Social Impact Assessors Certification Examination Workbook - e (1).pdf

This workbook has been developed to assist candidates in preparing for the National Institute of Securities Markets (NISM) Series XXIII: Social Impact Assessors Certification Examination. Workbook Version: February 2024 Published by: National Institute of Securities Markets © National Institute of Securities Markets (NISM), 5th Floor, NCL Co-operative Society, Plot No. C – 6, E Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400051 National Institute of Securities Markets, Plot 82, Sector 17, Vashi Navi Mumbai – 400 703, India National Institute of Securities Markets Patalganga Campus, Plot IS-1 & IS-2, Patalganga Industrial Area Village Mohopada (Wasambe) Taluka-Khalapur District Raigad-410222 Website: www.nism.ac.in All rights reserved. Reproduction of this publication in any form without prior permission of the publishers is strictly prohibited. Foreword NISM is a leading provider of high-end professional education, certifications, training and research in financial markets. NISM engages in capacity building among stakeholders in the securities markets through professional education, financial literacy, enhancing governance standards and fostering policy research. NISM works closely with all financial sector regulators in the area of financial education. NISM Certification programs aim to enhance the quality and standards of professionals employed in various segments of the financial services sector. NISM’s School for Certification of Intermediaries (SCI) develops and conducts certification examinations and Continuing Professional Education (CPE) programs that aim to ensure that professionals meet the defined minimum common knowledge benchmark for various critical market functions. NISM certification examinations and educational programs cater to different segments of intermediaries focusing on varied product lines and functional areas. NISM Certifications have established knowledge benchmarks for various market products and functions such as Equities, Mutual Funds, Derivatives, Compliance, Operations, Advisory and Research. NISM certification examinations and training programs provide a structured learning plan and career path to students and job aspirants who wish to make a professional career in the Securities markets. Till March 2023, NISM has issued more than 17 lakh certificates through its Certification Examinations and CPE Programs. NISM supports candidates by providing lucid and focused workbooks that assist them in understanding the subject and preparing for NISM Examinations. The book covers important topics to aware candidates about myriad aspects of Social Stock Exchange and Social Impact Assessment. It covers wide range of topics related to social sector organisations, enterprises and interventions, social impact assessment social impact assessment techniques, social impact assessment standards, social impact assessment reporting, etc. It will be immensely useful to all those who want to have a better understanding of Social Impact Assessment. Director Disclaimer The contents of this publication do not necessarily constitute or imply its endorsement, recommendation, or favoring by the National Institute of Securities Markets (NISM) or the Securities and Exchange Board of India (SEBI). This publication is meant for general reading and educational purpose only. The statements/explanations/concepts are of general nature and may not have taken into account a particular objective/ move/ aim/ need/ circumstances of individual user/ reader/ organization/ institute. 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Since the work and research is still going on in all these knowledge streams, NISM and SEBI do not warrant the totality and absolute accuracy, adequacy or completeness of this information and material and expressly disclaim any liability for errors or omissions in this information and material herein. NISM and SEBI do not accept any legal liability whatsoever based on any information contained herein. While the NISM certification examination will be largely based on material in this workbook, NISM does not guarantee that all questions in the examination will be from material covered herein. 3 Acknowledgement This workbook has been developed jointly by the Certification Team of NISM, Empanelled Resource Persons with NISM viz., Ms. Ananya Prabhavalkar, Ms. Bina Joshi and Institute of Chartered Accountants of India (ICAI), NISM’s knowledge partner for the Social Impact Assessor Certification Examination. The workbook is reviewed by Ms. Latha Suresh. NISM gratefully acknowledges the contribution of the Examination Committee for NISM-Series- XXIII: Social Impact Assessors Certification Examination consisting of industry experts. About NISM Certifications The School for Certification of Intermediaries (SCI) at NISM is engaged in developing and administering Certification Examinations and CPE Programs for professionals employed in various segments of the Indian securities markets. These Certifications and CPE Programs are being developed and administered by NISM as mandated under Securities and Exchange Board of India (Certification of Associated Persons in the Securities Markets) Regulations, 2007. The skills, expertise and ethics of professionals in the securities markets are crucial in providing effective intermediation to investors and in increasing the investor confidence in market systems and processes. The School for Certification of Intermediaries (SCI) seeks to ensure that market intermediaries meet defined minimum common benchmark of required functional knowledge through Certification Examinations and Continuing Professional Education Programmes on Mutual Funds, Equities, Derivatives Securities Operations, Compliance, Research Analysis, Investment Advice and many more. Certification creates quality market professionals and catalyzes greater investor participation in the markets. Certification also provides structured career paths to students and job aspirants in the securities markets. About the NISM-Series-XXIII: Social Impact Assessors Certification Examination (SACE) In order to create a common minimum knowledge benchmark for the persons to become Social Impact Assessors erstwhile known as Social Auditors, the examination aims to create a pool of Social Impact Assessors who would assess the impact of social interventions of various social enterprises who raise funds through the Social Stock Exchange platform. Examination Objectives On successful completion of the examination the candidate should: Know the basics of Social Impact Assessment, Code of conduct of Social Impact Assessors. Understand the general concepts related to social stock exchange, Social Impact Assessment (social audit). Know the Social Impact Reporting disclosures and regulations. 4 Assessment Structure The examination consists of 85 multiple choice questions and 3 case-based questions (each case having 5 sub-questions) adding up to 100 marks. The assessment structure is as follows: Multiple Choice Questions 85*1 = 85 [85 questions of 1 mark each] Case-based Questions 3*5*1 = 15 [3 cases (each case with 5 questions of 1 mark each)] How to register and take the examination To find out more and register for the examination please visit www.nism.ac.in Important Please note that the Test Centre workstations are equipped with either Microsoft Excel or OpenOffice Calc. Therefore, candidates are advised to be well versed with both of these softwares for computation of numericals. The sample caselets and multiple-choice questions illustrated in the book are for reference purposes only. The level of difficulty may vary in the actual examination. 5 Contents CHAPTER 1: INTRODUCTION TO SOCIAL SECTOR AND INDIAN FINANCIAL MARKETS……………….10 Section – I Social Sector in India………………………………………………………………………………………………10 1.1 Overview of Social Sector in India............................................................................................. 10 1.2 Sustainable Development Goals (SDGs).................................................................................... 12 1.3 Concept of Social Enterprises (SE)............................................................................................. 12 1.4 Taxonomy related to Social Enterprises.................................................................................... 17 1.5 Social Intervention..................................................................................................................... 18 1.6 International standards applicable for social development...................................................... 22 1.7 Challenges of comparability faced by social sector organisations............................................ 23 1.8 Social Sector Landscape in India................................................................................................ 23 1.9 Social Sector Inequities.............................................................................................................. 27 Section – II Indian Financial Markets……………………………………………………………………………………….30 1.1 Indian Financial Markets............................................................................................................ 30 1.2 Type of Securities....................................................................................................................... 35 Annexure 1 : List of areas and sub-areas for taxonomic classification of social objectives…………..37 Annexure 2: Developmental Initiatives………………………………………………………………………………………..45 CHAPTER 2: INTRODUCTION TO TRADING, CLEARING, SETTLEMENT AND RISK MANAGEMENT ON STOCK EXCHANGES……………………………………………………………………………………………………………… 48 2.1 Trading Mechanism................................................................................................................... 48 2.2 Clearing, Settlement and Risk management............................................................................. 52 CHAPTER 3: SOCIAL STOCK EXCHANGE: INTRODUCTION, FUNDING STRUCTURES AND INSTRUMENTS………………………………………………………………………………………………………………………..56 3.1 Concept of Social Stock Exchange.............................................................................................. 56 3.2 Stakeholders of Social Stock Exchange...................................................................................... 58 3.3 Funding Structures..................................................................................................................... 