A Sebi panel on social stock exchanges (SSE), headed by former Tata Sons director Ishaat Hussain, said the government should give tax incentives to investors, including exemption from securities transaction tax (STT) and long-term capital gains (LTCG) tax, to help build traction for the new platform. “A tax on transactions could reduce traded volume and liquidity on the exchange. There is some evidence of this happening in India post the imposition of the tax (STT) in 2004,” said the report, which was submitted to Sebi on Monday.
It further said exemption from capital gains tax would incentivise investors to stay invested for longer time horizons and thus provide much needed long-term capital for social enterprises. The regulator had formed the 15-member panel last September following a budget proposal. It has also proposed allowing philanthropic donors to claim 100% tax exemption for their donations to all NPOs (non-profit organisations) that benefit from the SSE, in line with international practices.
At present, by law NPOs face restrictions on their ability to issue debt, equity and units. As Trusts and societies are not corporations under the Companies Act, bonds issued by them cannot qualify as securities under the Securities Contracts (Regulation) Act. “It is noted that, since most NPOs are not revenue-generating, it is not clear how they would issue conventional debt securities or units. It is easier to imagine that they will use funding structures that produce debt securities or units, as exist already in practice, but these structures are typically intermediated,” the report said. The panel said despite this shortcoming, NPOs can unlock funds from donors in the form of zero coupon zero principal bonds.
These bonds would be listed on SSE and would carry a tenure equal to the duration of the project that is being funded, and at tenure, they would be written off the investee’s books. “The zero coupon zero principal bond is particularly well suited to investors who are looking to create social impact but do not wish to have their funds returned to them,” the panel said. The committee has also proposed tweaks in several regulations of Sebi related to corporate social responsibility and alternative investment fund and Securities Contract Regulation Act. It has suggested that funding to NPOs on SSE should count toward CSR commitments of companies.