Social Stock Exchange: Tax And Other Policy Recommendations

In this series of columns, members of a drafting team on the Working Group report on Social Stock Exchange detail important recommendations.

The majority of the recommendations in the Social Stock Exchange (SSE) report, prepared by a SEBI-appointed Working Group, are focused on non-profit organizations (NPOs). Some of these recommendations have already been covered in the first two of our articles – namely, the minimum reporting standard, and the new instruments and structures that NPOs could hope to access via the SSE. In this, the third and final article, we direct our attention to the remainder of the recommendations, primarily designed to attract funders and NPOs onto the SSE platform. The working group has also devoted a chapter in the report to for-profit enterprises, and we briefly discuss them in this article as well.

Donors to NPOs in India have traditionally received tax exemptions under Section 80G of the income tax code, but there are limits to how much of an exemption the donor can claim, and furthermore, the finance minister, in her February 2020 union budget speech, hinted at removing the provision for exemption altogether. The working group has noted this development and recommended that Section 80G not only be retained but that the extent of exemptions be increased (i.e., the relevant limits relaxed), so as to incentivise even more donations to NPOs. Further, investments in the instruments and structures that the SSE will enable for NPOs, could also be tax deductible. For example, the working group recommends that first time retail investors in mutual fund structures that benefit NPOs should be granted a 100% tax exemption on their investment, subject to an overall limit of Rs 1 lakh.

In order to incentivise NPOs to commit to the minimum reporting standard, the report has recommended that NPOs that comply with this standard be fast-tracked on their 80G (and related) certifications. It is also envisioned that for such NPOs, a one-time 80G certification could suffice and periodic renewals be not required.

There is also a great need for enabling corporates to participate in the SSE as Corporate Social Responsibility (CSR) spenders. The various regulations pertaining to CSR spending are determined by the ministry of corporate affairs. The working group has urged the MCA to tweak these regulations so as to allow CSR spends to flow to the various instruments and structures on the SSE. For example, a corporate should be easily able to purchase a zero coupon zero principal bond (ZCZP) being floated by an NPO on the SSE. Since CSR spends cannot flow back to the corporate in any form, the ZCZP bond is an ideal conduit for corporates to direct funding towards the social sector. Further, such funding could be tax deductible, thereby creating an incentive for corporates to use this conduit actively.

The working group has recognized that foreign donors are eager to fund NPO-driven social impact in India, and that the SSE could provide them with a reliable and credible route to do so. However, current regulations come in the way of foreign donors participating in some of the structures (such as Social Venture Funds) that the SSE will likely mainstream. Therefore, a recommendation to the government to look into and modify these regulations, has also been made.

Finally, and continuing with its focus on NPOs, the working group has suggested that a capacity building unit be created within the SSE. This unit could be funded by philanthropic donations and CSR expenditures, and such funding would enjoy the tax benefits that regular funding to NPOs would enjoy. The purpose of the unit would be to create widespread awareness among NPOs and funders about the SSE and its various innovations. Importantly, this unit would also offer assistance, both skill-based and finance-based, to NPOs to navigate the SSE (for e.g., with reporting according to the minimum standard).

We turn now to the for-profit enterprises (FPEs). Although far less numerous than NPOs, they too are beginning to make their presence felt in India’s social sector. The working group’s conception of a minimum reporting standard is intended to fully embrace these participants as well. That is to say, FPEs are also encouraged to raise funds through the SSE, but only if they too, like NPOs, conform to the minimum reporting standard. Because FPEs are profit-making enterprises, they will be able to list equity directly on the SSE, subject to listing criteria that SEBI will work out (in addition to the minimum reporting standard).

It is important to understand that it is not the profitability of FPEs but rather the social impact they create that the SSE and its reporting standard are meant to call out and highlight. It is this that “impact investors” truly care about, and whom the working group would like to attract to the SSE. Aside from the obvious attraction, therefore, that the minimum reporting standard will present to impact investors, there are also some tax incentives that the report has proposed for such investors, such as tax exemptions on the trading of equities on the SSE, and on long term capital gains thereof.

It is hoped that the working group’s recommendations are deliberated on carefully by the government and if found to be satisfactory, given expression in the most expedient way possible.

Indradeep Ghosh is Executive Director at Dvara Research and was a member of the drafting team the Working Group report on Social Stock Exchange. The publication of this article was coordinated by Omidyar Network India whose members also assisted in the drafting and participated in the Working Group.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.