We have seen a long time with ‘Social Enterprise’ not gaining the rightful attention it deserved, even so, legally it was not recognised as a term. The statutory demarcation was made between ‘For Profits’ and ‘Not- For Profits’, and this structure was strategically designed in a manner that they both operated at arm’s length from each other.  The funding framework was designed keeping financial capital growth in mind, however anything related with communities at large was by default perceived as an act of charity.

Typically, the ‘for-profit’ enterprises raised capital funding by issuing equity, quasi-equity, and debt instruments; and the ‘not-for-profits’ commonly called as NGOs were categorised into Trusts, Societies, Section 8 Company, and raised funding through grants and donations to achieve certain targets.

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 the creation of Social Stock Exchange (SSE) was suggested and SSE was proposed to be an electronic fundraising platform for listing social enterprises (both, for-profit and not-for-profit) so that they raise 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. Post realisation of the urgent need to do so, on July 25, 2022, SEBI amended the following regulations:

• the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations") were amended to align investments by Social Venture Funds ("SVFs") with the SSE.
• 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 (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations") were amended to insert "Chapter X-A: Social Stock Exchange".

Functionalities of the regulations

• ICDR- elucidates requirements for issuance of capital for the listed entity
• LODR- deal with the requirements for listing your entity on a recognized stock exchange
• AIFs- provide for different types of pooling vehicles for making sector specific investments, including the social sector

Understanding Social Stock Exchange

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 Auditor

means an individual registered with a self-regulatory organization under the Institute of Chartered Accountants of India or such other agency, as may be specified by the Board, who has qualified a certification program conducted by National Institute of Securities Market and holds a valid certificate. A Social Audit Firm refers to any entity which employs ‘social auditors’ and has a reputable record of a minimum of 3 years for conducting social impact assessment for establishments.

Understanding Social Enterprise

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 not-for-profit organization, most popularly known as an NGO, which satisfies the requirements of Chapter X-A of ICDR Regulations is also a Social Enterprise ("NPO").

Understanding listing requirements

Both FPSE and NPO must establish their dominant intent of working towards a larger cause. This needs to be established by three important aspects highlighted in ICDR

1) Undertaking Permitted Activities

The ICDR Regulations provide an exhaustive list of 17 activities that 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 are required to be fulfilled. This requirement may evolve as the measure for ‘performance’, ‘deservedness’ and ‘privilege’.

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. The 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.

Understanding the financial instrument provided by SE

Like any other listed entity, the listing social enterprise also needs to provide an instrument to the investors.  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.

NPOs receive funds as grants and donations; and may (or may not) issue utilization certificates against such grants and donations. It is pertinent to note that the ICDR Regulations allow the 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.

The Road ahead

Currently, few FPSEs have submitted the draft fund-raising document. As multiple Social Enterprises start registering/ listing and raising funds through the SSE, the norms of the regulatory regime pertaining to this industry will gain clarity and traction. This is a progressive move by the Government that brings more clarity and transparency monitoring the behaviour of fundraisers, investors, and traders, streamlining the finance in the direction where it is ideally is supposed to reach. Transparency brings more accountability, in turn changing the behavioural patterns of all stakeholders, that takes time to mature, but it is a good start.