[By Jaskaran Singh Saluja and Khushi Sethia]
The authors are students at the Institute of Law, Nirma University.
The advent of The Working Group Report on the Social Stock Exchange (Report) is a gamechanger for restructuring the capital inflow of the social sector in the country. The Report got published on 1st June 2020. However, the idea of a Social Stock Exchange (SSE) was first proposed during the budget speech of 2019, wherein the Finance Minister Nirmala Sitharaman highlighted the need to strengthen the social enterprises by way of SSE under the aegis of the Securities and Exchange Board of India (SEBI).
SSE is a fundraising structure following the principle of additionality. The organizations in each sector can be bifurcated into for-profit enterprises (FPEs) and non-profit organizations (NPOs). SSE is expected to provide a separate closed-ended fund structure under the current stock exchange. Pre-determined norms screens entities into FPEs and NPOs. SSE acts as an intermediary allowing the flow of capital from institutional investors to NPOs and FPEs by way of the market instrument. The investment funds are directed towards a social cause consequent to which outcome funders will payout following the social impact created by the entities. Such a mechanism of SSE will untangle the snag of capital-shortage, usually faced by the social enterprises in carrying out the activities for the betterment of societies. Thus, SSE will count as a trump-card for society.
I.Financial Instruments & Its Operations
a. For Non-Profit Organisations (NPO
- Zero-Coupon Zero-Principal Bonds: – Zero-coupon zero-principal bonds are capital raising instruments that remain active for a term equivalent to the span of the project and ends by writing-off the investee’s account by funds availed for the project. These bonds are appropriate for the investors, hoping to make any social impact without expecting back the principal funds.
- Mutual Funds: – An asset management company will act as an intermediary that accumulates capital from different individual and institutional investors. The gains produced by their investments will get directed towards financing the tasks of NPOs, working for social outcomes, in the form of grants. Lastly, the intermediary will restore the principal amount invested by the investors and offer certain tax-exemptions
- Social Impact Bond (SIB): – In SIB structure, an intermediary interposes between NPOs, investors, outcome funders, and independent evaluators. The intermediary unlocks the capital from investors and contractually connects it with NPOs. Further, only after observing the successful accomplishment of the outcome-metrics through evaluators, the outcome funders repay the principal amount and returns to the investors, or else, they withdraw their liability.
- Pay-For-Success: – In this apparatus, the outcome funders repay the principal amount and returns to the lending partners through the intermediaries, only after the successful completion of the set outcomes. However, if the set results will not get achieved, then the risk of economic loss will be dealt with by the lending partners. Moreover, the Pay-For-Success model is almost identical to the SIB model. The key difference discerned in this model is that the intermediary raises capital from the lending partners and through grants.
Even the Report proposes that the SSE should lay down an aid fund for recovering the pandemic situations of COVID-19. It can be set-up in the mock-up of Pay-For-Success or SIBs or even through Zero Coupon Zero Bonds for CSR spenders, philanthropic donors, and various investors.
- Social Venture Funds (SVFs): – The umbrella of SEBI’s Alternative Investment Funds (AIFs) covers the instruments like SVFs. These SVFs already exist in the financial market by SEBI for FPEs, although it also acts as grants-in and grants-out apparatus for NPOs and other charitable enterprises.
b. For For-Profit Enterprises (FPEs)
- Equity Issuance: – For FPEs, the issuing of equity through SSE will be the significant source of unlocking the funds from investors, subject to minimum reporting standards. It is akin to SEBI’s Innovators Growth Platform (IGP), which provides a separate locus for start-ups with its listing preconditions.
- Social Venture Funds (SVFs): – FPEs already deal with SVFs for its funding, with no social impact reporting. However, in SSE, these FPEs are subject to minimum reporting standards while raising funds through the channel of SVFs and other AIFs.
II. A Setout to Revamp the CSR
The Report proposes to get rid of the requisite enrolment of Section 8 enterprises for Corporate Social Responsibility (CSR) commitment under the draft of CSR Policy Amendment Rules, 2020. However, in SSE, the listing of NPOs on the SSE or the existence of recipient NPOs in the SSE catalog will be adequate for setting up the validity of transactions.