64 CHAPTER 4: REGISTRATION AND LISTING ON SOCIAL STOCK EXCHANGES………………………………..78 4.1 Registration process on Social Stock Exchanges........................................................................ 78 4.2 Rights, Obligations and Disclosures Document......................................................................... 81 4.3 Key Listing Guidelines................................................................................................................ 82 Annexure 3: Application form for registration of Social Enterprises on National Stock Exchange of India Limited……………………………………………………………………………………………………………………………….85 Annexure 4 Undertaking from the NPO……………………………………………………………………………………….86 6 Annexure 5 Undertaking from the Third Party for NPO registration on NSE SSE............................87 Annexure 6 Outline for the Offer document requirements for Zero Coupon Zero Principal Instruments………………………………………………………………………………………………………………………………..88 CHAPTER 5: SOCIAL IMPACT ASSESSMENT AND SOCIAL IMPACT ASSESSORS…………………………..91 5.1 Evolution of Social Impact Assessment..................................................................................... 91 5.2 Principles of Impact Assessment............................................................................................... 95 5.3 Social Impact Assessors............................................................................................................. 97 5.4 Social Impact Assessment (Audit) Standards........................................................................... 104 5.5 List of Social Impact Assessment (Audit) Standards (SAS)....................................................... 104 5.6 Social Impact Assessment Standard (SAS) Framework............................................................ 105 5.7 Social Impact Assessment Process........................................................................................... 106 5.8 Impact Assessment Evidence................................................................................................... 110 5.9 Social Impact Assessment Engagement................................................................................... 112 5.10 Social Impact Assessment Quality Control for Social Impact Assessor/ Audit firm............... 116 5.11 Field level research agency and/or subject matter experts.................................................. 116 5.12 Challenges related to Social impact assessment................................................................... 121 5.13 Use of Technology in Social Impact Assessment................................................................... 122 5.14 Social Impact Assessment Report.......................................................................................... 122 5.15 Impact Assessment Conclusions............................................................................................ 125 CHAPTER 6: SOCIAL IMPACT ASSESSMENT FRAMEWORKS, TECHNIQUES AND STANDARDS….127 6.1 Introduction to Social Impact Assessment Frameworks......................................................... 127 6.2 The flow of Project/ Program design under Logic Model........................................................ 130 6.3 Other Guidelines and Tools for Impact Assessment................................................................ 134 CHAPTER 7: SOCIAL IMPACT ASSESSMENT…………………………………………………………………………….141 7.1 Social Impact Assessment........................................................................................................ 141 7.2 Different organisational models for structuring evaluation.................................................... 144 7.3 Impact Reporting..................................................................................................................... 147 7.4 Issues or Challenges in conducting SIA.................................................................................... 152 CHAPTER 8: SOCIAL IMPACT ASSESSMENT (CASE STUDIES).....................................................155 8.1 Case Study on Draft Social impact assessment Standard (SAS) 500: Ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation.................................................................................................................................. 155 8.2 Case Study on Draft Social impact assessment Standard (SAS) 200: Promoting health care including mental healthcare, sanitation and making available safe drinking water..................... 160 7 8.3 Case Study on Draft Social impact assessment Standard (SAS) 400: Promoting gender equality, empowerment of women and LGBTQIA+ communities................................................................ 164 8.4 Case Study on Draft Social Impact Assessment Standard (SAS) 1300: Promotion of Financial Inclusion……………………………………………………………………………………………………………………………………169 8.5 Case study on Affordable Housing on Draft Social Impact Assessment Standard (SAS) 1100: Slum area development, affordable housing and other interventions to build sustainable and resilient cities...............................................................................................................................................175 Social Impact Assessment Report.................................................................................................. 180 CHAPTER 9: DISCLOSURE NORMS, REPORTING REQUIREMENTS BY SOCIAL IMPACT ASSESSOR AND PENALTIES…………………………………………………………………………………………………………………….194 9.1 Disclosures as per SEBI ICDR Regulations................................................................................ 194 9.2 Disclosures norms under SEBI LODR Regulations.................................................................... 196 9.3 Penalties as per the SEBI Act, 1992......................................................................................... 200 9.4 Different books to be maintained as per SC(R)R, 1957........................................................... 201 Annexure 7: Guidance notes for listed/registered NPOs on disclosures of general, governance financial aspects:...........................................................................................................................202 Annexure 8: Guidance notes for all Social Enterprises (SEs) on AIR…………………………………………. 206 CHAPTER 10: TAXATION………………………………………………………………………………………………………. 211 10.1 Introduction........................................................................................................................... 211 10.2 Securities Transaction Tax..................................................................................................... 211 10.3 Deduction under section 80G of Income Tax Act.................................................................. 212 10.4 Exemptions for Social Enterprises......................................................................................... 213 CHAPTER 11: KEY REGULATIONS.............................................................................................216 11.1 Securities Contracts Regulation Act (SCRA 1956).................................................................. 216 11.2 SEBI Act 1992......................................................................................................................... 216 11.3 Depositories Act, 1996........................................................................................................... 217 11.4 SEBI (Stock Broker) Regulation, 1992.................................................................................... 218 11.5 SEBI (Prohibition of Insider Trading) Regulations, 2015........................................................ 218 11.6 Prevention of Money-Laundering Act, 2002.......................................................................... 219 11.7 SEBI Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003…………………….219 8 Syllabus Outline and Weightages Chapter Chapter Name Weightages No. 1 Introduction to Social Sector and Indian Financial Markets 10 (8+2) Introduction to Trading, Clearing Settlement and Risk 4 2 Management Social Stock Exchange: Introduction, Funding Structures and 10 3 Instruments 4 Registration and Listing on Social Stock Exchanges 5 5 Social Impact Assessment and Social Impact Assessors 10 Social Impact Assessment Frameworks, Techniques and 15 6 Standards 7 Social Impact Assessment 15 8 Social Impact Assessment- Case Studies 15 Disclosure Norms, Reporting Requirements by Social Impact 10 9 Assessors and Penalties 10 Taxation 4 11 Key Regulations 2 9 CHAPTER 1: INTRODUCTION TO SOCIAL SECTOR AND INDIAN FINANCIAL MARKETS Learning Objectives After studying the chapter, you should know about: Various aspects and taxonomies of social sector in India Various segments of financial markets in India Section – I Social Sector in India 1.1 Overview of Social Sector in India India has a rich tradition of voluntary work, known as "shramdaan," which has played a vital role in shaping the country's civil society ethos since Independence. The culture of voluntary action emerged during the pre-Independence era with social reformers campaigning for an equitable social order.1 The decades of 1970 and 1980 witnessed a surge in professional Non-Governmental Organisations (NGOs) or Non-Profit Organisations (NPOs), supported by government agencies and international donors. With the liberalization in the 1990s, NGOs became crucial advocates for vulnerable populations. Government funding, both central and state, played a pivotal role in supporting voluntary efforts. Additionally, the Companies Act of 2013 mandated Corporate Social Responsibility (CSR) contributions, further boosting the non-profit sector. The Non-Profit Sector in India has undergone significant transformations to address the changing needs of society. Established through early legislations like the Societies Registration Act (1860) and the Trusts Act (1882), the sector has persisted, with additional regulations such as the Bombay Public Trusts Act (1950) and the Income Tax Act (1976). The NGO’s/Non-profit sector operates in diverse fields, including remote areas, policy advocacy, juvenile justice, right to information, and cultural preservation, contributing significantly to social welfare in India. The non-profit sector's contributions are evident in achievements such as polio eradication, disaster relief, and policy reforms like the Right to Information and Right to Education. NGOs have become instrumental in shaping democratic processes, attracting young talent, and fostering tech-enabled activities