[Anenya and Yash Sharan are students of Hidayatullah National Law University, Raipur]
On 19 March 2025, the Securities and Exchange Board of India (“SEBI”) issued a circular (“the Circular”) proffering a framework on a social stock exchange (“SSE”). This regulatory development allows social enterprises to obtain funding through an exchange system that receives regulatory recognition. Through the SSE, not-for-profit organisations (“NPOs”) and for-profit social enterprises (“FSEs”) can receive financial capital while maintaining clear reporting and demonstrating social impact transparency requirements. Despite its progressive nature, the SSE framework faces multiple regulatory and operational challenges along with conceptual concerns. Since the Circular introduces profound implications on the Indian securities landscape, it becomes imperative to analyse it and underscore SEBI’s framework that seeks to bridge the chasm between social impact and capital markets.
This post delves into the intricacies of the Circular in three parts. Firstly, it discusses the major terms and tenets of the Circular and the changes it aims to bring about. Secondly, it underscores the shortcomings and hurdles of the Circular. Further, it also puts forth authors’ suggestions to resolve these roadblocks. Lastly, the post concludes with a summary and a way forward for moving ahead on the matter.
Stock Market Meets Social Mission: Analysing SEBI’s Provisions for Impact Investing
SEBI has introduced a comprehensive regulatory framework by exercising its statutory powers under section 11 of the SEBI Act, 1992. The Circular provides regulatory guidelines for social enterprises to obtain funding through equity, debt instruments, and zero coupon zero principal (“ZCZP”) instruments. This framework requires a detailed appraisal of investors and reported outcomes, as well as motivating factors for investors to promote both transparency and accountability. Some of the major provisions of the Circular are as follows.
Firstly, social enterprises can access capital markets through a detailed SSE regulatory framework as established by SEBI while retaining full transparency for investors under a system ensuring trust. The SSE eligibility criteria function to exclude profit-focused entities so that only genuine social impact organizations can participate in the SSE.
NPOs can obtain funding through ZCZP instruments, which serve as a new financial instrument to attract funds without requiring financial returns from investors. The financial arrangement follows the regulatory standards for charitable funding because donations function as donor-based contributions instead of investor-driven returns. NPOs can use donations alongside mutual fund-based social impact investment schemes while following section 135 of the Companies Act, 2013, which requires specific companies to expend funds on corporate social responsibility (“CSR”). Through this provision, corporates can meet their CSR requirements by investing funds into SSE-listed NPOs while uniting regulatory compliance with socially driven financial instruments.
The FSEs obtain funding by issuing equity shares along with debt instruments as well as other financial tools approved by SEBI. The securities regulator requires FSEs seeking approval to demonstrate social intent through their operations when revenue and spending or beneficiary allocation reaches a minimum 67% threshold for social causes, which include poverty reduction and education and health programs, and gender equity and environmental protection goals. The 67% threshold exists to verify that FSEs maintain a social mission above profit generation goals.
The strict eligibility requirements of FSEs in India follow principles established through Sahara India Real Estate Corp. Ltd v. SEBI. In this case, the Supreme Court confirmed that businesses must follow strict disclosure guidelines to protect investors from fraudulent fundraising practices while stopping financial mismanagement. SEBI’s full disclosure method matches these legal guidelines because it requires businesses to show detailed information together with periodic social impact analysis, which supports openness and responsibility standards. The case of PACL Ltd. v. SEBIraised multiple concerns about the financial situation of these entities. SEBI implements regulatory safeguards for SSE-listed entities to protect social financing from misuse following the misrepresentation issues that arose in the afore-mentioned case.
Secondly, the concerned framework requires all listed entities to fulfil mandatory rules of transparency and accountability through their disclosure and reporting obligations. Audited financial statements and yearly Social Impact Scorecards together with impact reports form the mandatory reporting requirements of NPOs and FSEs under the circular. Such standards allow investors to trust the outcomes and minimize false communication while providing a common approach to assess social impact.
Judicial authorities have repeatedly emphasised that strong disclosure procedures ought to exist based on their multiple rulings. In Serious Fraud Investigation Office v. Nitin Johari, the Supreme Court affirmed that organisations must disclose financial data transparently to avoid corporate fraud and misadministration. Similarly, Naresh Shridhar Mirajkar v. The State of Maharashtra established that the public needs full financial disclosure to maintain transparency because accountability matters in financial operations.
Companies must provide truthful financial statement disclosures in terms of section 129 of the Companies Act, 2013, failing which they face major penalties under section 447 for committing financial fraud. Under regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed entities must file quarterly reports and year-end statements, and SSE-listed enterprises now follow this requirement to maintain financial discipline.
The implementation of impact-driven disclosures and independent audits along with standardised reporting frameworks according to SEBI’s SSE framework reduces financial risks and builds trust in social enterprises. Through the combination of laws, legal framework, and financial tools, SEBI seeks to create equilibrium between charitable endeavours and business-oriented social spending. The success rate of this social enterprise model depends heavily on the implementation tools, which protect authentic social businesses from exploitation through financial schemes presented as social impact investments.
Impact Investing or Impact Illusion? Unpacking and Addressing the Legal Gaps in SEBI’s Circular
While the Circular is a watershed reform and has profound implications on the Indian securities landscape, concerns persist over potential risks that could challenge its effectiveness. While enhancing transparency, the Circular poses risks which this section elucidates.
