Social Stock Exchange (SSE) – A New Paradigm

The Not-For Profit Social Enterprises which although being a part of the Indian Financial ecosystem since decades, were an oblivious part of the system till date. But, the introduction of Social Stock Exchange (SSE) by the SEBI has opened a plethora of new opportunities for such Social Enterprises.

Khushboo Sharma
Khushboo Sharma

Published on: Sep 21, 2022

Aakanksha Singhal
Aakanksha Singhal

Updated on: Sep 28, 2022

(7 Ratings)
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Social impact and entrepreneurship are deeply grounded in the Indian culture. The best examples of such entrepreneurship are cooperative and community-owned business models like Amul and Fabindia that have existed in India since the 1950s. Such Social Enterprises (SE) are largely dependent on the funding received via Corporate Social Responsibility (CSR), philanthropic donations, crowdfunding activities, Social Incubators/Accelerators etc. The prospective investors of the Indian Financial ecosystem do not have enough information about such Social Enterprises (SE) and this lack of knowledge often impedes the flow of funding.

In the report published by the British Council on the basis of survey conducted on around 258 Social Enterprises (SE) peculiarly enlightens the contributions of such enterprises to our ecosystem as under:

  • Around 2,000,000 social enterprises currently operating in multiple sectors like skill development, education, food & nutrition, human rights, rehabilitation etc., with set growth plans are anticipated to be a part of the Indian social ecosystem
  • 57% of the Social Enterprise (SE) are 5 years old or younger wherein the leadership is also relatively young viz the average age is below 44
  • Employment to 19 employees on average (17 full-time and 4-part-time) wherein 25% of the full-time employees and 65% of the part-time employees are women
  • 24% of the social enterprises are led by women, higher than the 8.9% female-led firms in mainstream business/ private sector firms.

Globally, countries like Brazil, Portugal, South Africa, Jamaica, the UK, Canada & Singapore already have established Social Stock Exchanges (SSE) in their respective countries.

Social Stock Exchanges (SSE), provides a unified funding channel, to the listed Social Enterprises (SE) thereby giving the potential to uplift those enterprises that are at the bottom of the socio-economic pyramid. This novel concept of Social Stock Exchange (SSE) gained momentum during the pandemic, bringing the spotlight on the need for social capital for enterprises and voluntary organizations that are working for social welfare. The idea of establishing a Social Stock Exchange (SSE) in India was first floated by the Finance Minister in her budget speech for the year 2019-20 and the Board has subsequently approved the creation of such an exchange with the objective, to take capital markets to the masses specifically, organizations working towards social welfare, in order to make it easier for them to raise funds.

Key Concepts under the Social Stock Exchange Framework

  1. For-Profit Social Enterprise refers to a company or a body corporate operating for profit, which is a Social Enterprise for the purposes of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and does not include a company incorporated under section 8 of the Companies Act, 2013.
  2. Not for Profit Organization means a Social Enterprise which is any of the following entities:
    • Charitable trust registered under the Indian Trusts Act, 1882
    • Charitable trust registered under the public trust statute of the relevant state
    • Charitable society registered under the Societies Registration Act, 1860
    • Company incorporated under section 8 of the Companies Act, 2013
    • Any other entity as may be specified by the Board.
  3. Social Enterprises refers to either a Not-for-Profit Organization or a For-Profit Social Enterprise that meets the eligibility criteria specified in the Chapter X-A of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
  4. Social Stock Exchange refers to a separate segment of a recognized stock exchange having nationwide trading terminals permitted to register Not for Profit Organizations and/ or list the securities issued by Not-for-Profit Organizations in accordance with provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
  5. Zero Coupon Zero Principal Instruments are instruments issued by a Not-for-Profit organization that will be registered with the social stock exchange segment of a recognized stock exchange.

Criteria for Identification as a Social Enterprise

Eligible Entities Ineligible Entities
To be identified as a Social Enterprise (SE) Establishing the primacy of their Social Intent is vital by fulfilling the below stated criteria:
  1. Engage in at least one of the 17 activities listed under Chapter X-A of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018
  2. Target the population segments or regions that are underserved or less privileged and have recorded lower performance in the development priorities of central or state governments
  1. Corporate Foundations
  2. Political or Religious Organizations/Activities
  3. Professional or Trade Associations and
  4. Infrastructure and Housing Companies except affordable housing.
  1. Have at least 67% of its activities qualifying as eligible activities that are extended to the target population which shall be on the basis of either of the following:
    • at least 67% of the immediately preceding 3-year average of revenues is earned by rendering eligible activities to the members of the target population
    • at least 67% of the immediately preceding 3-year average of expenditure has been incurred for rendering eligible activities to the members of the target population
    • members of the target population to whom the eligible activities have been rendered constitute at least 67% of the immediately preceding 3-year average of the total customer base and/or total number of beneficiaries.

