India’s Social Stock Exchange is up and running
India’s Social Stock Exchange is up and running. Non-profit as also For-profit Social Enterprises are encouraged to visit the official website www.bsesocialstockexchange.com to register their interest.
In July 2022, the Securities & Exchange Board of India (SEBI) notified the Rules for Social Stock Exchanges to provide ‘Social Enterprises’ with additional avenues to raise funds.
SEBI has also given Bombay Stock Exchange (BSE) the approval to set up a Social Stock Exchange (SSE) as a separate segment of the BSE. Accordingly, BSE has constituted a Governing Council of the Social Stock Exchange comprising ten individuals with diverse skills and experience of the Social Sector.
Members of the Governing Council include:
- Ingrid Srinath (Former Director – Centre for Social Impact and Philanthropy, Ashoka University)
- G G Sohani (Chairman – BAIF)
- Pushpa Aman Singh (CEO – GuideStar India)
- Manoj Kumar (CEO – Tata Social Alpha)
- Priti Savla (Co-Head – SRSB)
- Jayshree Vyas (Managing Director – Sewa Bank)
- Neeraj Kulshreshta (CRO – Bombay Stock Exchange)
- Noshir Dadrawala (CEO – Centre for Advancement of Philanthropy)
- Hemant Gupta (Head – BSE, Social Stock Exchange)
The Governing Council also conducted its first meeting on 5th January 2023.
Social Stock Exchange
‘Social Stock Exchange’ (SSE) is the first of its kind in India and will soon have nationwide trading terminals permitted to register Social Enterprises and / or list the securities issued by Social Enterprises.
The SSE will list only securities that raise money for ‘non-profit’ or ‘for-profit’ ‘social enterprises.’
Social Enterprise means either a ‘Not-for-Profit Organization’ or a ‘For Profit Social Enterprise’ that meets the eligibility criteria specified by Securities and Exchange Board of India (SEBI).
SEBI’s earlier notification of 25th July 2022 has clarified that a ‘For-Profit Social Enterprise’ means a company or a body corporate operating for profit, which is a Social Enterprise for the purposes of SEBI’s regulations on the SSE and does not include a company incorporated under section 8 of the Companies Act, 2013.
‘Not-for-profit Social Enterprise’ shall include charitable trusts, charitable societies, companies licensed under section 8 of the Indian Companies Act 2013 and any other entity as may be specified by the Board
A ‘for-profit’ or ‘not-for-profit’ entity must first be identified as a ‘Social Enterprise’ by establishing primacy of its social intent. Corporate foundations, political or religious organizations or activities, professional or trade associations, infrastructure and housing companies, except affordable housing, shall not be eligible to be identified as a Social Enterprise.
Listing on SSE
Getting listed on the SSE would entail going through a vigorous due-diligence process. However, once listed, it would be an important recognition and enhance credibility of the social enterprise.
Social enterprises listed on the SSE will also be subject to regular audits to measure social impact and the reports shall be disclosed to all stakeholders just the way it is done by for-profit entities (listed companies) on regular stock exchanges.
Social Audits shall be carried out by ‘Social Auditors’ (who have qualified a certification program conducted by National Institute of Securities Market and hold a valid certificate) and ‘Social Audit Firms’ (employing Social Auditors and having a track record of minimum three years for conducting social impact assessment).
A Not-for-Profit Organization may raise funds on SSE through:
- issuance of Zero Coupon Zero Principal Instruments to institutional investors and/or non-institutional investors
- donations through Mutual Fund schemes as specified by SEBI;
- any other means as specified by SEBI from time to time.
A For-Profit Social Enterprise may raise funds through:
- issuance of equity shares on the main board, SME platform or innovators growth platform or equity shares issued to an Alternative Investment Fund including a Social Impact Fund;
- issuance of debt securities;
- any other means as specified by SEBI from time to time
Securities issued by For Profit Social Enterprises shall be listed and traded under the applicable segment of the stock exchange with an identifier stating that the scrip is that of a For-Profit Social Enterprise and such For-Profit Social Enterprises shall meet the eligibility criteria for the main board, SME Platform or innovators growth platform, as applicable.
What is ‘Zero Coupon Zero Principal Instrument’
Zero Coupon Zero Principal Instruments are financial instruments that any not-for-profit organization can use to raise funds.
Generally, NPOs raise funds through donations from individuals by appealing to them for their philanthropic support or write grant proposals to grant-making foundations or companies to support specific projects and programs. In like manner, now on the SSE the NPO may issue a ‘zero-coupon zero-principal security’ (like Bonds) and those willing to provide grant support could buy (as social investment) these securities or bonds.
The ‘zero-coupon, zero-principal’ structure resembles a debt security like a bond. In the business sector when an entity borrows money (as a loan) by issuing regular debt security (like a bond), it has to make interest payments and pay back the principal when the bond matures.
However, with this new financial instrument, when an entity issues these securities and raises money, it is not exactly a loan but a donation/grant for a social project of the social enterprise.
So, the borrowing entity (NPO) does not have to pay interest (i.e., zero coupon) and it does not have to pay the principal (i.e., zero principal) either.
In other words when a philanthropic individual or company buys a ‘Zero Coupon Zero Principal Instrument’ on the SSE it is essentially a grant for a specific social project or program. The individual or corporate social investor does not receive any financial return by way of interest or the principal amount. It would be in the nature of a ‘Social Investment’ without any ‘financial return’, making it a gift/donation/grant.