for the larger public interest. The Non-profit sector is also called the social sector or the third sector comprising myriad development organizations, voluntary organizations, NGOs, non-state, non-market organizations working on issues of development, Section 8 Companies, social enterprises and entrepreneurs, individuals working on fellowships, collaborative and collectives. The term 'social sector' refers to all those sets of activities which contribute to human capital formation 1 Excerpted from India’s Million Mission Report 10 and human development such as education, health, medical care, water supply, sanitation, and housing etc.2 The approaches of social sector aim at; addressing the gap in sectors like education, health, sanitation, housing, energy, environment and so on, focusing on the disadvantaged and vulnerable sections of the population. conducting research-based advocacy and feeding into better informed programs across the sectoral spectrum of the social sector. forming think tank organizations with a rights- based approach to address social issues. The social sector plays a crucial role in the development landscape of India and act as catalysts for positive change. By bridging the gaps in government services, reaching marginalized communities and implementing grassroots projects, this sector contributes significantly to India's social and economic progress. As India strives for inclusive growth, the collaboration between NGOs and other stakeholders remains instrumental in tackling complex development issues and fostering a more equitable and sustainable society. Box 1: Current Status of NPOs - A cross-sectional study3 A cross-sectional study by CSO Coalition@75 of non-profit organisations working in different geographies and across diverse sets of activities through a primary survey in 2023 indicate that 70% NPOs focus on social services, 59% NPOs focus on education, and 56% on employment and community development. NPOs primarily contribute to Sustainable Development Goals (SDGs) related to education, health, gender equality, and poverty reduction. The survey revealed key insights into NPOs geographical presence, activities, organizational attributes, funding sources, accountability systems, and recent trends. The study, based on 851 NPOs, indicated that Maharashtra, Tamil Nadu, Karnataka, Uttar Pradesh, and Delhi were primary regions of operation, with 50% working in Maharashtra. A significant 54% operate in aspirational districts with low Human Development Index. The survey also highlights the organizational attributes, with 87% of NPOs registered after 1990. Small organizations, constituting 62%, dominate the sector in terms of annual expenditure. The report emphasizes the role of NPOs in creating local livelihoods and developing skills, showcasing their impact on socio-economic status improvement over five years. Collaborations are common, with 75% working with government schools and 69% with Panchayats. The report also identifies recent trends, with 58% reporting increased budgets in the last five years. However, the COVID-19 pandemic affected 65% of small and midsize NPOs, leading to some losses. Despite these challenges, the study highlights the increased efficacy of NPOs over the last 15 years, suggesting positive growth in impact, collaboration, and clarity in interactions with regulators. The findings provide valuable insights for policymakers, funders, and NPOs to inform strategies, resource allocation, and capacity-building initiatives. 2Panchmukhi, 2000; https://niti.gov.in/planningcommission.gov.in/docs/reports/sereport/ser/stgpnt/stgpnt_ch1.pdf 3 https://www.guidestarindia.org.in/SiteImages/IndiasMillionMissions.pdf 11 Furthermore, the social sector has been identified as an important partner towards addressing the Sustainable Development Goals (SDGs) 2030 Agenda. 1.2 Sustainable Development Goals (SDGs) Member states of the United Nations adopted the 2030 Agenda for Sustainable Development in the year 20154. It is pegged as the blueprint for peace and prosperity for the people and the planet, now and into the future. The said Agenda has identified 17 Goals for the developed as well as developing countries. It urges all the nations to respond to this on an urgent basis and “recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.”5. The Sustainable Development Goals Report 2021 describes 17 Sustainable Development Goals as listed below.6 The List of Sustainable Development Goals: 1. No Poverty 2. Zero Hunger 3. Good Health and well being 4. Quality Education 5. Gender Equality 6. Clean Water and sanitation 7. Affordable and Clean Energy 8. Decent work and economic growth 9. Industry Innovation and Infrastructure 10. Reduced Inequalities 11. Sustainable cities and communities 12. Responsible Consumption and Production 13. Climate Action 14. Life below water 15. Life on land 16. Peace, justice, and strong institutions 17. Partnerships for the goals 1.3 Concept of Social Enterprises (SE) Social Enterprises have gained importance in late 1990s in India, where their contribution towards social change has been recognised by different sectors. Social Enterprises have been 4Source: https://www.un.org/sustainabledevelopment/news/communications-material/ 5Sustainable Development Goals; https://sdgs.un.org/goals 6Status of the SDG goals can be read: The Sustainable Development Goals Report 2021 https://unstats.un.org/sdgs/report/2021/The-Sustainable-Development-Goals-Report-2021.pdf 12 developing innovative models to address complex social problems. This term was formally introduced in India in 1981 with the establishment of ‘Ashoka’ - the global association of world’s leading social entrepreneurs.7 Social Entrepreneurship (used as short hand for social and environmental entrepreneurship) is a field of practice that deals with application of entrepreneurial energy primarily for: (a) addressing social and environmental issues at community and/or higher levels and (b) causing social and environmental change through non-violent, non-coercive methods and generating significant impacts in the target areas and beyond. Social enterprises use entrepreneurship, innovation and market approaches to create social value and change. They can be a non-profit or a profit making organisation and usually share the following characteristics:8 1. Social Purpose – created to generate social impact and change by addressing a social issue; 2. Enterprise Approach – uses business principles, entrepreneurship, innovation, market approaches, strategic-orientation, discipline and determination of a for-profit business; 3. Social Ownership – with a focus on public good and stewardship, although not necessarily reflected in the legal structure. The core philosophy of social enterprise lies in the belief that profitability and social impact are not mutually exclusive, but rather mutually reinforcing, offering a unique and compelling way to address global challenges. The pioneering social enterprises in India include SELCO Solar, Basix, Barefoot College, Arvind Eye Hospital, Pratham, etc. Key features of a Non-Profit Social Enterprise include: Working for a social or environment cause It has a revenue generating model where profits are earned through sale of products or services. Revenue generated is invested back into the enterprise They operate like companies and have enterprise orientations. The fundamental difference between Non-Profits and Social Enterprises is the source of funding. Non-profits rely on funding through donations and grants. Social enterprises are businesses, and they generate their own profit for their financial sustainability. Though social enterprises generate revenue, all profits are ploughed back into the business. So, while they do create a profit, they operate like a non-profit by directing all funds towards the social, economic, or environmental cause. 7 https://www.ashoka.org/en-in 8www.4lenses.org 13 Social Enterprises both ‘For-Profit’ and ‘Non-Profit’ can access not just grants and donations but also have access to social venture capital funds. Funding agencies and venture capital firms started focusing on social enterprises after recognising their role in the social sector. Grass root Innovations Augmentation Network, Acumen Fund, Intellecap, Villgro and other funding organisations started their investments in social enterprises. Today, multilateral agencies like companies, impact investors, incubators and accelerators, academic institutions, research agencies are contributing to social enterprises through funding and advisory support, research studies and capacity building workshops etc. With a legal mandate on CSR spending of 2% from a company’s net profit, many nonprofit social enterprises are getting funding support. According to SEBI ICDR Regulations, a Social Enterprise means either a Not for Profit Organisation or a For Profit Social Enterprise that meets the eligibility criteria specified in the SEBI ICDR Regulations9. The Eligibility Conditions for being identified as a Social Enterprise as per SEBI ICDR Regulations: A. To be identified as a social enterprise, a Not for Profit Organisation (NPO) or a For Profit Social Enterprise (FPSE), shall establish primacy of social intent. B. In order to establish the primacy of its social intent, such Social Enterprise shall meet the following eligibility criteria10: - a. The social enterprise shall be indulged in at least one of the following activities: 1) eradicating hunger, poverty, malnutrition and inequality; 2) promoting health care including mental healthcare, sanitation and making available safe drinking water; 3) promoting education, employability and livelihoods; 4) promoting gender equality, empowerment of women and LGBTQIA+ communities; 5) ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation; 6) protection of national heritage, art and culture; 7) training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports; 8) supporting incubators of Social Enterprises; 9) supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building; 10) promoting livelihoods for rural and urban poor including enhancing income of small and marginal farmers and workers in the non-farm sector; 9 https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-issue-of-capital- and-disclosure-requirements-regulations-2018-last-amended-on-november-21-2022-_65522.html 10 The detailed criteria have been described in chapters 3 and 4. 