By Ashley Coutinho
The government has put in place a series of measures to create a social investment ecosystem in the country. On Monday, the Securities and Exchange Board of India (Sebi) notified a framework for social stock exchanges (SSEs) and included social impact funds (SIFs) in category I AIFs, replacing the existing social venture capital funds. SSEs will facilitate fundraising for non-profit organizations (NPOs) and for-profit social enterprises (EPFs) and help standardize social impact reporting and disclosures.
The changes follow the recommendations of the Sebi technical group on ESS, led by Harsh Kumar Bhanwala. SSEs were first mentioned in the FY20 budget to list social enterprises and voluntary organizations.
“Social impact is considered an important area by organizations in most jurisdictions. Business leaders also contribute significantly to philanthropy. In this context, the Sebi framework governing social stock exchanges, social enterprises and social impact funds adds an interesting regulatory dimension to it. It presents non-profits with a new structured and formalized avenue to fundraise,” said Saurabh Tiwari, Partner, DSK Legal.
The new standards come with required checks and balances, such as disclosing the purpose of fundraising and providing a timeline for their use. The requirement to submit annual impact reports audited by social audit firms will add to the element of transparency, experts said.
The framework for SIFs will help align the venture capital industry’s social impact initiatives with those of stock exchanges and provide additional flexibilities to social funds in terms of minimum corpus, grant receipt and investment standards . The amendments also allow retail funding by SIFs in recognized social enterprises listed on SSEs by allowing the issuance of social units for Rs 2 lakh per investor (up from the earlier limit of Rs 25 crore).
“The social impact fund can, with the help of other variables, support social enterprises (both NPOs and FPEs), large donors like CSR contributors, and retail philanthropic donors by providing an expanded avenue to galvanize funding towards credible social impact creating opportunities,” said Yashesh Ashar, Partner, Bhuta Shah & Co.
Relaxed fundraising and investment standards can help SIFs gain traction in India, Ashar said. Furthermore, the alignment of the SIF with the ESS could lead to growth interdependencies for both. “This will benefit all non-profit organizations and also lead to the emergence of for-profit social enterprises with a goal of social impact. Standardizing reporting, disclosures and social impact reporting would go a long way to building trust in systems and various stakeholders,” Ashar said.
Earlier this month, the government declared zero coupon zero principal (ZCZP) instruments as securities under the Securities Contracts (Regulation) Act 1956. These bonds will allow organizations to raise funds through corporate or individual donations. Entities that borrow money through these bonds do not have to pay interest or repay principal. Additional disclosures before and after the issuance of these bonds will also improve the accountability of NPOs.
There are gaps in various regulations that may need to be filled. “Current FDI policy does not allow investing in ZCZP bonds. FCRA regulations will need to be relaxed for the purposes of the issuance of social units by SIF and the issuance of ZCZP bonds by social enterprises. Setting up the necessary infrastructure in terms of social auditors, developing social auditing standards and information repositories can take some time,” Ashar said.
“The Enabling Amendments are small but welcome steps towards achieving the Sustainable Development Goals by 2030 and net-zero carbon emissions by 2070. The challenges of mission drift by fundraising entities and increased compliance will need to be considered when operationalizing these frameworks,” said Sumit Agrawal. , Founder, Regstreet Law Advisors.