Capital Markets

SEBI recently notified key changes to its framework for fund raising, such as introducing social stock exchanges for social enterprises and allowing specialised real estate and infrastructure investment trusts to issue listed commercial paper.

Richa ChoudharyPartner

Ronak ChawlaCounsel

Maitreya RajurkarSenior Associate

In the last quarter, fund raising was at the forefront of regulatory developments in the capital markets space. The Securities and Exchange Board of India (SEBI) launched a framework for establishing and governing social stock exchanges (SSEs) through amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). It also operationalised the Reserve Bank of India’s (RBI) directions permitting Real Estate Investment Trusts (REITS) and Infrastructure Investment Trusts (InvITs) to issue commercial paper, by putting in place an enabling framework for the issuance of listed commercial paper.

Key Developments

  • Framework for social stock exchanges

    In June 2020, SEBI had issued a working group report on establishing an SSE to enlarge the pool of capital accessible to social enterprises and improve public provision of essential services (driven primarily by philanthropy and corporate social responsibility). Consequently, on 25 July 2022, amendments to the ICDR Regulations (ICDR Amendment) were introduced to launch the regulatory framework for SSEs in India. The ICDR Amendment applies to ‘Not for Profit Organisations’ (NPOs) and ‘For Profit Social Enterprises’ (FPSEs). The key highlights of the framework are:

    • Social Enterprises

      ‘Social Enterprises’ are those NPOs or FPSEs that meet the prescribed eligibility criteria. Eligible social activities include the eradication of hunger and poverty and the promotion of healthcare, gender equality, environmental sustainability, welfare, digitisation, etc. At least 67% of a Social Enterprise’s activities must qualify as eligible (i.e. 67% of its average revenue and expenditure for the last 3 years is attributable to such eligible social activities).

      NPOs include registered charitable trusts and societies, companies incorporated under the Companies Act, 2013 or any other entity as may be specified by SEBI. FPSEs include companies or body corporates operating for profit but which meet the prescribed eligibility criteria.

    • Modes of fund raising

      An NPO may raise funds by issuing Zero-Coupon Principal Instruments (Zero Coupon Instruments), amongst others. An FPSE may raise funds by issuing equity shares on the main board, small and medium enterprises (SME) platform or innovators growth platform or by issuing equity shares to alternative investment funds (including social impact funds). Such issuances by FPSEs must comply with the other criteria prescribed under the ICDR Regulations for such listings.

    • Social stock exchanges

      An SSE is a separate segment of a recognised stock exchange which registers NPOs or lists securities issued by such NPOs. Accordingly, FPSEs cannot access SSEs. SSEs are only accessible to institutional investors and non-institutional investors at present. Retail investors have been excluded. SSEs must also constitute a Social Stock Exchange Governing Council to oversee their functioning.

    • Eligibility for fund raising

      A Social Enterprise will not be eligible to raise funds:

      • if the Social Enterprise, any of its promoters, promoter group, directors, selling shareholders or trustees are debarred from accessing the securities market by SEBI;
      • if any of the promoters or directors or trustees of the Social Enterprise is (i) a promoter or director of any other company or Social Enterprise which has been debarred from accessing the securities market by SEBI, or (ii) a fugitive economic offender; or
      • if the Social Enterprise or any of its promoters or directors or trustees (i) is a wilful defaulter or a fraudulent borrower, or (ii) has been debarred from carrying out its activities or raising funds by the Ministry of Home Affairs or any other ministry of the Central Government, State Government, Charitable Commissioner or any other statutory body.
    • Procedure

      Zero Coupon Instruments, which may be issued by NPOs, must have a specific tenure and cannot have a coupon or principal maturity attached. Further, they may be issued through a public issue or a private placement, in each case by filing an offer document containing all required disclosures with the SSE for its review and observations. The minimum issue size should be INR 1 crore and the minimum application size should be INR 2 lakh. Further, the minimum subscription that must be achieved is 75% of the funds proposed to be raised. A public issuance is deemed to comply with the minimum public float requirements under the Securities Contracts (Regulation) Rules, 1957.

    • Social auditor

      The concept of a Social Auditor/Social Audit Firm has also been introduced. A Social Auditor is an individual registered with a self-regulatory organisation under the Institute of Chartered Accountants of India or such other agency as may be specified by SEBI, who has passed a certification program conducted by the National Institute of Securities Market. A Social Audit Firm is any entity which employs Social Auditors and has conducted social impact assessments for a minimum of three years.

      Social Auditors and Social Audit Firms can audit annual social impact reports prepared by the Social Enterprise, to be submitted to the SSEs.

    Consequent changes have been made to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the Securities Contracts (Regulation) Act, 1956. Further, on 19 September 2022, SEBI also issued a circular setting out the legal requirements, minimum fund flows, and disclosure requirements for NPOs and FPSEs to issue instruments. Such developments should help to bring parity across regulations and resolve regulatory ambiguity. Further, the social development sector, which is becoming more important each day, should now have better access to capital instruments for their funding needs.

  • Issuance of commercial paper by REITs/InvITs

    REITs and InvITs were permitted to issue commercial paper under the Reserve Bank Commercial Paper Directions, 2017. However, SEBI had not notified any enabling procedures for issuance of listed commercial paper.

    Through two circulars issued on 22 September 2022, SEBI has permitted REITs and InvITs to issue listed commercial paper, provided that the REIT/InvIT:

    • has a net worth of at least INR 100 crore;
    • abides by the guidelines prescribed by the RBI for issuance of commercial paper; and
    • fulfils the conditions of listing norms prescribed under SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

    The issuance of the commercial paper should be within the overall debt limit permitted under the SEBI (Real Estate Investment Trusts) Regulations, 2014 or the SEBI (Infrastructure Investment Trusts) Regulations, 2014, as applicable.

This development provides REITs and InvITs another route to meet their financing requirements. The SSE framework, on the other hand, should provide an impetus to the development of the social sector in India, and enable Social Enterprises to access larger pools of capital. This is particularly relevant with the increased importance of ESG investment.

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