Regulatory updates

On 25 July 2022, the Securities and Exchange Board of India (SEBI) had introduced new chapters to establish the broad framework relating to the Social Stock Exchange (SSE) by issuing the SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022 (ICDR Amendment Regulations), SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022 (LODR Amendment Regulations) and SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2022 (AIF Amendment Regulations).

Consequently, SEBI, vide a circular dated 19 September 2022 (the circular) issued further clarifications regarding the overall framework of SSE. The key guidelines specified in this regard include:

1. Minimum requirements for registration of a Not for Profit Organisation (NPO) with SSE: Regulation 292F of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) prescribes that a Non-Profit Organisation (NPO) may seek registration with an SSE, however it may or may not raise funds through the SSE. The circular has laid down the minimum requirements for registration of an NPO on an SSE as below:

• Registration: An entity should have been registered¹⁴ as an NPO for at least three years, and the registration certificate should be valid for at least the next 12 months.
• Disclosure of ownership and control: NPOs must disclose details with respect to their ownership and control and also submit prescribed documents such as the Memorandum of Association (MoA), Articles of Association (AoA), trust deed, bye-laws, constitution, etc.
• Income tax registration: The NPO should have a valid IT PAN, a registration certificate under Section 12A/12AA/12AB of the Income Tax Act, 1961 which would be valid for at least the next 12 months, a valid registration under Section 80G of the Income Tax Act, 1961 and should not have a notice or ongoing scrutiny by Income Tax.
• Minimum fund flows: The annual spending of an NPO desirous of being registered with an SSE, as per the audited financial statements for the past financial year should be at least INR50 lakhs. Additionally, the annual funding received by such an NPO as per the audited accounts should be at least INR10 lakh.

1. Minimum initial disclosure requirements for NPOs raising funds through the issuance of ZCZP Instruments : As per Regulation 292G(a) of the ICDR Regulations, an NPO which is eligible to get listed on an SSE, may raise funds by the issue of Zero Coupon Zero Principal (ZCZP) bonds, donations through mutual funds schemes, or other means, as specified by SEBI. Additionally, Regulation 292K specifies the procedure for public issue of ZCZP instruments by an NPO, including disclosure of certain requirements to be prescribed by SEBI.

The circular has now stipulated the minimum disclosures that should be provided by NPOs in the draft and final fundraising document when raising funds through ZCZPs. The key disclosures required in this regard include:

• Vision and strategy: Details of the organisation’s activities, interventions and programmes which are in line with the aims and objects stated in its constitution, and strategy formulation for accomplishing the vision.
• Target Segment: The target segment (i.e., those affected by the problem and how are they affected) and the approach to be followed to accomplish its planned activities should be disclosed. The NPO must disclose how its approach intends to improve inclusion of its customers/recipients.
• Governance and management: Details of the governing body, composition, dates of board meetings held, key managerial staff such as those in charge of programmes, fundraising, marketing, communication, finance, human resource, periodic performance appraisal process etc. should be disclosed.
• Financial results and related compliance requirements: Disclosure must be made of the audited financial statements for the last three financial years prepared in accordance with guidelines for NPOs issued by ICAI. It should also be noted that, there should not be any material qualifications or irregularities reported by the auditor. Additionally, the organisation should also be in compliance with the relevant income tax regulations.
• Social impact: Details of past social impact in terms of parameters specified under the minimum disclosures of the Annual Impact Report (AIR) should be disclosed.

1. Annual disclosure requirements by NPOs ¹⁵  registered on SSE Regulation 91C of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (LODR Regulations) provides that an NPO which is registered on a SSE is required to provide annual disclosures on matters specified by SEBI, within 60 days from the end of the financial year or within such period as may be specified. In this regard, SEBI vide the circular has issued the following list of disclosures that are required to be made on an annual basis:

1. Disclosures in the Annual Impact Report (AIR)¹⁷

As per Regulation 91E of the LODR Regulations, a Social Enterprise¹⁸ (SE), which is either registered with or has raised funds through an SSE, must submit the AIR to the SSE in the format specified by SEBI. The AIR must be audited by a social audit firm employing social auditors¹⁹.

In this regard, SEBI, vide its circular dated 19 September 2022 issued the general requirements and the minimum disclosures required to be made in an AIR by all SEs registered with or which have raised funds using the SSE. These requirements are listed below:

General requirements

• Time period for submission: The audited AIR should be submitted within 90 days from the end of the financial year
• Utilisation of funds: The AIR should explicitly provide the qualitative and quantitative aspects of the social impact generated by the entity/project or solutions for which funds have been raised on SSE. In case of an NPO registered as a SE without listing any security, the AIR must include details regarding the significant activities, intervention, programmes or projects during the year and the methodology for determination of significance must be explained.
• Social impact fund: A social impact fund where the underlying recipients of the funds are SEs that have registered or raised funds using the SSE, should disclose an overall AIR of the fund, disclosing details of all investee/grantee organisations where the fund has been deployed. Disclosure requirements An AIR should at a minimum cover the following aspects:
• Strategic intent and planning: It should include the social or environmental challenge addressed by the organisation, approach adopted to cater to the challenge, etc.
• Approach: The baseline status, key past performance trend, etc.
• Impact score card: Disclose details of the metrices monitored, trend in performance, etc.

