Table of Contents
Chapter 11: Key Regulations
11.1 SEBI Act 1992 and Core Regulatory Powers over Social Stock Exchanges
The Statutory Foundation: SEBI Act, 1992
The Securities and Exchange Board of India Act, 1992 (SEBI Act) establishes the statutory architecture empowering SEBI to protect the interests of investors in securities, promote the development of the capital market, and regulate the securities market across India. With the advent of the Social Stock Exchange (SSE), the regulatory boundaries of the SEBI Act expanded to encompass non-profit social organizations and social instruments.
+---------------------------------------------------------------------------------------------------+
| SEBI'S THREE-FOLD STATUTORY MANDATE (PREAMBLE) |
+---------------------------------------------------------------------------------------------------+
| 1. Protecting the interests of investors in securities (including philanthropic impact donors) |
| 2. Promoting the development of the securities market (establishing innovative SSE platforms) |
| 3. Regulating the securities market (enforcing standards, audits, and disclosure regimes) |
+---------------------------------------------------------------------------------------------------+
Key Regulatory Sections Governing the Social Stock Exchange
- Section 11(1) & 11(2): Grants SEBI comprehensive authority to regulate the business in stock exchanges, register and regulate market intermediaries, and specify standards for social auditing.
- Section 11B: Empowers SEBI to issue binding operational directives to any social enterprise, trustee, intermediary, or social impact assessor in the interest of market integrity and prevention of charitable fund diversion.
- Section 11(4): Authorizes SEBI to take interim emergency measures pending investigation:
- Suspend the issuance or trading of any social security (ZCZP instruments).
- Restrain non-profit promoters or trustees from accessing the capital markets.
- Attach escrow bank accounts containing unutilized social subscription proceeds.
- Section 12A: Prohibits manipulative devices, deceptive schemes, and fraudulent practices in connection with the issue or listing of securities on the Social Stock Exchange.
11.2 SEBI ICDR Regulations 2018 (Chapter X-A) and SEBI LODR Regulations 2015 (Chapter IX-A)
The Two Regulatory Engines of the Social Stock Exchange
The operationalization of the Social Stock Exchange was achieved through synchronized amendments to SEBI's two foundational capital market rulebooks:
+---------------------------------------------------------------------------------------------------+
| SEBI SSE REGULATORY DUAL-ENGINE ARCHITECTURE |
+-----------------------------------+---------------------------------------------------------------+
| SEBI ICDR Regulations, 2018 | SEBI LODR Regulations, 2015 |
| (CHAPTER X-A: Regulations 292A-O) | (CHAPTER IX-A: Regulations 91A-F) |
+-----------------------------------+---------------------------------------------------------------+
| - Governs ENTRY & ISSUANCE | - Governs CONTINUOUS LISTING & DISCLOSURES |
| - Definition of Social Enterprise | - Disclosures by For-Profit Social Enterprises |
| - 16 Eligible Social Activities | - Disclosures by Not-for-Profit Organizations |
| - Registration criteria for NPOs | - Quarterly Statement of Fund Utilization (Reg 91D) |
| - ZCZP Instrument parameters | - Audited Annual Impact Report (AIR) (Reg 91E) |
| - Minimum issue size & allocations| - Material Event Disclosures within 7 days (Reg 91F) |
+-----------------------------------+---------------------------------------------------------------+
Detailed Highlights of Chapter X-A (ICDR Regulations)
- Regulation 292E (Primacy of Social Intent): Requires that an eligible entity demonstrate that at least 67% of its activities, revenue, or beneficiaries are directed towards one or more of the 16 eligible social activities targeting underserved populations.
- Regulation 292F (NPO Registration): Establishes eligibility criteria (3 years track record, ₹50L spend, ₹10L receipts, 12AB/80G status, CA-audited financials).
- Regulation 292H & 292J (ZCZP Issuance): Governs the issuance of Zero Coupon Zero Principal instruments via public issue or private placement. Mandates filing of Draft Information Memorandum, 14-day public notice, and minimum subscription condition of 75%.
Detailed Highlights of Chapter IX-A (LODR Regulations)
- Regulation 91E (Annual Impact Report): Mandates that all listed social enterprises submit an Annual Impact Report audited by a certified Social Impact Assessor within 90 days from the end of the financial year.
- Regulation 91D (Utilization of Funds): Mandates quarterly reporting of fund utilization certified by an independent practicing Chartered Accountant until 100% of proceeds are fully spent.
11.3 Prevention of Money Laundering Act (PMLA 2002) and SEBI PFUTP Regulations 2003 in Social Capital Markets
Anti-Money Laundering Framework: PMLA, 2002
Because non-profit organizations mobilize substantial philanthropic capital, international regulatory bodies (such as the Financial Action Task Force - FATF) recognize non-profits as potentially vulnerable to terrorist financing, round-tripping of illicit funds, and money laundering:
+---------------------------------------------------------------------------------------------------+
| PMLA 2002 OBLIGATIONS IN SOCIAL STOCK EXCHANGE |
+-------------------+-------------------------------------------------------------------------------+
| Intermediary KYC | Stock brokers, depositories, and merchant bankers handling SSE issuances must |
| Mandate | conduct strict CKYC/KRA verification of all donors and subscribing entities |
+-------------------+-------------------------------------------------------------------------------+
| UBO Verification | In non-individual donors (corporate CSR trusts, family foundations), identify |
| | Ultimate Beneficial Ownership (natural persons holding > 10% interest) |
+-------------------+-------------------------------------------------------------------------------+
| Suspicious Flow | Any transaction lacking economic rationale or suspected of routing illicit |
| Reporting | funds must be reported to FIU-IND via a Suspicious Transaction Report (STR) |
+-------------------+-------------------------------------------------------------------------------+
| Record Retention | All transaction logs, donor identities, and project accounts must be retained |
| | securely for a minimum statutory period of **five (5) years** |
+-------------------+-------------------------------------------------------------------------------+
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP)
The SEBI PFUTP Regulations protect the integrity of the Social Stock Exchange against manipulative and deceptive devices:
+---------------------------------------------------------------------------------------------------+
| PFUTP PROHIBITIONS IN SOCIAL MARKETS |
+-----------------------------------+---------------------------------------------------------------+
| Social Washing / Impact Fraud | Falsifying or deliberately exaggerating social outcome data |
| | (e.g., claiming 10,000 children were vaccinated when only |
| | 2,000 received doses) to deceive donors and outcome funders |
+-----------------------------------+---------------------------------------------------------------+
| Circular Fund Round-Tripping | Donating funds through ZCZP bonds with covert side-agreements |
| | to siphon cash back to promoter-affiliated vendors |
+-----------------------------------+---------------------------------------------------------------+
| Bribery of Social Auditors | Offering financial inducements to Social Impact Assessors to |
| | secure clean or unqualified assurance reports |
+-----------------------------------+---------------------------------------------------------------+
Violations of PFUTP in the Social Stock Exchange trigger immediate criminal investigation, attachment of bank accounts, cancellation of SSE registration, and statutory penalties of up to ₹25 Crore under Section 15HA of the SEBI Act.