Eligibility and Related-Party Questions Before an SSE Listing
Gramin Shakti is a 14-year-old public charitable trust wishing to raise INR 8 crore on the Social Stock Exchange through zero coupon zero principal instruments. Of its revenue, 60% comes from a fee-charging skill-training centre and 40% from a grant-funded nutrition programme. The trust proposes to use the ZCZP proceeds to expand the skill centre into four new districts. Its 12A registration lapsed eight months ago and renewal is pending; 80G is current. A private limited company owned by the same three trustees pays the trust a "brand usage fee" of INR 30 lakh a year, which is 6% of the trust's total income. The trust's draft impact report describes the skill centre as serving "aspirational youth" and does not disaggregate fees paid by students. The managing trustee asks you to both confirm eligibility and advise on how to restructure the group so that it qualifies.
1. What eligibility and social-intent questions does this fact pattern raise?
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Several distinct issues, which should not be bundled together.
Registration status. The ZCZP route on the Social Stock Exchange is for not-for-profit organisations, and a valid income-tax registration is part of the eligibility architecture. A lapsed 12A with renewal pending is a live compliance defect, not a technicality. It should be resolved before any filing, and you should not certify eligibility while it is outstanding.
Social intent and target population. A fee-charging skill centre can qualify, but the case has to be made on who is served. "Aspirational youth" is not a target population description. The report needs disaggregation by household income band, gender, caste, rural/urban, and fee paid or waived. If the paying students are largely from non-underserved households, the skill centre may be a commercial activity sitting inside a charitable vehicle.
Use of proceeds. Proceeds must be applied to the stated social purpose. Expansion of a fee-charging centre into new districts is fundable only if the expansion demonstrably serves the eligible population - the four new districts and the fee policy there need to be specified.
Mixed-purpose entity. With 60% commercial revenue, the assessor must ask whether the entity's dominant purpose is charitable. That is a judgement, and it should be reasoned and disclosed, not asserted.
2. How do you assess the INR 30 lakh brand usage fee paid by a trustee-owned company?
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Treat it as a related-party transaction and a potential leakage of social value, and run three tests.
Arm's-length test. Is INR 30 lakh a market rate for the use of this brand? Obtain comparable trademark licence arrangements or a valuation. A fee set by the same people on both sides of the transaction is not self-evidently arm's length.
Value-for-money test. What does the trust receive? If the brand has little independent market value and the fee is effectively a profit extraction from the charitable entity to the trustees' commercial vehicle, it reduces programme spend and is material at 6% of income.
Disclosure test. The transaction must be disclosed in the impact report and in the related-party disclosures, with the basis for the fee. Trustee overlap means the conflict is structural.
In the assessment, present it as a governance finding with a recommendation - independent valuation, or conversion to a nominal fee, or termination - rather than as a pass/fail eligibility item. Then quantify the effect: INR 30 lakh a year is a measurable reduction in resources available for the stated social purpose, and the reader is entitled to see that.
3. The client asks you to advise on restructuring the group and also to conduct the impact assessment. How do you respond?
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Decline the restructuring advisory and keep the assessment, or decline both - but do not do both.
Advising on how to reorganise the group so that it qualifies for listing creates a self-review threat: you would be designing the structure and then opining on whether the structure meets the eligibility test. The assessor's value to the market rests on independence from the entity's fundraising design.
What you can legitimately do is different in kind: state the eligibility criteria, identify which facts are unresolved (12A lapse, fee policy, related-party fee), and tell the client what evidence an assessor would need to see. That is explaining the test, not engineering the answer.
Practically:
- Write to the managing trustee setting out the scope boundary and the reason for it.
- Recommend that the restructuring be handled by a separate advisor - a company secretary or legal firm - with no role in the impact assessment.
- Confirm in the engagement letter that your fee is not contingent on a favourable eligibility finding or on the listing proceeding.
- If the client insists on bundling the two mandates, withdraw from both rather than accept a compromised assessment.