Listing gains for NGOs

Social stock exchange will increase transparency and strengthen the overall development of the sector

Non-governmental organisations (NGOs) play an important role in a country like India with limited state capacity. Given India’s low rankings in human development indicators and vulnerability to environmental degradation, a number of NGOs are working in related areas to improve outcomes. While some are engaged in delivering social services to the vulnerable sections of the population, others provide research inputs to nudge the state to act in a certain way. NGOs and voluntary organisations also played a vital role in extending relief during the Covid-19 pandemic. Though the government recognises the role being played by such organisations, it has tightened funding and other requirements in recent years to contain misuse of benefits granted to such entities. In this context, the detailed framework on the social stock exchange (SSE), issued by the Securities and Exchange Board of India (Sebi), enabling the listing of not-for-profit organisations (NPOs), will help a great deal.

The idea of an SSE was first announced by Union Finance Minister Nirmala Sitharaman in the 2019-20 Budget. Registration of NGOs or NPOs on the SSE will aid the sector in a variety of ways. Fulfilling the requirements laid down by the regulator will increase transparency in the sector. This will help large donors to evaluate NPOs based on their performance. It would also become easier for individuals to support organisations engaged in social causes. Since registration on the exchange will make it comparatively easy for NPOs to raise funds, it would encourage entities in the sector to improve disclosures to be able to get registered on the exchange. Improvement in disclosures, competition for funding, and more efficient allocation by donors will help better outcomes at the aggregate level.

In terms of requirements for registration at the SSE, the entity should be registered as NPO with a valid certificate for 12 months. It should be registered as a trust under relevant laws or as a company formed under Section 8 of the Companies Act. It would have to disclose its ownership — whether controlled by the government or private individuals — and must have annual spending worth Rs 50 lakh in the previous financial year. Sebi has also given disclosure requirements for raising funds through the issuance of zero-coupon zero-principal instruments. The entity, for instance, will have to disclose its activities and how it intends to attain its objectives. It will also have to furnish financial statements for the previous three years in accordance with the guidelines of the Institute of Chartered Accountants of India. Besides, NPOs registered on the SSE will have to make a host of operational and governance-related annual disclosures, including the list of the top five donors and details of the top five programmes during the period. Entities will also have to disclose related-party transactions and remuneration policy, along with financial statements and the auditor’s report.

The reporting requirements are fairly comprehensive and will make it easier for donors to track NPOs. Hopefully, the information will be easily available and would be evaluated by analysts. According to a new report, Indian households donated Rs 23,700 crore between October 2020 and September 2021 and most of it went to religious organisations. It is reasonable to assume that households would be encouraged to give to transparently managed NPOs that are making a difference on the ground. Improved fund mobilisation and transparent management of NPOs will strengthen the overall development process.