14 11) slum area development, affordable housing and other interventions to build sustainable and resilient cities; 12) disaster management, including relief, rehabilitation and reconstruction activities; 13) promotion of financial inclusion; 14) facilitating access to land and property assets for disadvantaged communities; 15) bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection; 16) promoting welfare of migrants and displaced persons; 17) any other area as identified by the Board or Government of India from time to time b. The social enterprise shall target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state governments. 1.3.1 Legal structure of Non-Profit Social Enterprises There are different forms of social sector organizations in India like Trust, Society and Section 8 companies. There is no single regulatory body for these organisations as they are governed under different legislations as per their registration as described in Table 1.1 below. This implies that their accounting and reporting requirements also vary. Table 1.1: Difference Between Trust, Society and Section 8 Company11 Forms Trust Society Section 8 Company Particulars Meaning It is considered to be It is formed when a It is a company established the oldest form of collection of people with the purpose has in its charitable come together for a objects the promotion of organisations. It is, in common charitable commerce, art, science, essence, an purpose. It is not sports, education, arrangement between limited to charitable research, social welfare, parties whereby one purposes but may religion, charity, party holds ownership extend to multiple protection of environment over property on other fields. or any such other object behalf of another and whereby they apply person. any profits into furthering the objective. Governing A trust is established Societies Companies Act, 2013 Legislation under and governed Registration Act, by the Indian Trust 1860 or the relevant Act, 1882 for private laws of the trusts. General law is concerned state 11Source: https://cleartax.in/s/society-trust-section-8-company-comparison 15 applied for public trusts except in a few states such as Gujarat and Maharashtra, which have their own state laws. Registered NGO/NPO NGO/NPO They enjoy all the as privileges of a limited company without the need for them to add Pvt. Ltd. to the name. Document Trust Deed MOA (Memorandum MOA and AOA (Articles of of of Association) and Association) constitution rules and regulations Registration The official having Registrar or Deputy Registrar of Companies Authority jurisdiction in the Registrar of the (RoC) or Regional Director state for Trust particular state in registration. which it is to be registered. Minimum 2 trustees minimum 7 members 2 directors and 2 members minimum (5 for shareholders. It should be required Jammu and Kashmir) noted that the directors may also be the shareholders. Annual Audited financial The society must file The company must file the compliance statements required the list of names, annual returns and s to be submitted occupations and accounts with the ROC. address of the managing committee members of the society to the Registrar annually. With these legal structures, NGOs can get tax benefits as well as get access to foreign donations by registering under the Foreign Contribution (Regulation) Act. With evolution of the concept of social entrepreneurship, for profit social enterprises as well as hybrid models combining revenue generating models addressing a social cause have emerged. 1.3.2 Legal structure of For-Profit Social Enterprises (FPSE) For-profit social enterprises are organizations that sell goods or services that advance a social, economic, or environmental cause. They could manufacture products that are beneficial to society, be service providers or producer companies. They have well defined business models, 16 consumer base and revenue streams. They can be registered under the Companies Act, 2013 as a Sole Proprietorship, Limited Liability Partnership, Partnership, Private Limited or Public Limited company. 1.4 Taxonomy related to Social Enterprises 1.4.1 Primacy of Social Intent/Impact Social intent and impact are the primary goals of the SE which is demonstrated through its focus on social objectives for the underserved or less privileged populations or regions. The social objective is centered on creating products and services relevant to the target beneficiary to accelerate human welfare. The activities, interventions and programs adopted by the enterprise are in line to address the target beneficiaries in the target geography. An organisation has a social intent when it serves social good, has a social mission, creates social value through social change, building social capital and has a social bottom line. Funds are raised and plans are made to make a difference to society. Making profits and redistributing it amongst its board/ staff / other stakeholders is not the intention of such an enterprise. Additional resources if generated are re invested in the enterprise towards its stated objectives. In simplistic terms, “Social impact can be defined as the effect on people and communities that happens as a result of an action or inaction, an activity, project, programme or policy”.12 A social enterprise will have a positive change on the primary and secondary stakeholders and society at large which is called its social impact. For example, it can be seen through the delta change in education levels and rising rates of graduation in an underserved community, reduction in child malnutrition, increased biodiversity through a wasteland conservation program, etc. 1.4.2 Social Objective A Social Objective of an organization will denote that it is created / incorporated to serve a social good and has a social mission. Such an organization might be any of the legal entities viz. a society, a trust or a section 8 company. Such an organization creates social value through social change, building social capital and has a social bottom line. Thus, an enterprise having a financial bottom line as its objective (generating profits as its mandate) cannot pose a social objective. The social objective is centered around creating products and services relevant to the target beneficiary to accelerate human welfare. The target beneficiaries are those populations who are vulnerable and have special needs or problems. The social objectives will guide the formulation of activities, interventions and programs in line to address the target beneficiaries in the target geography. 12https://www.goodfinance.org.uk/ 17 Annexure 1 provides an illustrative list of areas and sub-areas for taxonomic classification of social objectives. 1.5 Social Intervention Social interventions are programs designed to deliver social benefits and develop human capital of specific target groups. Social interventions can be any of the following; social welfare, safety net, and social protection. Social interventions can cover programmes in the areas such as poverty alleviation, access to public healthcare, maternal/ neonatal child-care, access to financial services, access insurance and pension, job creation, technical and vocational skills development, refugee protection, and so on. Purpose of social interventions can be reducing symptoms, resolving problems, enhancing adaptive capabilities, and improving the overall psychosocial well-being of the beneficiaries. 1.5.1 Concepts and Terms in Social Sector Interventions i. Poverty Poverty is a multidimensional concept focusing on aspects more than lack of income. The United Nations (UN) elaborates definitions of poverty as, “Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity. It means a lack of basic capacity to participate effectively in society. It means not having enough to feed and clothe a family, not having a school or clinic to go to, not having the land on which to grow one’s food or a job to earn one’s living, not having access to credit...” According to the noted Noble Laureate and Indian Economist Amartya Sen, “Poverty is not just absence of income. Poverty is presence of Helplessness, Powerlessness and Voicelessness.” ii. Social Development Social development is a process of achieving desired social change. Some of the common social development initiatives are in the areas of housing, health and nutrition, education and training, livelihood opportunities, social security, social equality, social stability and social welfare. In the words of Amartya Sen, “Development has occurred when there has been an improvement in the basic needs, when economic progress has contributed to a greater sense of self-esteem for the country and individuals within it, and material advancement has expended people’s entitlements, capabilities and freedom.” iii. Social Capital The Organisation for Economic Co-operation and Development (OECD) defines Social Capital as “networks together with shared norms, values and understandings that facilitate cooperation within or among groups”. Complementing this definition, the World Bank has defined this concept as, “social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions.” There are numerous definitions of social capital where the common factor has been the emphasis on social relations formed for productive benefits. 18 iv. Stakeholders Stakeholders are defined as “any group or individual who can affect or is affected by the achievement of the organization's objectives.”13 The common groups which are considered as stakeholders are the direct beneficiaries of a social intervention, customers, employees, board members, local communities, government, regulatory bodies, media and so on. v. Sustainability Sustainability is a multidisciplinary concept encompassing social, environmental and economic aspects. In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Environmental Sustainability occurs when humanity’s rate of consumption does not exceed nature’s rate of replenishment and when humanity’s rate of generating Environment pollution and emitting greenhouse gases does not exceed nature’s rate of Society restoration. Social Sustainability is the ability of a society to uphold universal human rights and meet people's basic Economy needs, such as healthcare, education, and transportation. Healthy communities ensure personal, labour, and cultural rights are respected and all people are protected from discrimination. Economic Sustainability is the ability of human communities around the world to maintain their independence and have access to the resources required to meet their needs, meaning that secure sources of livelihood are available to everyone. The three dimensions of sustainability can be visualized in different ways. The nested model (right) shows how each dimension is dependent on the next. The economy is dependent on society, and both are dependent on the environment.14 vi. Inputs Inputs are the resources that go into the project or programme to carry out the activities which include human, financial and material resources such as money, raw material, training material, technology and so on. vii. Activities The initiatives that an organisation or project undertakes to achieve the desired goal; for instance, providing vocational training to women to achieve financial empowerment of women, providing financial aid to poor patients to improve their health and productivity and so on. 13 Freeman, 1984. 