This post captures comments by Dvara Research as a response to the call for public comments by SEBI to the report of the SEBI Technical Group on Social Stock Exchange (henceforth ‘Technical Group’). Dvara Research had previously played the role of writing secretariat to the drafting of the report of SEBI Working Group on Social Stock Exchange, which formed the basis for the Technical Group’s work.
Lack of a roadmap for the vision laid out in the first report
The report of the SEBI Working Group on Social Stock Exchange had laid out a detailed roadmap for attaining the vision of the Working Group, and a pathway for comprehensive social impact measurement and reporting (Annexure 3 of the first report), which involved steps spread across a 7-year horizon. Abandoning that approach, the report of the Technical Group has laid out a set of policy changes that it recommends to be made in the immediate term and to let the market develop from day 1. Such an approach provides much less room for learning and course-correction in the journey towards development of this key market (for impact-focused capital).
Ambiguity around requirements for various listable instruments
There is some ambiguity around the precise formats for participating in the SSE and as to whom the pre-listing, listing- and post-listing requirements apply (pp. 14-22, and pp. 30-31). We identify three different formats for participating:
For-Profit Enterprises (FPE) and Non-Profit Organisations (NPO) listing equity and debt instruments directly on exchanges: In this case, registration as a pre-requisite is clearly articulated, and all reporting/disclosure requirements for registration and pre-/post-listing are clearly articulated.
FPEs and NPOs raising funds via Social Impact Funds (SIF) alone:
Here, the kinds of SIFs allowed are two-fold. They can be either a 100% Grant In – Grant Out SIF or a 25% Grant In – Grant Out SIF. It is unclear why the Technical Group considered providing permissions only to these two constructs and why SIFs with other than 25% and 100% GIGO are not being considered. Also, if SIFs are continued to be permitted in the unlisted space as it is today, would SIFs with GIGO structures that are not 25% or 100% be allowed to call themselves SIFs and whether they would be able to raise impact capital, is a question on which clarity is sought.
Whether SIFs themselves must list in some form is not clearly articulated, particularly given SIFs are presently allowed to exist and raise funds without having to list on exchanges. If SIFs can function through either unlisted or listed formats, what must the requirements for SIFs be when they are listed versus unlisted, remains to be answered. Would the requirements in relation to registration, listing, and reporting/disclosure be different for unlisted SIFs, or would they not be permitted?
Where SIFs themselves choose to list, the underlying NPOs have been required to register on the SSE (section 4.3 describes this for both NPOs and FPEs where they are recipients of funds raised by SIFs). But the underlying FPEs have not been required to register on the SSE and in this case, only the SIF has the responsibility of preparing an overall Annual Impact Report for the fund covering all investee/grantee organisations where the fund is deployed. Therefore, NPOs have to undertake impact reporting on their own through the process of registration and also be subject to overall impact reporting of the SIF they are receiving funds from, whereas, the FPE is not subjected to this dual requirement, and therefore face easier disclosure requirements than the NPOs themselves if they choose the SIF route to fund-raising.
NPOs and FPEs raising funds via Mutual Funds (MF): It is unclear what the reporting/disclosure requirements are for MFs in this regard, beyond what is covered in the Offer document, as well as for the underlying NPOs and FPEs. Section c, Annexure 3 states that the frequency of disclosures on impact performance can be aligned with the minimum reporting standards, but no further clarity is given. Also, since MFs can invest in unlisted debt up to a limit, in such cases, should the underlying FPE be required to register on the SSE and provide reporting, and if not, how could the impact scorecard be made accessible to investors? It is also unclear whether an MF scheme can invest in a combination of FPE and NPO securities (like in the case of 25% GIGO for SIFs).
For an NPO that is registered as a Section 8 Company, the report considers it necessary to explicitly state that such a company must comply with Section 134 of the Companies Act 2013 (pg.31). It is unclear why this needs to be specified since this is already presumed to be the case for a Section 8 Company.
In the case of an event with material impact, the report says that the concerned NPOs must perform such reporting within 7 days of it happening, “to the exchange in which they are registered/listed.” (pg. 31). It is unclear what the requirements would be for NPOs that do not directly list but choose to raise funds through the SIF or MF route.
Availability of information on FPEs versus NPOs
It is reasonable to expect parity between NPOs and FPEs when it comes to the nature and quality of impact information available to impact investors, this is a general principle followed for commercial enterprises across the risk-return profile spectrum competing in the capital markets. It would help to provide clarity on how this parity is being maintained, for instance, in the following instances:
The report states “no registration required” for FPEs (Figure 2.2). This may however not be strictly correct since they are required to be registered under the Companies Act 1956/2013. FPEs are subjected to limited disclosure requirements to the Ministry of Corporate Affairs (MCA) once they register with the Registrar of Companies. It would be key to ascertain whether the information on an NPO registered with the SSE and the information on an FPE that is not registered but claims itself to be a social enterprise, are available with equal ease/effort for prospective impact investors/donors.
It has not been articulated whether and why “Differentiators” do not apply to FPEs that choose to list. Sub section (f) of section 1.4 Key Recommendations of the report (Offer document content for social enterprises) indicates that such offer document of SEs shall require disclosures on differentiators. It further states that FPEs will also be required to comply with disclosure requirements in offer documents as applicable currently by SEBI. However, elsewhere in the report, differentiators have been covered only under Listing Guidelines for NPOs (section 2.3.2), implying that FPEs wishing to list need not make disclosures under the differentiators list. This could be because FPEs may already have covered various elements of the differentiators list in the disclosures leading to listing. However, in the case of an FPE that is unlisted and is part of a listed SIF, would the FPE be required to disclose along the lines of the differentiators for there to be parity between this FPE and, say, a registered NPO that is part of the same SIF?
Under impact information reporting, the FPEs listing directly are being required to report on impact scorecard (section 1, Annexure 3) but such reporting is not being placed under an overarching Monitoring & Evaluation (M&E) Framework as is required for listing NPOs, and listing SIFs where the underlying SEs are FPEs and/or NPOs. It is not clear whether there are components under the M&E Framework for listing NPOs and SIFs that is not going to be applicable for listing FPEs, and if so, what the reason for this might be.
Components of a non-financial audit
The report can clearly call out what the various elements of a non-financial audit are (Section 3.3.1 of the report does not provide the needed clarity). There is some information on this in Annexure 5 which mentions that the non-financial audit “will consist of prelisting and post listing governance and compliance-related work and post listing assurance on Impact reporting done by the entities registered on Social Stock Exchange (SSE)”.
Entities ineligible to access the SSE
The report states that “corporate foundations, that are primarily funded by a parent corporate entity or a group of corporate entities” shall not be eligible to raise funds using the SSE’s mechanisms. It is unclear what the Technical Group meant by ‘primarily’ and whether there is a quantitative criterion for parent/group corporate funding beyond which such a corporate foundation can no longer access the SSE’s mechanisms.
Inadequacy of examples provided in the report
In Annexure 10, “Sample indicators of social performance in select sectors”, the Technical Group has laid out three categories of indicators (direct short-term outputs, medium-term outcomes, and capacity-related impact) and provides some examples for the benefit of various stakeholders. However, the examples cited in the specific arenas of livelihoods, health and education do not map to the three categories (of outputs, outcomes, and impact). A mapping would make for greater clarity for all stakeholders, especially SEs. Further, for “livelihoods” (p. 100) there are no sample indicators for sector-wide impact, and the row for sector-wide impact has perhaps been mislabelled as direct impact.