Social Stock Exchange: A Rendezvous of Philanthropy and Finance

[By Saumya Mittal]

The author is a student of Gujarat National Law University.

 

Introduction

The implementation of the Social Stock Exchange (“SSE”) in India exemplifies a point where socialism and capitalism intersect with the appropriate balance, providing a fitting illustration. Although in existence for more than two decades around the globe, SSE was mentioned for the first time in India in the Union Budget of 2019-20. The then-Finance Minister had declared the objective of SSE to be realisation of the social goal by way of our capital markets. Consequently, SEBI constituted a Working and a Technical group, which submitted their reports and recommendations on 1st June 2021 and 6th May 2021, respectively. Finally, on 22nd February 2023, SEBI gave its final approval to NSE for the constitution of SSE. But what exactly is an SSE?; What are the regulations that SEBI has mandated, and how is this whole concept going to be realised in the end? These are some aspects that this article shall try to address.

Meaning of Social Stock Exchange

Regulation 292A of the SEBI (ICDR) Regulations, 2022 defines SSE as a separate segment of a recognised stock exchange with which a Non-Profit Organisation (“NPO”) can be registered and/or its securities can be listed with SSE. But what is SSE? It is a stock exchange, where NPOs shall be listed rather than commercial entities. Like a company listed on a stock exchange for raising capital, an NPO gets listed on SSE for raising funds for its operations. The amount it receives is a donation which people donate without expecting any monetary return.

Definition of NPO

NPO stands for- Not-For-Profit Organisation. Their main objective is social welfare, and their primary sources of income are donations, subscriptions, etc. Regulation 292A(e) defines NPO as any entity constituted under the Indian Trust Act, 1882; the Public Trust statute of the relevant state; the Societies Registration Act, 1860; Section 8 of the Companies Act, 2013; or as may be specified by the Board.

Definition of For-Profit Social Enterprise (FPE)

It is an enterprise whose primary objective is to do social service in a specified way and, at the same time, earn profit through such activities. It aims to maximise both profit and social welfare. An instance of such an organisation can be a business that employs marginalised people to manufacture jute bags (to act as an alternative to plastic bags). Regulation 292A defines it as a company/body corporate operating for profit and within the purview of a social enterprise. FPEs and NPOs are collectively called ‘social enterprises.’

Brief History

SSE has been introduced in 7 countries till now, of which only three exchanges are currently active. SSE in Brazil, Portugal, South Africa and the UK failed and thus became non-functional, whereas the same in Canada, Jamaica, and Singapore are still operational. The focus of Canada and Singapore is solely on helping small and mid-cap companies raise capital through SSE. Social organisations, in general, are excluded from getting listed on the exchange. On the other hand, Jamaica is gearing up to introduce NPO under the aegis of SSE.

The failure of SSE has been observed to be due to a lack of focus on NPOs and diversion of funding towards FPEs only, major project-based funding and a dearth of social funding culture. India needs to learn from the mistakes of such predecessors.

Objectives of SSE

SSE intends to reduce the adverse economic impact of COVID-19 by utilising social finance to restore the lives of pandemic-hit people. It aims to address this urgent issue by unlocking vast reserves of social finance and fostering collaboration between social and commercial capital. It emphasises the importance of generating profits for social goals as a critical component of sustainability (this rationale only applies to an FPE).

How will the SSE function?

SEBI (ICDR) Regulations, 2022 state that SSE regulations apply only to NPOs registered and/or listed with it and to FPEs that want to be recognised as social enterprises. It is important to note here that it neither talks about registering FPEs nor listing their securities on SSE. This is because Regulation 292G (b) states that if an FPE wants to raise funds, it shall do so via the main Board (NSE/BSE), the SME platform, Alternative Investment Fund or by issuing debt securities. So, it can be inferred that, at present, SEBI has no intention of allowing FPEs to raise capital directly from SSE or even be registered with it. The Listing and Registration at present are limited to NPOs only, although the SSE framework provisions apply to FPEs as well.

