annually in the past financial year and should have received funding of at least Rs 10 lakh in the past financial year.
• The NPO also has to mention details of its governing body, composition, dates of board meetings held, and details of key managerial staff, etc.

What are the disclosure requirements to be followed before and after listing?

• The NPO has to make disclosures about its vision, its target segment (those affected by the problem and how are they affected), and how it plans to approach and accomplish its planned activities.
• Listed NPOs will have to mandatorily submit a statement of 'utilization of funds' to the SSE within 45 days from the end of the quarter.
• NPOs need to additionally disclose financial statements for the last 3 financial years. 
• Listed NPOs will have to submit the Annual Impact Report (AIR) within 90 days from the end of the financial year. This report will disclose the social impact in qualitative and quantitative terms.

• The entities will also have to disclose the projects for which money was raised on the stock exchange and the impact that was generated by the project or solution. NPOs will also have to separately mention the details of the social impact they did in the past, the risks they are facing today, and how they plan to mitigate them.
• To comply with annual disclosure requirements, NPOs will have to disclose details of the Top 5 donors or investors. These Top 5 investors can be in terms of contribution to the budget, scale of operations, employee and volunteer strength, governance structure, financial statement, program-wise fund utilisation for the year, and as per auditors report.