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Framework on Social Stock Exchange: SEBI

Nikhil Mogha

| Updated: Sep 22, 2022 | Category: SEBI

Social Stock Exchange

Based on recommendations of the working group and technical committee, the SEBI issued a comprehensive framework for Social Stock Exchange[1] on 19th September 2022. It provides a detailed framework for registration of Social Stock Exchanges. The detailed guidelines aim to provide social enterprises and voluntary organisations an option to raise capital in the form of equity, units of a mutual fund and debt. This framework also seeks to provide an organised and transparent channel for social enterprises to raise funds from stock exchanges.

Thesocial enterprises that are working for the objective of social welfare will be considered for participation in Social Stock Exchange, including:

  1. Not for Profit Organisation (NPO)
  2. For-Profit Social enterprises

Essential Requirements for NPO to be registered as Social Stock exchange

A not-for-profit organisation that wants to register itself as Social Stock Exchange shall fulfil the following:

A) Registered as an NPO

The entities shall be registered as NPO, and their registration certificate shall be valid for a minimum of 12 months from the filing date on Social Stock Exchange. It is also mandatory that the registration certificate of the NPO shall be held for a minimum of 3 years. The entities who can apply for SSE are:

  1. Charitable Trusts registered under
  2. Public trust Statute
  3. Societies Registration Act,1860
  4. Indian Trusts Act,1882
  5. Companies under Section 8 of the Act,2013

B) Ownership and control

The NPO shall disclose whether it is under government or private control before filing for registration as Social Stock Exchange.

C) Exemption under Income tax

The NPO shall possess registration certificate issued under Section12A, 12AA, 12AB. It is also required that the registration certificate shall be valid for the next 12 months, and the entity should not have any scrutiny by Income Tax. Moreover, the NPO shall hold a Valid IT pan.

D) Eligible Deductions

The NPO shall hold a valid registration issued under Section 80G of the Income Tax act, 1961. The NPO shall also ensure whether tax deduction is available to investors or not.

E) Eligible to be Social Stock Exchange

The entity shall meet all the requirements of regulation 292E of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

F) Minimum Transactions

The entity to be eligible for registration as Social Stock Exchange shall have minimum transactions.

  1. Annual  Spending in the Past Financial Year- Minimum Rs.50 lakhs
  2. Funding in the past Financial Year-Minimum Rs10 Lakhs

Initial Disclosure by NPOs as Social Stock Exchange

The NPOs registered as Social Stock Exchange and are raising funds throughthe issuance of Zero coupons, Zero Principal Instruments shall need to make a final fundraising document. And it shall be posted on the SSE website.The documents shall contain the following:

A) Vision

The organisational activities and programmes are subject to the aims and objectives of the MOA and AOA of the organisation.

B) Targeted Group

The NPO shall mention the targeted segment. It should also provide the process to approach the targeted segment and how they will fulfil this objective. The NPO shall also disclose the method in which they approach their customers.

C) Strategy Formation

The NPO shall frame a strategy that defines its strategy toward fulfilling the challenges and the method of learning from these challenges.

D) Organisational Body

The NPO shall disclose the details about its organisation body, including compositions, Number of Board meetings, the total number of members etc.

E) Management

The NPO shall disclose the Key managerial person involved in fundraising, Marketing, communication, HR, and Finance.

F) Registered Address

The NPO shall disclose its registered and operational address in the document.

G) Financial Disclosures and Compliance

The NPO shall disclose the last 3 years of financial statements in the document, and an auditor shall audit it. It shall be made available at the request of the authority or any person.

H) Proof of Documents

The NPO shall include the following documents:

  1. Registration Certificate
  2. Trust Deed
  3. MOA and AOA
  4. Address Proof
  5. IT PAN
  6. 12A or 12AA or 12AB Certificate
  7. FCRA Certificate and returns
  8. Remuneration to Members

I) Risk Mitigation

The NPO shall disclose the process for mitigation of risk that:

  1. The NPO face on it day to day work
  2. Unintended Consequences that the NPO face

Annual Disclosures by NPO to Social Stock Exchange

The NPO shall have to make annual disclosures within 60 days from the end of every financial year. The disclosures shall be of the following:

A)     General Aspects

  1. Name of the NPO: The organisation shall report the registered name and the name that is prevalent among the stakeholders.
  2. Registered Organisational Address and its operational address: The organisation shall report on its registeredaddress. It shall also determine the location of all the significant operations in the significant area.
  3. Purpose of the NPO:The organisation shall report on the purpose it likes to fulfilby registering at Social Stock Exchange. The purpose could be understood as the cause for taking up organisational matters.
  4. Objective of Organisation, its activities and products & services offered: The organisation shall disclose the objective of the organisation relating to activities, programs, interventions and projects.
  5. Organisational Outreach (Number of Direct or Indirect Shareholders): The organisation shall disclose the number of stakeholders (whether direct or indirect) that are approached.
  6. Number of employees, including volunteers: The organisation shall disclose the scale ofoperations in the past years. It shall include the number of operational locations, number of beneficiaries, number of volunteers and number of employees.
  7. Top 5 Donors or Investors
  8. Top 5 Programs that are taken during the disclosure period