14 https://www.mcgill.ca/sustainability/files/sustainability/what-is-sustainability.pdf 19 viii. Output Outputs are the specific consequence of a project or intervention that can readily be measured, usually by numbers. These are often expressed quantitatively; for example, number of women who attended vocational training, number of vocational training sessions conducted, number of patients who received financial aid for critical treatment etc. ix. Outcome Outcomes are the difference that a project or intervention can make on its beneficiaries as a consequence of its activities. These short-term changes, benefits, learning or other effects are qualitative in nature and are an anticipated effect of the intervention. To take forward the previous example, an outcome of the women empowerment project could be an increase in the savings in banks of the women, or greater confidence to access credit from financial institutions. x. Impact Impact is the broader, long-term change that a project or intervention may have on individuals (beneficiaries) and on society more generally. It includes positive, negative, intended and unintended long-term effects commonly capturing changes in social behaviours, life style changes, social norms etc. For example, development of self confidence and self-esteem amongst women, improved productivity of patients after improved health conditions. 1.5.2 Methodologies for Social Interventions Social sector interventions are based on various factors such as beliefs, values and theoretical preferences of social sector organisations; transparency and trust amongst social/community workers and beneficiaries; and beliefs, culture and values of service users and so on. The five top methods used by social workers are illustrated in Figure 1.1 below: Figure 1.1: Social Intervention Methods15 15Source: Sutton, J, (2021), 13 Social Work Methods & Interventions for Helping Others 20 i. Care Management – It is linked mainly with community care or specific beneficiary community care initiatives like health care interventions, interventions for disability community. ii. Strength Based & Solution Based Approaches – This method looks at collaborative practice, understanding strengths of the beneficiaries or resources available in that region and focuses on specific social problems that need to be resolved. These interventions include projects like watershed management projects, entrepreneurship development programmes etc. iii. Narrative Social Work – This approach helps beneficiaries to discuss their problems and view it as external to themselves. It helps them to see its positive and negative effects. It can guide beneficiaries into discerning the causality of the problem and find solutions themselves. This method is used in the areas of personality development projects, mental health initiatives etc. iv. Group work – In this methodology an individual’s social development is influenced by the way of group effort. Members of the group look forward to achieving the same objective with collective endeavour. It helps individuals to enhance their social functioning. Some of the common initiatives with this methodology are formation of self-help groups, health and sanitation awareness programmes, educational programmes and so on. v. Task Centered Social Work –The task centered method emphasizes problem solving and evidence based practical approach.16 This method starts with defining the problem, establishing goals and achieving the same. It gives measurable results and effectiveness of the initiatives can be evaluated. This methodology can be used across all the areas of social development initiatives if the problem is clearly identified by the social organization. 1.5.3 Inherent risks and errors faced during social interventions a. Social systems are complex and shaped by interaction amongst diverse and continuously changing stakeholders. Society keeps changing rapidly leading to changes in human behavior, availability of resources, changes in economy, changes in government policies & interventions and so on. Social sector organisations find it difficult to keep up with the change and introduce innovative approaches. b. Social sector organisations work in a wide range of areas like environmental sustainability, education, health, poverty, equality, child development, mental health, elderly and disability care etc. These different sectors include a wide spectrum of stakeholders. Some of the risks faced by social sector organisations are: 16Edmondson (2020), 21 i. Strategic Risk – Many a times social interventions are funder driven and lack proper vision and strategies to make it long term and sustainable. ii. Financial Risk – If social intervention is funder driven, organisations cannot continue with the intervention in the absence of funding. Many times, small scale social organizations do not have expertise and resources for proper budgeting and financial management which affects the funding of the organisation. iii. Operational Risk – Social organisations with limited resources and their remuneration offered cannot employ highly qualified staff which can result in inefficient management of the operations. At times organisations face issues like changes in policies, disasters, lack of acceptance by beneficiaries which hinders in the operations of the organisation. iv. Technology Related Risk – With increasing use of digital tools, it is crucial for even social organisation to adapt to digital practices. Social organisations with limited financial resources find it difficult to invest in digital tools. In many organisations staff is not trained to use these digital tools and do not upgrade them with changing scenarios. Organizations working in remote areas, do not have infrastructure facilities like continuous electricity supply, internet and mobile networks cannot adopt digital practices. v. Regulatory Risk – Changes in CSR policy, provisions of schedule VII of Companies Act, FCRA regulations may affect the existing funding, interventions of social enterprises. vi. Environmental Risk – Lot of environmental interventions like solar projects, watershed management projects, activities to enhance agriculture productivity and so on depend on environmental and climatic conditions. Issues like climate change and global warming are affecting the outcomes and impact of these projects. 1.6 International standards applicable for social development In recent years, corporate social responsibility (CSR) has gained importance on the international stage as an emerging form in business. Companies report their efforts towards sustainability through various international standards such as OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, UN Global Compact, The Universal Declaration of Human Rights and Global Reporting Initiative etc. These international standards are voluntary guidelines and are subject to regulatory compliance. 22 1.7 Challenges of comparability faced by social sector organisations Social sector organisations in India vary in terms of registration and regulation. With changes in registration their objective, sources of funding, utilization of funds, and activities vary. Hence it is difficult to compare the outcomes and impact created by social sector organisation. Outcome and impact of social initiatives also depend on the service users. Social interventions often look at changes in behaviour, attitude, habits, and value which cannot be measured with quantitative indicators. There can be certain benchmarks which the organisation can set but most of the times these benchmarks are customized to specific social intervention. These cannot be applied across different social interventions to compare the outcomes. For instance, outcomes like improved self-esteem or enhanced social status are linked to the specific culture, social system and attitudes of those beneficiaries. The changes or improvements are captured in terms of situation prior to implementation of social intervention and post social intervention. It cannot be compared with other groups of beneficiaries coming from completely different social systems and cultures. 1.8 Social Sector Landscape in India 1.8.1 NPO Ecosystem in India The Non-Profit Organization (NPO) or Non-Governmental Organization (NGO) sector plays a crucial role in addressing various social, economic, and environmental challenges. Here are some key points about the NPO ecosystem in India: A. Diversity and Scope: 1. The NPO sector in India is diverse, covering a wide range of issues such as education, healthcare, poverty alleviation, human rights, environmental conservation, and more. 2. Organizations vary in size, from small community-based groups to large national and international NGOs. 62% NPOs raise less than Rs1 Cr & 57% less than 20 years old. 3. NGOs often collaborate with government agencies, international organizations, and corporate entities to address complex social issues. 4. Social entrepreneurship is gaining traction, with organizations focusing on sustainable and scalable solutions. Many Non-profit social enterprises have been instrumental in innovative approaches to address complex issues. 5. Volunteerism plays a significant role in the NPO sector, with individuals contributing their time and skills to various social causes. 23 B. Legal Framework/Regulation: 1. NPOs in India are regulated by the Ministry of Corporate Affairs. The Societies Registration Act, the Indian Trusts Act, or the Companies Act, are some of the primary legal frameworks under which NGOs can be registered. 