On June 18, 2021, in a notice, the capital market regulator SEBI extended the deadline from June 20 to July 20 for the submission of public comments on suggestions made by the working group for Social Stock Exchange (SSE), which is chaired by Ishaat Hussain, Director of SBI Foundation.
The idea of an SSE setup for India was floated by the Finance Minister Nirmala Sitharaman in her budget speech of 2019-2020 to revive the economy by boosting social and environmental impact investing in India. She introduced the prospect of creating an electronic fund-raising platform for Social Enterprises and voluntary organisations to help them raise capital through debt, equity and mutual funds. The two main aspirations of the proposed SSE, which will fall under the regulatory ambit of SEBI, were taking India’s capital markets closer to the masses and meeting various social-welfare objectives related to inclusive growth and financial inclusion.
In an exercise by the Central Bureau of Investigation in 2015, it was revealed that India had over 31 lakh NGOs, more than double the number of schools in the country, and 250 times the number of government hospitals, which comes down to one NGO for 400 people. According to the SEBI report, SSEs will exploit this huge market and will unlock large pools of social capital and encourage blended finance structures, so that conventional capital can partner with social capital to address the urgent challenges of COVID-19.
A separate segment of SSE will be set up under the existing stock exchange. Only the Social Enterprises (SEs) that are registered as non-profit organisations (NPOs) and for-profit social enterprises (FPEs), having social intent and impact as their primary goals will be eligible to participate. The SSE will not just be a place where securities or other funding structures are ‘listed’, but also a pre-defined process under which the intent of the social enterprises will be determined through three filters.
These filters are, first, Social Enterprises should be engaged in at least one of the 15 broad eligible activities which include eradicating hunger, poverty, malnutrition and inequality, promoting gender equality, education and better health care etcetera. Second, it should target underserved or less privileged population segments or regions and third, Social Enterprises should have at least 67 per cent of their activities qualifying as eligible activities to the target population.
The SEBI Working Report lays down various funding instruments such as zero-coupon zero-principal bonds, mutual Funds, social impact bonds, pay for success, social venture funds for NPOs and equity issuance and social venture funds for FPEs. They seek to provide a wide option to those ‘donor investors’ who invest with the motive of bringing in positive social change.
The report also proposes to get away with the mandatory enrolment of Section 8 enterprises for Corporate Social Responsibility (CSR) commitment under the draft of CSR Policy Amendment Rules, 2020. This will enable companies to deploy CSR funding by connecting directly with social organizations. As per the SEBI Board, dealing between companies with surplus CSR funds and companies with the scarcity of CSR funds will be permitted to be approved by the Ministry of Corporate Affairs (MCA). Also, the expenses incurred by these companies for capacity strengthening of SSE will be considered as CSR handouts by altering Schedule VII of the Companies Act.
The report proposes to allow numerous tax benefits to the SSE participants to increase the amount of investments. It suggests allowing donors to claim 50% tax-exemptions on their donations to all the private NPOs and 100% tax-exemptions on their donations to all the government NPOs, listed on the SSE. It also suggests removing the 10% cap on income eligible for deduction under Section 80G and allow investments made in NPOs listed on SSE to be tax-deductible.
Retail investors will be allowed to claim 100% tax-exemption on their investments in SSE which has an overall limit of Rs. 1 lakh. A 5-year tax holiday will be allowed for FPEs listed on the SSE after its first listing. Investors will be exempt from paying Securities Transaction Tax for dealings made on the SSE and Capital Gain Tax on capital gains accumulated by selling of securities.
The working group had suggested increasing the limit of raising capital via commercial activities from 20% to 50% for NPOs to make them more viable. Lastly, it recommended allowing the income generated by the SSE to be tax detectable.
The importance of boosting CSR activities and creating a strong social sector is being felt across the world, to deal with the after-effects of Corona. Although the idea of Social Stock Exchange is not novel, to plan and implement it in India is a daunting task. SSEs came into place only less than two decades ago, and are still in their embryonic stage of development.
India should review the existing SSEs across the world such as in Canada, Brazil, and Singapore, the United Kingdom, South Africa etc. and draw meaningful lessons from their implications in a civil society. The Government’s endeavor to bring in more private players by providing various incentives can be successful, but more clarity needs to given regarding what all can be included under ‘social enterprises’ as mentioned in the report. Also to be made clear is who will undertake the responsibility of spreading awareness among the financially illiterate unaware investors, which is crucial to fire-up SSE in India, and how it will be ensured that no profit-driven private players who prioritize profits over social benefits will enter the social setup unwarrantedly, among other things.
There is a need for an austere scrutiny mechanism and a well-rounded framework to gauge the credentials provided by self-declared FPEs. The SSE offers promising prospects of the social sector reaching the bottom of the pyramid citizenry of the country through the mobilization of greater capital. The working committee has come up with its suggestions under the background of the outré times we are living in, which calls for prompt action to be taken to retrieve the Indian economy through a fusion of conventional and social capital, which shall prove to be beneficial to the country.
Somya Luthra is a New Delhi-based legal scholar.