SOCIAL STOCK EXCHANGE

Disclaimer: Copyright infringement not intended.

Context

• The National Stock Exchange(NSE) has received final approval from the Securities and Exchange Board of India, to set up a Social Stock Exchange (SSE) as a separate segment of the NSE.

What is an SSE?

• An SSE allows the listing of non-profit or Non-Government Organisations (NGOs) on stock exchanges, providing them with an alternative fund-raising structure. It may be listed on BSE or NSE. The idea of SSE was first floated by Finance Minister Nirmala Sitharaman in her 2019-20 Budget speech. Countries like the UK, Canada and Brazil have SSEs.
• The fund-raising is proposed through several instruments such as zero-coupon-zero-principal bonds, social venture funds and mutual funds.

What are the objectives of SSEs?

• A Social Stock Exchange may be helpful in rebuilding the livelihoods of people as the investments will have a social impact.
• The SSEs will aim at unlocking large pools of social capital, and  encourage blended finance structures, so that conventional capital can partner with social capital to address the urgent social issues. 

Example

• The Cancer Fund by HDFC Mutual Fund is one example. It operates as a standard mutual fund, with the exception that the returns generated are channelled towards the financing of Non-Profit Organizations. Its investors get their money back from HDFC MF, but any interest or gains that are made are donated to the NPO.

What instruments will NPOs offer on SSEs?

• The SEBI working group report lays out several funding instruments such as zero-coupon-zero-principal bonds, social venture funds, and mutual funds,“providing a wide gamut of options to “donor” investors looking to invest with an objective to create a social impact. This initiative may also enable companies to be able to deploy CSR funding by connecting directly with social organisations. 

Eligibility to participate in SSEs

• Social enterprises eligible to participate in the SSE will be Not-for-Profit organisations (NPOs) as well as for-profit social enterprises.
• Social enterprises eligible to participate in the SSE will be entities - NPOs and for-profit social enterprises - having social intent and impact as their primary goal. Also, such an intent should be demonstrated through its focus on eligible social objectives for the underserved or less privileged populations or regions.
• The social enterprises will have to engage in a social activity out of 16 broad activities listed by the regulator- SEBI. Some of the eligible activities include:
• Eradicating hunger, poverty, malnutrition and inequality
• Promoting health care including mental healthcare, sanitation and making available safe drinking water
• Promoting education, employability and livelihoods
• Promoting gender equality, empowerment of women and LGBTQIA+ communities
• Promoting welfare of migrants and displaced persons.
• Promotion of financial inclusion
• Slum area development, affordable housing
• Protection of national heritage, art and culture
• Supporting incubators of Social Enterprises
• Disaster management, including relief, rehabilitation and reconstruction activities
• Further, the organisations will have to prove that over 67% of their business is related to activities like above to be recognised as a Social Enterprise.
• Corporate foundations, political, religious organisations, professional or trade associations, infrastructure and housing companies will not be eligible for listing on the SSEs. However, the affordable housing segment will be eligible for the same. 
• With regard to minimum requirements to be met by a NPO, NPO needs to be registered as a charitable trust and should be registered for at least three years, must have spent at least Rs 50 lakh annually in the past financial year and should have received a funding of at least Rs 10 lakh in the past financial year.
• NPOs raising funds through the issuance of zero coupon zero principal instruments, need to make disclosure about its vision, disclose target segment (those affected by the problem and how are they affected) and approach to accomplish its planned activities; details of its governing body, composition, dates of board meetings held; and details of key managerial staff.
• NPOs need to make disclosure of financial statements for last three financial years, details of past social impact and risks that they see to its work and how it proposes to mitigate these.
• In respect of annual disclosure by NPOs on SSE which have either raised funds through SSE or are registered with SSE, such NPOs will have to disclose details of the top five donors or investors in terms of budget, scale of operations, including employee and volunteer strength, governance structure, financial statement, programme-wise fund utilisation for the year and auditors report and auditor details.

How will SSEs work?

• The SSE shall be a separate segment under the existing stock exchanges. It is a set of processes that act as a filter, selecting only those entities that are creating measurable positive social impact and reporting such impact.

What are the tax benefits?

• Investors will get Section 80G benefits which allow all investments in securities/instruments of NPOs listed on SSE to be tax deductible, and corporates to deduct CSR expenditure from their taxable income, among other things.
• Investment by companies will be considered as part of their Corporate Social Responsibility (CSR) initiatives.

What is the size of the market?

• India has over 31 lakh NPOs – more than double the number of schools and  250 times the number of government hospitals, which amount to one NPO for 400 Indians.

Significance of SSEs

• SSE is a novel concept in India and it is meant to serve the private and non-profit sectors by channelling greater capital to them.It will also make investing in social ventures easier for morally conscious investors.
• This would be set up “under the regulatory ambit of SEBI for listing social enterprises and voluntary organisations working for the realisation of a social welfare”.
• The establishment of the Social Stock Exchange is expected to create more opportunities for Social Auditors since the regulation makes it mandatory for social enterprises which are keen to list on the platform and raise money to undergo social audit.

https://www.business-standard.com/article/markets/nse-gets-sebi-approval-to-launch-social-stock-exchange-as-separate-segment-123022300643_1.html