2. The Foreign Contribution (Regulation) Act (FCRA) regulates the acceptance and utilization of foreign contributions by NGOs. 3. The Companies Act in India mandates certain companies to spend a percentage of their profits on Corporate Social Responsibility (CSR) activities. Many corporations collaborate with NGOs to implement CSR initiatives. C. Challenges: 1. NGOs in India face challenges such as funding constraints, regulatory compliance issues, and the need for capacity building. 2. There have been debates and discussions around transparency, accountability, and the effectiveness of some NGOs. 3. NPOs often work in challenging environments, addressing issues such as poverty, healthcare, education, gender inequality, and environmental degradation. D. Government Initiatives: 1. The Indian government has initiated various schemes and programs to support the work of NGOs, particularly in areas like education, healthcare, rural development, and poverty reduction. 2. Many NPOs collaborate with the government at different levels to implement various development programs and projects. 3. Public-Private Partnerships (PPPs) are also common, with the government partnering with NGOs to address social challenges. 88% of NPOs work to strengthen government programmes across themes. 50% of NPOs work locally, improve socio-economic life of workers and engage local businesses. E. Technology and Innovation: 1. Many NPOs in India have embraced technology for fundraising, communication, and project management. 2. Social media and online platforms are used to raise awareness and mobilize support for various causes. 24 3. Many NPOs in India are leveraging technology for social impact, using tools like mobile apps and online platforms to address issues such as healthcare delivery, education, and financial inclusion. F. Capacity Building: Capacity-building initiatives are essential for strengthening the effectiveness of NPOs. Training programs and workshops are conducted to enhance the skills of individuals working in the sector. G. Impact Assessment: 1. There is an increasing emphasis on impact assessment and evaluation within the NPO sector to measure the effectiveness of programs and projects. 2. NGOs need to be trained to develop Monitoring & Evaluation tools that help them to track and report on the social impact created by them. 1.8.2 Need of different types of development interventions Annexure 2 is an illustrative list of different development interventions by various social organizations. It is important to note that though they are categorized as a specific type of intervention all would use a combination of intervention method. 1.8.3 Spectrum of stakeholders and their role in the development landscape In order to implement social interventions various stakeholders are involved in the process. These stakeholders are either affecting the intervention through provision of resources, implementing the interventions, acquiring required registrations or licenses or they get affected by the social intervention. Some of the stakeholders of an intervention may be: Beneficiaries, Board Members, Employees, Volunteers, Local community, Funders, and Government. These stakeholders can be further categorized as internal and external stakeholders or direct and indirect stakeholders. Internal and External Stakeholders - Internal stakeholders include individual/s and groups which are part of the organization such as employees, board members, contract / part time employees etc. However, the external stakeholders are not part of internal management of the organization but they can affect or get affected by the actions of the organization such as funders, Government, consultants, volunteers, beneficiaries/ customers etc. Direct and Indirect Stakeholders - Direct stakeholders are directly involved in the social interventions or get directly affected by social intervention whereas the indirect 25 stakeholders are not directly involved in the social intervention but get affected by social intervention such as indirect beneficiaries, local community, local political leaders etc. In order to bring social change, it is crucial that all stakeholders contribute to the social intervention. The achievement of the implementation is not only determined by the form of activities but also by the implementation of the organisation and cooperation by various concerned parties. These stakeholders have different interests in activities of the organisation. Table 1.2 below explains few stakeholders and their interests with an example of social intervention in a vocational training programme. Table 1.2: Stakeholders & Their Interests Social Intervention: Vocational Training Programme for Youth Sr. No StakeholderInterest in the Programme 1 Youth Employment Opportunities, Developing interest in advanced skill development 2 Funder Achievement of Goals 3 Government Achievement of Developmental Goal 4 Teachers Satisfaction, Upgradation of Skills 5 Companies Trained Future Workforce 6 Parents of Feel secure that the children are engaged meaningfully and not Youth "loitering" around Social Impact Assessment of Corporate Social Responsibility in India explains the stakeholders in the CSR Ecosystem in India. (Table 1.3)17 Table 1.3: Stakeholders of CSR Ecosystem in India Sr. No Stakeholder Role in CSR 1 Donor Expect return in terms of social impact from donations and Companies/ investments made to achieve social objectives Organisations 2 Implementing Use CSR funds effectively to create social impact Agencies 3 Beneficiaries/ Impacted by social interventions and are expected to have End Users positive intended social change 4 Regulatory and Offer various instruments to ensure effective and efficient CSR Monitoring practices like tax exemptions, award schemes, certifications, Authority issue of CSR compliances as well as voluntary guidelines, Standard setting and information dissemination in guiding, 17Report on Social Impact Assessmentof Corporate Social Responsibility in India published by Niti Ayog in 2021. 26 training and implementing best practices and promoting partnerships 5 Local Developing partnerships with companies and implementing Administration agencies to achieve common sustainable development agenda 6 CSR Ensuring that companies remain socially responsible and Professionals maximizing effectiveness of CSR expenditures. 1.9 Social Sector Inequities 1.9.1 Sectoral Thrust In the social sector, there are a lot of challenges across SDGs. Each organisation operates within its own area of expertise or a specific geography. These areas are the thrust areas – which can be demarcated by the themes viz. education, women empowerment and development, financial inclusion etc. Within these themes it can be hyper localized sectoral thrust e.g. learning amongst primary grade students in tribal pocket of “XYZ” taluka of “ABC” district. The performance of India is lowest in the areas of No Poverty, Zero Hunger and Gender Equality as shown in Table 1.418 Table 1.4: Development Priorities in India Top Priority Development Needs Other Strong Development Needs (SDGs in which India’s performance is (SDGs in which India’s performance is the lowest) relatively low) 1. No poverty 3. Good health and well being 2. Zero hunger 4. Quality education 5. Gender equality 8. Decent work and economic growth 10. Reduced inequalities 11. Sustainable cities and communities 12. Sustainable consumption and production 13. Climate action 16. Peace, justice and strong institutions NITI Aayog has strategized 41 policy priorities to assess the progress of SDGs and impact of pandemic Covid 19 on developmental initiatives. (Table 1.5) Table 1.5: Policy areas with High Development needs and Policy Momentum19 Sr. Shortlisted Policy Area with Related SDGs No. private investment momentum 1 Growth SDGs 1,8,17 18Source: SDG INDIA Index & Dashboard 2020-21 19Source: SDG Investor Map Report for India 2020 27 2 Balanced Regional Development: SDGs 1,2,3,4,5,6,7,9,10 OVER- Aspirational Districts ARCHING 3 Gender SDGs 1,2,3,4,5 POLICY AREAS 4 Modernizing City Governance for SDGs 1,3,5,6,8,10,11,12 Urban Transformation 5 Sustainable Environment SDGs 1,2,6,7,11,12,13,14,15 6 Optimizing Use of Land Resources SDGs 1,2,15 7 Employment and Labour Reforms SDGs 5,8,10 8 Nutrition SDGs 1,2,3,5,10 9 Smart Cities for Urban SDGs 1,5,6,8,9,10,11,12 Transformation 10 Doubling Farmer’s income SDGs 1,2,8,9,10,12,13 11 Digital Connectivity SDGs 1,4,5,9 SECTOR 12 Housing for All SDGs 1,5,6,11 SPECIFIC 13 School Education SDGs 3,4,5,8,16 POLICY AREAS 14 Skill Development SDGs 4,5,8,10 15 Financial inclusion SDGs 1,8,10,16 16 Human Resource for Health SDGs 3,5,8 17 Water Resources SDGs 6,11,12,14 18 Public Health Management and SDGs 2,3,6 Action 19 Comprehensive Primary SDGs 1,3 Healthcare 20 Universal Health Coverage SDGs 1,3 21 Swachh Bharat Mission SDGs 1,6,11 The Government of India allocated a significant amount of funds towards developmental initiatives giving more focus on health, education, infrastructure development and environmental initiatives. The Ministry of Corporate Affairs have reported CSR spending in various sectors which highlights that maximum CSR funds have been spent on Health and Sanitation which is 8,706 Crores followed by Education, Differently Abled and Livelihood (EDL) 8,020.82 Crores.20 The areas like Gender Equality, Women Empowerment, Old Age Homes, Reducing Inequalities (GWOR), Slum Development need more funding support. *AOF - Any Other Fund (Central Government Funds); PMNRF - Prime Ministers National Relief Fund; GWOR - Gender Equality, Women Empowerment, Old Age Homes, Reducing Inequalities; EAC - Environment, Animal Welfare, Conservation of Resources; EDL - Education, Differently Abled, Livelihood; Other Sectors-Technology Incubator and benefits to Armed Forces and Admin Overheads; HA&C - Heritage Art and Culture. 