B)     Governance Aspect

  1. Ownership Form: The organisation shall disclose the nature of ownership specific to Indian Operations.
  2. Legal Form: The organisation shall disclose the legal form specific to Indian Operations.
  3. Structure for Governance: The structure for governance will include governing body and a hierarchy of members according to their decision-making powers. It shall also state the management policies, structures, membership, and internal controls.
  4. The governing body includes details of the membership body: The organisation shall disclose the governing body’s role and state the members’ names. It shall also include the details of the senior designation member.
  5. Number of executives having key responsibilities: The organisation shall disclose the key executive positions, and it shall also disclose its respective roles.
  6. Total number of meetings:The organisation shall disclose the total number of meetings held in a year. It shouldalso state the method of reviewing the governing body’s performance.
  7. Organisational risk and the process for their mitigation: The organisation shall disclose the future risks and provide the method of mitigation for those risks.
  8. Related Party Transactions: the organisation shall disclose related party transactions and state the reason behind those transactions.
  9. Method of communicating concerns about conflict of interests and other critical conditions: The organisation shall disclose the mechanism for determining the lawful behaviours of the organising. It shall also include the details of the responsibilities assigned to the member.
  10. Policy for Remuneration:The policy for remuneration shall include fixed pay, performance incentives, variable pay and termination payments.
  11. A mechanism for Grievance Redressal for shareholders and its adjudicating process: The organisation shall disclose the adjudicating process of redressing the grievance of the shareholders.
  12. Process for Compliance and the statement from a senior member of governance structure: The organisation shall state the process of managing the compliance requirement relating to legal and regulatory. It shall also include the statement from a senior decision maker.
  13. Registration certificate and licenses: The organisation shall attach all the registration certificates, including 12A, 80G, FCRA, GST, etc.

C)     Financial Aspect

  1. Balance sheet
  2. Income Statement
  3. Cash flow Statement
  4. Annual disclosures required by the stock exchange
  5. Certificate of Program –wise fund utilisation
  6. Organisational expenditure and budget
  7. Diversification of funds to meet challenges

Annual Impact Report Disclosure by Social enterprises that have raised funds through Social Stock Exchange

The social enterprises that have registered or raised funds through the Social Stock exchange have to make the following disclosures:

  1. The audited Annual Impact Report has to be submitted by the social enterprises within 90 days from the end of the financial year.
  2. The Annual Impact Report shall state the impact that is supposed to be generated by the project, including the qualitative and quantitate aspects of the social impact.
  3. If NPO is registered, but there is no listing of security. In that case, the Annual Impact Report must state the NPO’s activities, programs, interventions and projects. If the respective activities are also covered under listed security, they will qualify as significant activities.
  4. If any Social Enterprises (SE) are the recipient of the Social Impact Fund and have raised funds through Social Stock Exchange. In that case, the SE shall disclose an Overall Annual Impact Report that states the manner of deploying the fund, and it shall include the details of the investor and the grants.
  5. The social auditor will audit the Annual Impact Report.

Different Aspects of Annual Impact Report for Social Stock Exchange

The Annual Impact Report shall contain the following aspects:

A) Strategic Goal and Planning

1.Environmental or social Challenge that the organisation wish to address: The organisation shall enlist in detail the challenges, cause and consequences that the organisation is trying to resolve.

2. Method of addressing the organisational challenges: The organisation shall enlist in detail the change that the organisation wants for the targeted segments.

3. Targeted Segment: The organisation shall disclosethe targeted groups.

4. Positive and Negative outcomes of the activities, programs, interventions and projects: The organisation shall disclose the inputs employed for the proposed solution.

B) Approach

1. Context Description at the start of activities, programs, interventions and projects and result at the end of activities, programs, interventions and projects:The organisation shall establish the baseline for activities, programs, interventions and projects. It is established to ascertain the deviation that takes place at the end of the activity.

2. Trend of Past performances: The Organisation shall disclose the past performance trends so that the inference can be adjudged for the present activities, programs, interventions and projects.

3. Measure for the sustainability of activities, programs, interventions and projects: The organisation shall disclose the detailed implementation plan for the sustainability of activities, programs, interventions and projects

4. Alignment of solutions to sustainable development goals.

5.Approach to Feedback of the Stakeholders: The organisation shall disclose the manner of implementing the shareholders’ feedback and how they mapped and prioritised the feedback from key shareholders.

C) Impact Score Card

1. Includes a report of impact on the targeted segment: It will include activity reach, program, intervention, level of impact generated etc.

2. Metrics Monitoring:

Statement of Utilisation of Funds

Any listed Non-Profit Organisation shall submit the statement of utilising funds to the Social Stock Exchange within 45 days from the end of the quarter.

Conclusion

The Social Stock Exchange provides an option for the Non-profit organisation to raise capital through equity, units of a mutual fund and bonds. It also acts as an alternative source of income for social enterprises so that they can fulfil their social objectives. The social enterprises can raise funds through Zero Coupon Zero Principal bonds, Mutual funds, Social Venture Funds and Equity Listing.The changes are bought, keeping in view the downfall of the economy after the pandemic. The move to include the social enterprises fulfils the objective of including all the entities under the scrutiny of SEBI.

Read our Article: SEBI eases Delisting norms, clears framework for gold, social stock exchanges

Nikhil Mogha

An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.

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