Firstly, ZCZP market instruments introduced by SEBI under SSE regulations have established important developments in impact finance strategies. The lack of financial returns, such as interest or dividends, or capital appreciation, becomes a substantial obstacle for institutional and retail investors to participate. ZCZP instruments lack traditional security features because they depend solely on goodwill donations combined with charitable contributions; therefore, they face restricted market utilisation and limited transaction speed.
The financial approach used internationally meets obstacles in its implementation. The implementation of social impact bonds (“SIBs”) in both the United Kingdom (“UK”) and the United States (“US”) faces difficulties in growth because public investors show limited trust, while return payments are delayed. The Peterborough Social Impact Bond in the UK received limited success from private investors who received only 40% of their expected social return because of performance measurement uncertainties. Impact investment instruments show poor performance in Canadian secondary markets, which discourages major financial institutions from participating.
The ZCZP instruments face legal repercussions because the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 establish investor protection standards and market liquidity requirements that these instruments do not meet. Section 2(h) of the Securities Contracts (Regulation) Act, 1956 sets a requirement for marketable interest in securities, and ZCZP instruments might not satisfy this condition, which reduces their trading potential.
To resolve this, SEBI should explore three options, such as government-backed guarantees together with blended finance mechanisms and tax incentives, which work similarly to Singapore’s Social Enterprise Development Programto boost investor trust in India’s social capital markets.
SEBI should establish a requirement for impact report audits performed by independent third parties to prevent social-washing and greenwashing in SSE disclosures. Companies should face penalties for inaccurate social performance reporting because such measures need to stop deceptive corporate practices. NFRA, as a body mandated by section 132 of the Companies Act 2013, should supervise SSE-listed entities regarding their impact and financial reports to verify both auditing standards and corporate accountability requirements.
ESG verification through the EU Sustainable Finance Disclosure Regulation (“SFDR”) requires strict compliance checks with additional investigation of misleading sustainability disclosures by the U.S. SEC’s ESG Task Force. India needs to implement an identical enforcement system that uses the same graded penalty framework found in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The combination of required audits alongside oversight by the National Financial Reporting Authority (“NFRA”) and well-structured fine systems enables SEBI to build greater investor trust and market integrity, and lasting SSE credibility.
Secondly, social-washing and greenwashing appear as major problems within SEBI’s SSE framework because FSEs mislead stakeholders about their impact for funding and tax advantages. Corporate use of SSE listings without proper verification allows them to evade CSR requirements and interest investors through false impact claims so they receive tax benefits despite delivering no real social benefits, which thus damages both trust in investors and SSE objectives.
The 2015 Volkswagen emissions scandal proved that businesses may manipulate regulatory requirements to generate greater profits. SSE-listed entities might create misleading impact disclosures when seeking CSR funds, but they provide misinformation to their investors. Research indicates that over half of European ESG funds violate EU SFDR and U.S. SEC ESG Task Force disclosure rules regarding ESG performance reporting. A strong protective system is required to enhance the framework of India’s SSE.
There are no explicit regulations in India to authenticate reports about social impact outcomes. Social misrepresentation remains unpenalized under section 447 of the Companies Act 2013 despite its fraud provisions. SEBI needs to implement independent third-party social audits that combine blockchain impact monitoring to boost transparency along with accountability measures.
The implementation of penalties serves as an important deterrent against misrepresented information, according to SEBI’s regulations pertaining to listing obligations and disclosure requirements. The NFRA must oversee SSE-listed entities for compliance with auditing and corporate accountability standards described in section 132 of the Companies Act, 2013. SEBI can maintain SSE’s trustworthiness along with ensuring that impact-driven businesses receive financial assistance through its implementation of rigorous auditing procedures combined with financial penalties and monitoring systems.
Additionally, as per SEBI’s definition of social intent, businesses must dedicate at least 67% of their financial resources or operational expenses or beneficiary outreach to social purposes. The quantitative threshold of 67% fails to account for sustainability and continuous impact together with hybrid enterprises between commercial and social objectives, such as ed-tech and health-tech startups.
The Social Enterprise Mark, operating from the UK together with the EU Social Economy Action Plan, conducts extensive assessments which blend organisational intent alongside governance protocols and measurable impact metrics without limiting themselves to financial tests. The framework developed by SEBI fails to adjust, and this may result in the exclusion of new social enterprises that produce substantial impact.
SEBI should create a complex classification system that unites quantitative and qualitative impact evaluations so it welcomes all entities without undermining its regulatory standards. The establishment of an Impact Evaluation Committee by SEBI becomes necessary to conduct model assessments according to EU and US ESG disclosure standards. The SSE framework should adopt dynamic impact assessment measures to ensure social inclusivity and effective oversight of genuine social impact according to section 135 of the Companies Act, 2013, which allows flexible CSR spending.
Conclusion and Way Forward
An inclusive approach to SSE framework development is essential for SEBI to refine its capitalist structures to foster impact investing throughout markets effectively and build trust among investors. Even though the framework ameliorates transparency, it faces hurdles in its implementation, especially because of social-washing along with regulatory gaps and strict eligibility barriers. The ZCZP model experiences insufficient cash flow, while the 67% limitation for FSEs bars many hybrid social-impact businesses from SSE participation.
SEBI should require independent audits and create defined penalties against misreporting activities while developing a multi-level classification system to provide comprehensive social enterprise assessment. SEBI should create an Impact Evaluation Committee, which will assess enterprises using both qualitative and quantitative social impact indicators based on the EU SFDR’s ESG verification and UK Social Enterprise Mark and Singapore’s blended finance models. A flexible regulatory system, along with strong enforcement, will make India’s SSE position the global example for ethical, sustainable impact investment.
– Anenya & Yash Sharan