20 Source: Ministry of Corporate Affairs, National CSR Portal 28 1.9.2 Geographical Thrust India is rightly called a country of contrasts - these pertain to not only the diversity in culture and landscapes but more importantly the development indices of our states and regions. In India, some states indicate good performance through their development indicators across SDGs, while some are poor performers. The performance of states21 based on the SDG index is formulated using composite score for each State/UT computed by aggregating their performance across the SDGs. Of the Indian States, 112 districts have been identified as the aspirational districts by NITI Aayog. The intra-regional and inter regional disparities are seen in the poverty index, agricultural and industrial development, infrastructure development index, infant mortality index etc. Social enterprises are focused to mitigate these development disparities through their programs, projects and activities.22 1.9.3 Technological Thrust Technology is described as the application of scientific knowledge to realms of human life. India has witnessed a boom in technology being available on the supply side in the areas of agriculture, health, financial services, livelihood opportunities, education technology and production. STEM (Science, Technology, Engineering and Mathematics) sectors are growing both as a part of our economy as well as a differentiator within social sector funding. However, the gap / divide is seen favoring the male v/s females, urban v/s rural, rich v/s poor and the youth amongst the working population. This is creating imbalances and is rightly being called the new face of inequality. The Indian Government has launched e governance, health ID, JAM (JanDhan, Aadhar and Mobile), e kranti, e shram portal and so on with the aim to have a deep, direct and positive impact on the health, livelihood prospects, access to financial products and market accessibility. For instance, within the agricultural sector, remote sensing, unmanned aerial surveys, e- choupals represent how technology can enhance agriculture and provide value added services. Digital Agriculture includes inclusion of artificial intelligence/ machine learning, block chain technology to benefit the farmers. While this technology is available, the challenge is the “reverse embrace” - adoption of technology by the beneficiary group that remains a challenge in India. This is exacerbated by the sectoral and geographical inequities. The OECD defines the digital divide as the “gap between individuals, households, businesses, and geographic areas at different socio-economic levels about both their opportunities to 21Source: SDG INDIA Index & Dashboard 2020-21 22https://dmeo.gov.in/sites/default/files/2021-11/Report_on_Social_Impact_Assessment_of_Corporate.pdf) 29 access information and communication technologies (ICTs) and to their use of the Internet for a wide variety of activities.”23 Section – II Indian Financial Markets 1.1 Indian Financial Markets 1.1.1 Introduction The financial markets enable efficient transfer and allocation of resources for productive activities in the economy. Users of funds include governments, businesses and households who seek funds to run their activities. Governments, businesses and households also act as providers of surplus funds. Intermediaries such as banks, financial institutions, mutual funds and insurance companies, among others, channelize the available surplus funds from lenders to the users. Financial market consists of various types of markets (money market and securities market); investors (buyers of securities), issuers of securities (users of funds), intermediaries and regulatory bodies (SEBI, RBI etc.). 1.1.2 Types of Financial Markets in India i. Money Market Money market is an integral part of the financial system and includes instruments that provide short-term funds with maturity ranging from overnight to one year. The purpose of the money market is to enable institutions and companies to meet short- term funding needs by borrowing and lending from each other. Money market securities consist of repos/reverse repos, certificates of deposits, treasury bills, and commercial papers. ii. Securities Market The market in which securities are issued, purchased by investors and subsequently transferred among investors is called the securities market or capital market. The securities market has two interdependent and inseparable segments, viz., the primary market and the secondary market. The primary market, also called the new issue market, is where issuers raise capital by issuing securities to investors. The secondary market, also called the stock exchange, facilitates trade in already-issued securities, thereby enabling investors to exit from an investment or to accumulate more, if it meets their expectations. 23Basu Chandola ; Exploring India’s Digital Divide https://www.orfonline.org/expert-speak/exploring-indias-digital-divide 30 1.1.3 Intermediaries in Financial Markets in India i. Market Infrastructure Institutions Stock exchanges, depositories and clearing corporations are collectively referred to as Market Infrastructure Institutions (MIIs). The stock exchanges provide a trading platform where the buyers and sellers (investors) can meet to transact in securities. A clearing corporation performs three main functions, namely: clearing and settlement of all transactions executed in the stock market and carrying out risk management activities. (discussed in detail in Chapter 2). A depository is an entity facilitating holding securities in electronic form and enables transfer of securities by book entry. The main objective of depository is to provide maintenance of ownership or transfer records of securities in an electronic book entry form. There are two Depositories in India, Central Depository Services (India) Limited (CDSL) and National Securities Depository Limited (NSDL). The Depository provides its services to investors through its agents called depository participants (DPs). ii. Custodians Custodians hold securities and manage bank accounts on behalf of the institutional investors. They manage the transactions pertaining to delivery of securities and funds after a trade is made through the broker, and also maintain the accounts of securities and funds. Custodians are usually large banks. iii. Stock Brokers /Authorized Persons Stock Brokers are members of a Stock Exchange who acts as an agent for clients and buys and sells shares on their behalf in the market. All secondary market transactions on stock exchanges have to be conducted through registered brokers. Authorized persons (AP) are agents of the brokers (previously referred to as sub- brokers) and are registered with the respective stock exchanges. APs help in reaching the services of brokers to a larger number of investors. iv. Investment Banks Investment Banks are financial entities that provide strategic advice to companies, governments and others on their capital requirements and investment decisions and arrange raising such funds on terms that are most suitable to the company. Their activities include advisory services for business expansions, project financing, mergers and acquisition, investment valuation, among others. They charge a fee for their services. v. Insurance Companies Insurance companies are intermediaries that pools-in surplus funds from corporates & households and invest in financial markets. The large pool of funds mobilised by the 31 insurance companies act as a source of long-term funding for government and corporates. vi. Pension Funds Pension Funds are intermediaries who are authorized to take contributions from eligible individuals and invest these funds according to the directions of the contributors to create a retirement corpus. These funds provide different options for investment of the contribution, such as debt, equity or a combination. Investors select the type of fund depending upon their ability to take risk and their requirement for returns. vii. Asset Management Companies and Portfolio Managers Asset Management Companies and Portfolio Managers are investment specialists who offer their services in selecting and managing a portfolio of securities. Asset management companies are permitted to offer securities (called ‘units’) that represent participation in a pool of money, which is used to create the portfolio of a mutual fund. Portfolio managers do not offer any security and are not permitted to pool the money collected from investors. They act on behalf of the investor in creating and managing a portfolio. Both asset managers and portfolio managers charge the investor a fee for their services, and may engage other security market intermediaries such as brokers, registrars, and custodians in conducting their functions. viii. Investment Advisers Investment Advisers work with investors to help them make a choice of securities that they can buy, based on an assessment of their needs, time horizon returns expectation and ability to bear risk. They may also be involved in creating financial plans for investors, where they define the goals for which investors need to save money and propose appropriate investment strategies to meet the defined goals. ix. Credit Rating Agencies Credit rating agencies look at the financial situation of the issuing entities and then rank their various instruments in terms of their ability to safely repay the debt and interest. They act as an information bridge between the investors who might not understand the financial details of the issues or might not have access to the required information. The credit ratings provided by these agencies is a simple way to have an idea about the financial position of an entity and how this would affect an investment into it. x. KYC Registration Agencies KYC registration agencies (KRA) perform a significant task in the securities market. The need to ensure a proper verification of the investors who are putting their money into the various investments. is done through the KYC process. These KYC details are maintained by the KYC registration agency. Every time that an investor goes to transact they would not need to submit the same documents and this can be verified through the details maintained by the KYC registration agency. The records of the investors are 32 maintained in a central database on behalf of the various intermediaries which can be fetched when required. xi. Registrar and Transfer Agents Registrar and Transfer Agents are the custodians of the investor data, both for fund houses or corporates. RTAs are responsible to record and maintain data, both financial and non-financial, either in physical or in electronic form. RTAs also ensure smooth processing of investor service requests, both financial and non-financial such as mutual fund transaction requests, KYC updation, processing corporate actions on behalf of issuers etc. xii. Non-banking financial companies and housing finance companies Non-banking financial companies (NBFCs) and housing finance companies are a route for investors to access funds for their needs. The housing finance companies provide housing loans that are long term loans for purchasing property and this ensures that the individual is able to finance their asset building activity. NBFC also provide finance for a wide variety of areas ranging from personal loans to consumer durable loans. They ensure that those who need money for such purchases are able to have access to it. xiii. Credit Bureaus Credit bureaus or Credit Information Companies keep the record of the loan servicing behaviour of the borrowers and then assign them a credit score to reflect their overall position. A higher credit score means a better situation for the borrower i.e. they are more likely to get a loan as compared to someone with a low credit score. They form a crucial part of the entire system because they highlight the risk faced by lenders and help them to make the right lending decisions. 