All about Social Stock Exchanges

It’s an alternative for social enterprises to raise funds for social responsibility projects
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Organisations working exclusively for the welfare of people, especially for underprivileged sections of the society, have a reason to cheer up. Now they won’t be facing hassles in implementing their projects as far as finances are concerned.

The Securities and Exchange Board of India (SEBI) has paved the way for them to board the capital market by granting approval to the National Stock Exchange (NSE) to launch Social Stock Exchanges (SSEs) as a new segment.

The capital market regulator had already given an in-principle approval on December 19, 2022 to NSE to launch SSEs. It also granted its final approval, on December 27, for introducing Social Stock Exchange (SSE) as a separate segment on BSE.

By virtue of this approval, the NSE can now launch the new platform and sign-up social enterprises for listing. The bourse in its handout on February 24 stated that the Social Stock Exchange segment will provide a new avenue for social enterprises to finance social initiatives, provide them visibility and bring in increased transparency in fund mobilisation and utilisation by such enterprises.

Notably, Social Stock Exchange, going to be first of its kind in the country, is a fundraising platform explicitly established for social enterprises to tap into wider sources of donations. Even as Social Stock Exchanges exist in countries like the United Kingdom, Canada, Brazil, Singapore, etc. It is a new concept in India. It was during the Covid-19 pandemic when this concept emerged as an alternative route for social capital for organisations that are working for welfare of societies and communities. Finance Minister Nirmala Sitharaman floated this idea in her Budget Speech 2019-20.

Establishing a Social Stock Exchange in the country is a sort of gift to the social enterprises on the World NGO Day which was celebrated on February 27. The World NGO Day is observed to raise awareness about the work of NGOs (non-profit organizations) and their impact on society. NGOs play a vital role in addressing social, economic, and environmental challenges.

As far as definition of social enterprises is concerned, the National Stock Exchange has identified two forms of such enterprises, Not-for-Profit Organisation (NPO) & For Profit Social Enterprise (FPE), engaging in the activity of creating positive social impact and that meets primacy of their social intent, to be listed on the Social Stock Exchange. A For-Profit-Social Enterprise (FPE) is an entity operating for profit and does not include a company incorporated under section 8 of the Companies Act, 2013 (18 of 2013).

It’s mandatory under regulations that the entity must indulge in eligible activities prescribed, and targeting underserved or less privileged population segments or regions which have recorded lower performance in the development priorities of central or state governments. Further, in order to be identified as a social enterprise, the organization shall demonstrate that 67% of its activities qualify as eligible activities to the target population.

However, corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure, and housing companies, except affordable housing, are not eligible to be identified as a social enterprise.

Here it is worth mentioning that a social enterprise otherwise eligible to raise funds through the Social Stock Exchange cannot use the platform if any of the promoters or directors or trustees of the social enterprise is a willful defaulter or a fraudulent borrower.

Besides, those social enterprises having any of its promoters or directors or trustees declared as a fugitive economic offender or debarred from carrying out its activities or raising funds by the Ministry of Home Affairs or any other ministry of the Central Government or State Government or Charitable Commissioner or any other statutory body, won’t be allowed to board the Social Stock Exchange platform to raise funds.

Listing of social Enterprises on the SSEs is similar to normal initial public offerings (IPOs). However, the difference is that instead of shares, the investors are allotted Zero Coupon Zero Principal (ZCZP) instruments. These instruments don’t yield any returns to the investor and are more like donations. In normal IPOs, investors can sell their shares post listing and make profits.

Let me explain. An asset management company creates a Fund for underprivileged patients suffering from terminal diseases. The fund will operate as a standard mutual fund.

The only exception here is that the returns generated are channelled for the financing of Not-for-Profit organization (NPO) handling the treatment expenses of such patients. In other words, any profit generated is donated to the NPO. The investor gets his money back from the asset management company.

Meanwhile, the mode of raising funds through the SSE is different for NPO and the FPE. A Not-for-Profit Organization (NPO) shall have to mandatorily seek registration with a Social Stock Exchange before it raises funds through a Social Stock Exchange.

It may choose to register on a Social Stock Exchange and not raise funds through it. It can also continue to raise funds through any other means. For NPO, fundraising options include equity, zero-coupons, zero principal bonds, development impact bonds, a social impact fund with a 100 percent grants-in grants-out provision, and mutual fund donations.

A For-Profit-Social Enterprise (FPE) need not register with the Social Stock Exchange for raising funds through the platform. Notably, FPE may raise funds through issue of Equity Shares, issue of Debt Instruments or any other means that SEBI may specify in future.

However, it’s not eligible to issue Zero Coupon Zero Principal Instruments for raising funds. Such instruments shall be issued only by a Not-for-Profit Organization (NPO) registered on a Social Stock Exchange. Zero Coupon Zero Principal Instruments must have specific tenure and can only be issued for a specific project or activity to be completed within a duration specified in the fund-raising document.

So far so good. The social stock exchanges are just less than two decades old and are still in the budding stage of their evolution. There is no significant international success story related to these Exchanges. Most of such exchanges were reported inactive just a few years back. It’s here the international scenario around these Exchanges will guide the regulator to ensure the Social Stock Exchanges in India as a successful model which others across the world can emulate.

The beginning has been good as the SSEs have been hosted within the country’s existing stock exchanges—the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)—since they fall under the regulatory ambit of SEBI.

While having close working relationships with the conventional stock exchanges, the SEEs can take advantage of the collaborations offered by these conventional stock exchanges such as access to networks, investor pools, and technological and process-related infrastructure. However, it is imperative for the SSEs to remain independent in terms of leadership, operations, and decision making.

It needs no elaboration that the Covid-19 pandemic affected millions of Indian households economically as well as socially. Millions lost jobs or faced drastic fall in their incomes.

Experts have rightly pointed out that it is imperative to rebuild the life of those who have suffered immensely due to the pandemic & for this, Social Stock Exchange can be of a great help as it open doors for the conventional capital to partner with social capital in order to support & fortify social structures that are in danger of collapsing because of the Covid19.

It would be a shot in the arm of social stock exchanges if social funding through Corporate Social Responsibility (CSR), impact investing, Socially Responsible Investing (SRI), philanthropic/Government grants, etc. is pooled at the SSE platform  to channelize the funds in a most transparent and progressive manner for the upliftment of societies and communities. Let’s wait and watch how these social stock exchanges affect the social market.

(Inputs from NSE acknowledged. The views are of the author & not the organization he works for)

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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