Sebi seeks clarity on foreign participation in social stock bourse

It has also asked whether such investment will be construed as “speculative activity”.

Currently, there is no restriction on foreign fund participation in the regular stock markets. However, entities listed on the SSE deal in voluntary work and other social projects. Foreign contributions for such organisations normally fall under the purview of Foreign Contribution Regulations (FCRR), which places various curbs and additional compliance requirements on entities receiving donations from foreign institutions. Sebi has now asked the Ministry of Home Affairs (MHA) if the same restrictions will apply on entities listed on social stock exchanges, people cited above added.

Emails sent to Sebi and MHA remained unanswered.

“Foreign entities such as multi-national companies and international funds allot a portion of their corporate social responsibility funds to such platforms and hence allowing participation of such entities will augur well for the development of SSEs,” said a person cited above. “However, in India, additional safeguards apply in cases where say an Indian NGO wants to accept foreign donations. It needs to be seen if the same will be applicable in case of SSE.”

One of the key issues at hand is with a rule under which any foreign contributions received by entities involved in activities of “political” nature or “speculative activities” need to submit a special register of such investments for MHA audit every fiscal. According to FCRR rule 4, speculative activities include any investment ‘linked to market forces’ where there is an element of ‘risk of appreciation or depreciation of the original investment’.

“Since SSEs work just like stock exchanges, Sebi wants clarity from MHA on whether investment into SSE will be considered speculative activity. If it is considered so, the compliance burden will increase significantly on both the SSE listed entity and on foreign donors,” said another person cited above. “Under the proposed Sebi rules for SSEs, these foreign entities will anyway not exert any control over the SSE listed entity, nor will they have any say on where the resources can be deployed.”

In the Union Budget for FY20, the central government proposed the creation of SSEs. In her budget speech, the finance minister said SSEs would help to “take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion.” As per the proposal, Sebi was given powers to formulate rules and regulate such SSEs.

Post this announcement, Sebi formed a task force for establishing SSEs. In its board meeting held on September 28, 2021, Sebi tweaked its rules and introduced a special framework for SSEs. However, unlike regular equities or debt products, SSEs operate in a multi-regulatory environment and hence several proposals of the task force needed change/interpretation of rules by other regulators such as the tax department and MHA.