1.1.4 Type of investors Investors are individuals or organisations with surplus funds that are used to purchase securities. The chief objective of investors is to convert their surplus and savings into financial assets that earn a return. i. Retail Investors Retail Individual Investor means an individual investor who applies or bids for specified securities for a value of not more than INR 2 lakhs. ii. Qualified Institutional Buyers (QIBs) QIBs are organizations that invest large sum of money and employ specialised knowledge and investment skills. They comprise of domestic financial institutions (DFIs), banks, insurance companies, mutual funds, and Foreign Portfolio Investors (other than individuals, an FPI is an entity established or incorporated outside India that proposes to make investments in India) and any other entity specified by SEBI. 33 Any investor other than retail individual investor and institutional investor is called Non- Institutional investor. iii. Accredited Investors The concept of a class of investors who understand various financial products and the risks-returns associated with them and therefore, are able to take informed decisions regarding their investments, is recognized by many securities and financial market regulators around the globe. These investors are typically termed as Accredited Investors or Qualified Investors or Professional Investors. iv. Role of Issuers Issuers are organizations that raise money by issuing securities. They may have short- term and/or long-term need for capital and they issue securities based on their need, their ability to meet the obligations to the investors, and the cost they are willing to pay for the use of funds. Issuers of securities have to be authorised by appropriate regulatory authorities to raise money in the securities markets. Issue of securities in the primary market is made by different stakeholders such as central, state and local Governments, Public Sector Units, Private Sector Companies, Banks, Financial Institutions and Non-Banking Finance Companies and Mutual Funds. v. Financial Market Regulators Ministry of Finance The Ministry of Finance through its Department of Financial Services regulates and overseas the activities of the banking system, insurance and pension sectors. The Department of Economic Affairs regulates the capital markets and its participants. The ministry initiates discussions on reforms and overseas the implementation of law. Ministry of Corporate Affairs The Ministry of Corporate Affairs regulates the functioning of the corporate sector. The Companies Act is the primary regulation which defines the setting up of companies, their functioning and audit and control. The issuance of securities by companies is also subject to provisions of the Companies Act. Reserve Bank of India The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth." 34 Securities and Exchange Board of India The Securities and Exchange Board of India (SEBI), a statutory body appointed by an Act of Parliament (SEBI Act, 1992), is the primary regulator of securities markets in India. The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as "...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto". Insurance Regulatory and Development Authority of India Insurance Regulatory and Development Authority of India (IRDAI) is the licensing authority for insurance companies and defines the capital and net worth requirements for insurance companies. It ensures the adherence of insurance products to the rules laid down and defines the rules for the terms and conditions of insurance contracts such as sum assured, surrender value, settlement of claims, nomination and assignment, insurable interest and others. It regulates the distribution of insurance products by laying down the qualification and training requirements of intermediaries and the payment of commission to distributors. Pension Fund Regulatory and Development Authority Pension Fund Regulatory and Development Authority (PFRDA) is the authority entrusted to act as a regulator of the pension sector in India under the PFRDA Act, 2013. PFRDA regulates the National Pension System (NPS) and any other pension scheme specified under its ambit. It is responsible for registering the various constituents such as the fund managers, custodians, central record keeping agency and trustee banks and to define the parameters of their roles and responsibilities. 1.2 Type of Securities 1.2.1 Equity Equity shares represent ownership in a company that entitles its holders share in profits and the right to vote on the company’s affairs. Equity shareholders are residual owners of the firm’s profit after other contractual claims on the firm are satisfied and have ultimate control over how the firm is operated. Investments in equity shares reward investors in two ways: dividend and capital appreciation. 1.2.2 Derivatives Derivatives are financial instruments whose value depend upon or are derived from the value of other, more basic underlying variables. These are traded both in the over-the-counter (OTC) market and on exchanges. The exchange-traded derivatives in India are futures and options. Futures contracts are agreements between a buyer and seller to buy or sell the underlying asset at a predetermined price and quantity on a predetermined date. Options are contracts that give the holder of the 35 option the right (but not the obligation) to buy or sell the underlying asset at a predetermined price and in a specified quantity at or before a predetermined date. 1.2.3 Fixed Income Securities/Instruments Debt instruments, also called fixed income instruments, are contracts containing a promise to pay a stream of cash flows during the term of the contract to the investors. The debt contract can be transferable, a feature specified in the contract that permits its sale to another investor, or non-transferable, which prohibits sale to another party. A debt contract also establishes the financial requirements and restrictions that the borrower must meet and the rights of the holder of the debt instruments if the borrower defaults. Debt securities are issued by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. 1.2.4 Commodities These are investments in real assets such as gold, silver, copper, agricultural produce etc. as opposed to financial assets like stocks and bonds. Commodity investment can be in the physical form but is generally in the form of financial products such as commodity mutual funds, exchange-traded funds (ETFs) and commodity derivatives. Commodity ETFs and mutual funds are suitable for retail investors. 1.2.5 Real Estate Real estate is the largest asset class in the world. It offers significant diversification opportunities. Investors can invest into real estate with capital appreciation as an investment objective as well as to generate regular income by way of rents. It is usually a long-term investment. Real estate is classified into two sub-classes: commercial real estate or residential real estate. Real estate investments often involve large commitments. Real estate funds and Real Estate Investment Trusts (REIT) have emerged as good options to enable investors to take exposure to this asset class with smaller outflow commitments. 1.2.6 Mutual Funds These are investment vehicles that pool together the funds collected from a large number of investors and invest these funds in debt, equity or other asset classes according to a specific mandate. Mutual funds are best suited for retail investors. 36 Annexure 1: List of areas and sub-areas for taxonomic classification of social objectives24 # Area Sub-area 1 Eradicating End hunger and ensure access to all people, in particular the hunger, poverty, poor and people in vulnerable situations, including infants, malnutrition and to safe, nutritious and sufficient food all year round inequality; promoting health End all forms of malnutrition and address the nutritional care (including needs of adolescent girls, pregnant and lactating women and mental health) and older persons sanitation; and making available Eradicating extreme poverty for all people everywhere, safe drinking currently measured as people living on less than $1.25 a day water Implement appropriate social protection systems and measures for all Build resilience of the poor and those in vulnerable situations and reduce their exposure and vulnerability to climate- related extreme events and other economic, social and environmental shocks and disasters Empower and promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status Facilitate orderly, safe, regular and responsible migration and mobility of people, including through the implementation of planned and well-managed migration policies Reduction of Maternal Mortality Ratio End preventable deaths of new born and children under 5 years of age End the epidemics of AIDS, tuberculosis, malaria and neglected tropical diseases and combat hepatitis, water- borne diseases and other communicable diseases 24 Source: SEBI Technical Group Report 37 Reduction in premature mortality from non-communicable diseases through prevention and treatment and promote mental health and well-being Strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of alcohol Reduction in deaths and injuries from road traffic accidents Ensure universal access to sexual and reproductive health- care services, including for family planning, information and education, and the integration of reproductive health into national strategies and programmes 2 Promoting Ensure that all girls and boys complete free, equitable and education, quality primary and secondary education leading to relevant employability and and effective learning outcomes livelihoods Ensure that all girls and boys have access to quality early childhood development, care and pre-primary education so that they are ready for primary education Ensure equal access for all women and men to affordable and quality techn

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