Also, SSE can only be accessed by institutional and non-institutional investors. Along with this, an SSE Governing Council shall also be constituted to monitor its functions. Further, in 292E, areas of social work have been provided from which political or religious organisations, corporate foundations and housing companies have been explicitly excluded.

The framework provides for only two securities through which money can be raised by NPO – Zero Coupon Zero Principal Instruments and donations through mutual funds. The former is a financial instrument in which no coupon is provided, and no principal money is paid on maturity. It can be compared to a bond. Generally, when an entity issues a bond (which is a debt security), it has to make interest payments on the same and there’s final payment of principal money on the maturity of bonds. In Zero Coupon Zero Principal instrument, any interested investor can purchase these securities but he shall receive neither the interest nor the principal money. So instead of a debt, it’s a donation in essence. But it’s still similar to a bond due to its structure i.e. it shall be issued for a certain time or a certain project, albeit the monetary returns. Similarly, donations can be made in the form of investment in mutual funds offered by the NPOs. For issuance of any security, NPO is required to file a draft fundraising document with SEBI.

Advantages of SSE in India

SSEs can provide an additional source of funding to NPOs since they do not have access to traditional capital markets. This can enable these organisations to grow and scale their impact. SSE shall act as a perfect bridge between an NPO and an investor. Not only this, if FPEs are later allowed to be listed on SSE, they will become more mainstream in the market and raising funds would become easier for them. Moreover, since they will provide returns, investors shall be more willing to invest in the same. If this becomes a financial trend, more FPEs would be in the picture. This would relieve the government’s burden of spending its limited resources on social work. Also, SEBI (LODR), 2022 mandates numerous disclosure requirements for NPOs and FPEs, which would establish investors’ confidence in that SSE. This is a significant advantage of SSE because earlier, there was not much transparency in the functioning of NPOs, and donors or social investors who hardly knew where their money was being utilised, but these disclosure requirements would ensure extensive transparency.

Loopholes in the Framework

The framework is drafted in such a manner that small-scale NPOs and FPEs will not be able to list with SSE. The minimum annual spending and funding in the previous financial year should be Rs. 50 lacs and Rs.10 Lacs, respectively. Too many disclosure requirements and compliances would discourage various NPOs and FPEs from registering with SSE. Such extensive procedural requirements (many of which are annual) are also unaffordable for many social enterprises.

Social enterprises also need to prepare an Annual Impact Report that would capture the qualitative and quantitative impact created by the entity. Since social work and its impact are quite subjective, it may get cumbersome for these entities to draft such a report. Also, social auditors are required to audit the financial statements of such NPOs and FPEs annually. This is a major issue with respect to NPOs since there is no uniformity in the maintenance of accounts by an NPO. Every NPO follows a different basis (cash basis, accrual basis, etc.), and they follow no common accounting standard. Due to this, there would be no uniformity in auditing the accounts. An NPO may collude with a social auditor to manipulate its financial statements and later claim lack of uniformity as a defence.

Recommendations

If SSE turns out to be a success, it should allow the listing and registration of FPEs as well. Additionally, provisions should be made for small-scale NPOs and FPEs since India’s social sector is largely composed of these small-scale entities. If India wants to make social enterprises strong, it should also make provisions for its listing. Although disclosure requirements are required for extensive transparency, SEBI should make them less stringent for small-scale entities so they are not discouraged. Tax benefits should be given to social impact investors to incentivise them to donate more funds. Within the CSR duties of companies, buying the securities of NPOs and FPEs should also be added so that CSR can be outsourced (in a way) to the latter and companies can solely focus on their main objectives. Also, uniform accounting standards should be developed by ICAI for those NPOs that wish to be listed with SSE.

Conclusion

Unlike other countries, the Indian government and SEBI, have developed a remarkable framework for SSE that is almost exhaustive, except for some minor loopholes here and there. Since India has a large social sector, SSE has great potential to be a success in India, which would benefit the masses significantly. It perfectly applies to capital markets in the social sector, and the less fortunate shall get the best of both worlds. But it should be kept in mind that in the name of raising funds, the primary goal of social welfare should not be lost, and thus some social constraints are required. All in all, SSE is a unique and fruitful rendezvous of philanthropy and finance.

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