1. Due date for submission of statement of utilisation of funds

Regulation 91F of the LODR Regulations requires a listed NPO to submit to the SSE(s) the following statement of utilisation of the funds raised on a quarterly basis:

1. Category-wise amount of monies raised,
2. Category-wise amount of monies utilised, and
3. Balance amount remaining unutilised.

The SEBI, vide its circular dated 19 September 2022 has prescribed that the aforementioned statement of utilisation of funds should be submitted within a period of 45 days from the end of the quarter.

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14. Entities must be registered in India as any one of the following entities:
    1. A charitable trust registered under the Indian Trusts Act, 1882,
    2. A charitable trust registered under the public trust statute of the relevant state,
    3. A charitable trust registered under the Societies Registration Act, 1860, or
    4. A company incorporated under Section 8 of the Companies Act, 2013.
15. The SEBI circular dated 19 September 2022 contains the guidance note with respect to each of the above categories of disclosures.
16. It is to be noted that ICAI is in the process of publishing the uniform accounting and reporting framework for NGOs.
17. The circular also includes a guidance note which will enable preparation of the disclosures in an AIR.
18. A social enterprise means either an NPO or a For Profit Social Enterprise that meets the eligibility criteria as specified by SEBI
19. ‘Social auditor’ means an individual registered with a self-regulatory organisation under ICAI or such other agency, as may be specified by SEBI, who has qualified a certification program conducted by the National Institute of Securities Market and holds a valid certificate.

To access the text of the circular, please click here

SEBI in its board meeting dated 30 September 2022 took some key decisions pertaining to the following:

1. Disclosure of Key Performance Indicators (KPIs) and price per share of the issuer, in public issues, based on past transactions and past fund raising from the investors

In February 2022, SEBI had issued a consultation paper²⁰ recommending provisions relating to disclosures for ‘Basis of Issue Price’ section in an offer document. As per the consultation paper, issuers undertaking an Initial Public Offering (IPO) would be mandated to provide key disclosure of Key Performance Indicators (KPIs), as well as the price per share of issuer based on past transactions and past fund raising done from the investors, subject to the conditions specified in this regard. The said disclosures must be made under ‘Basis for Issue Price’ section of the offer document, and in the price band advertisement.

These proposals in the consultation paper have been approved by SEBI in its board meeting.

1. Introduction of pre-filing of offer documents in case of IPOs

In May 2022, SEBI had issued a consultation paper²¹ recommending that SEBI would introduce an alternate mechanism for regulatory review of offer document by permitting pre-filing of offer documents for issuers contemplating an IPO.

Pre-filing mechanism allows issuers to carry out limited interaction without having to make any sensitive information public. Further the document which incorporates SEBI’s initial observations would be available to investors for a period of at least 21 days, thereby, assisting them better in their investment decision making process. The existing mechanism of processing offer document shall continue in addition to this alternative mechanism of pre-filing.

These proposals in the consultation paper have been approved by SEBI in its board meeting.

1. Flexibility in approval process for appointment and/or removal of Independent Directors

Currently, as per the provisions of the LODR Regulations, appointment, re-appointment or removal of independent directors must be made through a special resolution.

The SEBI has now introduced a new optional provision in the LODR Regulations for appointment and removal of independent directors, appointed for the first term in listed entities. As per the alternate mechanism, if the special resolution passed does not get the requisite majority, then the following thresholds should be tested:

• Threshold for ordinary resolution, and
• Threshold for majority of minority shareholders.

If the resolution passed meets the above two thresholds, in the same voting process, then such a resolution would be deemed to have been approved by the shareholders. This would also be applicable for removal of an independent director, appointed under this alternate mechanism.

1. Amendment to LODR Regulations, in the context of schemes of arrangement

SEBI has approved amendments to the LODR Regulations, to introduce provisions pertaining to schemes of arrangement for debt listed entities, handling of unclaimed amounts pertaining to non-convertible securities of listed entities which do not fall within the definition of a ‘company’ under the Companies Act, 2013 and the Rules made thereunder. Additionally, amendments have been approved for continuous disclosure norms for entities with listed nonconvertible securities, pertaining to financial results and related requirements.

1. Inclusion of units of mutual funds under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations)

In July 2022, SEBI had issued a consultation paper²² which proposed to cover dealing in units of Mutual Funds under PIT regulations so as to harmonise the regulations governing trading in securities, while in possession of Unpublished Price Sensitive Information (UPSI).

The proposals in the consultation paper have been approved by SEBI in its board meeting.

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20. Consultation Paper on Disclosures for ‘Basis of Issue Price’ section in offer document under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
21. Consultation Paper on Pre-filing of Offer Document in case of Initial Public Offerings
22. Consultation Paper on Applicability of SEBI PIT Regulations to MF units

To access the text of the minutes of the SEBI board meeting, please click here