The CSR capital must be permitted to pile-up in an escrow account for three years. Further, if the CSR funders observe that the NPO has achieved its outcome, then they unlock the CSR capital from the escrow account and repay the partial amount to the interim funding partner for recovering the latter’s cost for executing the program. The residual amount in the escrow account will get transferred to the NPOs in the form of accelerator grants. If the CSR funders feel that the NPOs have not accomplished the social outcomes, then following the same, the said account will get liquidated, and the CSR capital will get utilized under Schedule VII of the Companies Act, like PM’s Relief Fund, etc.
Moreover, the SEBI board prescribes that the Ministry of Corporate Affairs (MCA) should be permitted to approve the dealings of CSR capital between companies with surplus CSR funds and those who have a scarcity of CSR funds. Even the expenses incurred by various companies for capacity strengthening of SSE will also be considered as CSR handouts by altering Schedule VII of the Companies Act.
III. Make A Killing Via Taxation Policy
The Working Group (WG) has proposed to allow various tax-benefits to every player who will be part of the SSE transactions. The Committee believes that such tax-benefits will act as a spur for all the players. The Report commends for the same as follows: –
- The WG has suggested allowing donors to assert 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.
- The Report has also recommended to exempt investors from paying Securities Transaction Tax for dealings made on the SSE and Capital Gain Tax on capital gains accumulated by selling of securities.
- Moreover, the WG has advised the Government to take off the 10% ceiling on deductions made in Section 80G and allow investments made in NPOs listed on SSE to be tax-deductible.
- Their Report also covers that the retail investors will be allowed to claim 100% tax-exemption on their investments in SSE and has an overall limit of Rs. 1 Lakh.
- For FPEs listed on the SSE, the WG has proposed to allow a 5-year tax holiday after its first listing.
- For NPOs, the WG has commended to expand the limits of raising capital through commercial activities from 20% to 50% to make the NPOs more viable.
- Lastly, it has endorsed to allow the income spawned by the SSE to be tax-deductible.
IV. Denunciations Of The Social Stock Exchange
While the Report tried providing a holistic view of the proposed SSE model, fundamental questions are remaining unanswered. Acknowledging the benefits offered, one cannot turn a blind eye to it. Therefore, the authors have identified few shortcomings while rolling out the red carpet for SSE in India:
- The contours of the definition of social enterprises, as provided in the Report, leave a lot of room for interpretation, therefore, defeating the purpose of the minimum reporting requirement.
- The setting up of SSE will incur a very high cost. Moreover, the easy-accessibility of investor’s profiles on SSE may strengthen the bias, following in liquidity-allied hurdles for issuers.
- The global presence of social exchange platforms cannot be the ultimate indicator of the effective social transformation in our country, where such problems run deep.
- The numerous tax concessions suggested to boost the social investments might boomerang and thus encourage people to devise tax evasion schemes by entering into certain illicit agreements with owners of NPOs and FPEs.
- The magnitude of the transaction cannot be a sole indicator of the impact created through SSE. It can be a bane for smaller organizations not being able to earn enough finance to sustain and ultimately being cannibalized due to the injection of commercialization.
V. Conclusion & Recommendations
Market and socialism are interlinked, and only in recent years, the myth of them being mutually exclusives has got busted. The rise in CSR activities and Social exchanges around the world are creating an ecosystem to augment the social sector and India can propel its social sector by garnering the dexterity from the working model of such exchanges in the countries such as Canada, Brazil, the United Kingdom, Singapore, South Africa.
The Government’s efforts to entice private players by providing minimum reporting yardstick, tax incentives, etc. can be successful. Yet, Rome wasn’t built in a day, and SSE requires to overcome the arduous task of ensuring the coveted results by addressing and clarifying the above-stated issues.
Moreover, the Government shall introduce an exclusive support channel, ensuring that the social organization sails smoothly through the listing and evaluation process. Further, NGO Darpan shall get developed to provide an integrating point with self-regulatory organizations (SRO) and information repositories (IR) to ensure the layout of reliable information regarding the NPOs. Moreover, apart from the self-reporting social impact, there is a need for a stringent scrutiny mechanism and a well-developed framework to assess the credentials supplied by the self-declared FPEs.
Ultimately, the arrival of SSE presents trailblazing prospects for the social sector to reach the bottom of the pyramid through enhanced capital inflow. The recommendations in the Report are highly motivated by these unprecedented times wherein there is a pressing need to retrieve the Indian economy through a blend of conventional and social capital, and ensuring win-win situations.