Means of Funds Raising by Social Enterprises:

  1. Social Enterprises (SE) are those organizations that innovate to solve societal problems and their returns blend social benefit as well as financial revenues. They provide goods and services to customers willing to pay a premium for a socially beneficial product such as organic food and also to poor customers at a decent profit while still providing that service more affordably than other suppliers do. But many such Social Enterprises (SE) face difficulty in funding themselves entirely through their sales or investment.
    But, with the introduction of Social Stock Exchange (SSE), such Social Enterprises (SE) will have augmented exposure to the traditional Financial Markets thereby curtailing the funding constraint faced by them to a larger extent. Such enterprises may raise funds on a Social Stock Exchange (SSE), as under:
Modes of Raising Funds by Social Enterprises
Not-For-Profit Organizations For-Profit Social Enterprises
  1. Issuance of Zero Coupon Zero Principal Instruments for specific project or activity which should be completed within the duration specified in the fundraising document and subject to such specific project or activity coming under the purview of the list of eligible activities
  2. Donations through Mutual Funds Schemes
  3. Any other Board specified means
  1. Issuance of Equity shares on the main board, SME platform, or innovators growth platform or issuing equity shares to an Alternative Investment Fund including a Social Impact Fund
  2. Issuance of Debt Securities
  3. Any other Board Specified means
  1. Minimum Requirements for registration on Social Stock Exchange:
    A Not-for Profit Organization (NPO) desirous of registration on the Social Stock Exchange (SSE), in terms of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, is required to fulfil the criteria detailed under Annexure 1.

Disclosure Requirements of Social Enterprises/For-Profit Social Enterprise/Not for Profit Organization:

With great privilege comes greater responsibility so will be case for Social Enterprises (SE). The introduction of Social Stock Exchange (SSE) has opened new doors for the Social Enterprises (SE) to get themselves listed and explore the traditional financial markets by raising funds on recognized platform of the Board but this also brings a chain of enhanced disclosure requirements to be complied with by these Social Enterprises (SE).

Disclosure Requirements

Not-For-Profit Organizations

  1. Annual disclosures on the General aspects, Governance aspects and Financial aspects within 60 days from the end of the financial year or within Board specified period
  2. Furnish a Statement of Utilization of Funds on a quarterly basis viz within 45 days from the end of the quarter, till the time issue proceeds have been fully utilized or stated purpose has been achieved

For-Profit Social Enterprises

  1. Compliance with the disclosure requirements specified in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 pertaining to the issuers whose specified securities are listed on the Main Board or the SME Exchange or the Innovators Growth Platform, as the case may be.

Social Enterprises

  1. Disclose any event that may materially impact their planned achievement of outputs or outcomes to the Social Stock Exchange(s) or Stock Exchange(s) where it is registered or has its specified securities listed, maximum within seven days or within Board specified period from the occurrence of such events.
  2. Submit an Annual Impact Report (AIR) capturing the qualitative and quantitative aspects of the social impact generated by the entity including the impact generated by the project or solution for which funds have been raised in Board specified format, duly audited by a social audit firm employing a social auditor. Such report is required to be furnished within 90 days from the end of the financial year.

Conclusion:

The introduction of Social Stock Exchanges undeniably is a welcome step in the securities market which would improvise the visibility and knowledge, of all the stakeholders, especially funders, issuers, and customers of such social enterprises. These stock exchanges are anticipated to bridge the funding gap for such social enterprises thereby creating the necessary social investment ecosystem so as to maximize the positive social impact and place the environmental, social and governance (ESG) features within the pursuit of profits and growth.

References:

  1. Chapter X-A of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018
    https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/aug-2022/1659325789387.pdf#page=1&zoom=page-width,-15,842
  2. Chapter IX-A of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
    https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/jul-2022/1659096400607.pdf#page=91&zoom=page-width,-15,833
  3. Framework on Social Stock Exchange (SSE) notified by the Securities and Exchange Board of India as on September 19, 2022
    https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2022/1663587424298.pdf#page=1&zoom=page-width,-15,251
  4. The British Council report on the state of Social Enterprises in India
    https://www.britishcouncil.org/sites/default/files/bc-report-ch4-india-digital_0.pdf

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