Bolstering the Framework of Social Stock Exchanges in India

Minimum requirements for registration on SSE

SEBI has expanded the eligibility criteria for NPOs seeking registration with SSE by allowing entities registered under Section 10(23C) and Section 10(46) of the Income Tax Act, 1961 (Income Tax Act) to be eligible for registration as NPO with SSE. Earlier, only entities registered under Section 12A / 12AA / 12AB of the Income Tax Act and possessing a valid Section 80G registration certificate were eligible for registration as an NPO with the SSE. It was observed that several NPOs such as government funded educational institutions and hospitals are wholly engaged in not-for-profit activities for the benefit of the public but do not possess a Section 80G registration. Such NPOs, merely on account of not possessing a Section 80G certificate would be deprived of the opportunity to raise funds on SSE. Entities which do not possess a Section 80G certificate have now been permitted to register on SSE if they are registered under either Section 10(23C) or 10(46) of the Income Tax Act.

Further, earlier, NPOs with pending notice or ongoing scrutiny by the Income Tax department were ineligible for registration with SSE. The Circular has now rationalised this requirement by permitting NPOs with ongoing scrutiny or pending notices to be eligible for registration subject to disclosure of details of such scrutiny by the entity at the time of application for registration. Such applicants are also required to disclose the status of fines imposed during such scrutiny. SSEs have been empowered to refuse the registration of NPOs if the notices / scrutiny are grave enough to endanger the registration of an NPO under the Income Tax Act or other relevant laws.

Initial disclosure requirements

NPOs now have the flexibility to disclose their past social impact in the fund-raising document as per their existing practice. Earlier, an elaborate format to be followed for such disclosure was mandated. However, it was observed that requiring NPOs to report such impact assessment in the specific format would involve unnecessary costs and delay in the listing of NPOs on SSE. Hence, the reporting of past social impact in the fund-raising document is no longer required to be made in SEBI’s prescribed format, as long as certain key parameters, which may be determined by the exchanges from time to time, are disclosed.

Procedure and conditions for issue of ZCZPs

The Circular has amended the threshold of minimum issue and application size of ZCZPs along with restricting the transferability of ZCZPs.

Minimum Issue Size: The minimum issue size for ZCZPs has been reduced from INR 1,00,000,00 to INR 50,00,000.

Minimum Application Size: The minimum application size for subscribing to ZCZPs has been reduced from INR 2,00,000 to INR 10,000.

It is expected that the reduction in the minimum issue and application size will enable more participation from smaller NPOs and retail investors to access SSEs platform for raising capital.

Minimum Subscription: There has been no change in the position on minimum subscription to be achieved. The current requirement is that if the NPO does not achieve a subscription of more than 75% of the issue size, the subscription amount received shall be refunded to the investor. It appears that the requirement of refund could be harsh for the NPO considering the time and costs involved in the fund-raising process. Further one of the objectives of the SSE is to facilitate the NPO in raising capital (which is normally difficult for NPOs to raise). The requirement of refund could be reconsidered by allowing the NPO to extend the time to achieve the minimum subscription. This will allow the NPO to reap maximum benefit of the fund-raising opportunity. The regulator could also consider mandating that until the minimum subscription level is achieved, the funds received shall be held in an escrow account.

ZCZP Issuance Activity: The activity for issuance of ZCZP by an NPO through an offer on the SSE has been set out in the Circular.

the NPO is required to file the draft fund-raising document with the relevant SSE where it is registered;

pay applicable fees and seek in-principle approval for listing its ZCZP on the SSE;

the draft fund-raising document will be made available on the website of both the SSE and the NPO, for a minimum period of 21 days for public comments;

the relevant SSE will provide its observations within 30 days from the date of filing or the receipt of clarifications, whichever is later;

the NPO will incorporate SSE’s observations in the final fund-raising document which is to be filed with SSE before opening of the issue; and

The final fund-raising document will contain all material disclosures and any other additional disclosures that may be prescribed such that investors can make an informed choice on whether to invest in such NPO.

Restriction on transferability of ZCZPs

ZCZPs cannot be transferred from the original subscriber of the ZCZP till the expiry of the tenure of the instrument.