Big relief to Corporate India! Companies can soon trade their surplus CSR spends

In a big move, companies which are spending heavily under Corporate Social Responsibility (CSR) will soon be able to trade their excess component. This has been recommended by market watchdog SEBI's high powered committee on Social Stock Exchange (SSE). Under this dispensation, companies that are spending more than the limit under the CSR rules can sell this surplus to those firms which have failed to meet their annual quota. 

Currently, the excess CSR spend can’t be carried forward. SEBI has sought stakeholders views by June 30 after which the final guidelines will be put in place. 

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List Certificates

As per the suggestions, companies with surplus CSR spends would be able to list their certificates on the exchange platform for trading. The idea is somewhat similar to Reserve Bank of India’s priority sector lending certificate trading platform. 

Under SSE, the actual fund will be transferred from one company to the other against the CSR certificate. As per Companies Act 2013, eligible companies will have to spend 2% of their net profit of three preceding years on CSR. 

The committee has suggested that CSR certificates can remain valid for 3-5 years and can’t be traded more than once. Social Stock Exchanges will be allowed to charge a small flat fee for facilitation of trading. 

“Many-a-times companies' CSR funds remain unutilised so a third party platform can connect the eligible entities with excess and deficit spends,” the  recommendations stated. 

“This is much more beyond the regulations prevailing in Canada, UK, Singapore and USA which merely allow exchange of information and interaction between investors and the social enterprises says Nitin Potdar M&A Partner J. Sagar Associates who leads education practice. He further observed that ‘India is the only country which mandates corporate social responsibility (CSR) and there was certainly a need to allow them to inter se facilitate / coordinate their CSR on public good.”

There is also a view that an electronic fund raising platform that would allow investors including global investors to invest in social enterprises given the current global pandemic situation in India.

SSE Origins

The concept of SSE was first mooted in the Union Budget of 2019. The markets regulator was assigned to suggest a road map after which a high powered committee was formed under Ishaat Hussain comprising social entrepreneurs, voluntary organisations,  SEBI officials from Corporate Finance Department and Investment Management Department, and representative from the Finance Ministry. 
Role of SSE

As per the recommendation of the committee The SSE will have two primary roles, to effectively deploy the fundraising instruments and structures available under the regulatory guidelines towards social enterprises and to foster overall sector development by creating a capacity building unit.

For fund raising, the structures suggested are: 

For-Profit Entities: Equity and Social Venture Funds,  

For Non Profit Organisations : Zero coupon zero principal bonds, Mutual Funds (MFs)

For Section 8 Companies:  ( Charitable Trusts etc),  Equity and Debt. 

The committee has suggested encouraging the setting up of  Self-Regulatory Organization (SRO) that will bring together existing Information Repositories (IRs) for extending requisite support to SSE.

Roopa Kudva, Member of SEBIs High Powered Committee and MD at Omidyar Network India says , “There is special consideration for smaller NGOs - the recommended capacity building fund of Rs 100 crore will prioritise support to smaller NGOs, particularly for reporting on social impact, which is required for fundraising on the SSE."

Leveraging Existing Infrastructure

As per the recommendation of the committee, the SSE can be housed within the existing stock exchange such as the Bombay Stock Exchange and National Stock Exchange. This will help the SSE leverage the existing infrastructure and client relationships of the exchanges to connect investors, donors, and social enterprises for-profit and non-profit efforts. 

Critical Role SSE Can Play

Experts suggest that at a time when Covid 19 has wreaked havoc across the world, the Social Stock Exchange can play a crucial role in raising funds for welfare the lowest strata of the society through various social ventures. As per the SEBI high powered committee there were more than 31 lakh Non Profit Organisations (NPO) in the country, which translates to 1 NPO/400 persons and  is double the number of schools in the country and 2500 more than the number of hospitals. With this huge network of NPOs a lot more can be achieved if proper funding, social impact evaluation system is developed.

Member of the SEBI’s High Powered Committee on Social Stock Exchange and Chairman of Aavishkaar Group Vineet Rai says “My personal belief is that the world post covid would look at Resilience with Return rather than Return at all cost and Impactful and social investments would thus have significant allocation;  if we are able to establish the Social Stock Exchange and demonstrate transparency of intent and accountability of the claim of impact we would be attracting  global capital to India like never before for impactful businesses.”

Tax Benefits Made Available

Besides structure and ecosystem for Social Stock Exchanges, SEBI committee has also proposed tax benefits, like-retaining section 80G, Allowing all investments in securities/ instruments of NPOs listed on SSE to be tax deductible, Allowing corporates to deduct CSR expenditure from their taxable income, also removing the 10% cap on income eligible for deduction under 80G(for donations to all NPOs that benefit from the SSE, Increasing the limits under the IT Act on charitable institutions raising funds from commercial or semi-commercial activities to 50% from the current 20% etc. 

For CSR related changes Ministry of Corporate Affairs and for amendment related to taxation Department of Revenue are expected to take a call.