Social Stock Exchange (SSE) under the regulatory ambit of SEBI
Historically, social organisations have constantly been fraught with the issue of lack of a formal stream of aid, financial or otherwise. Such organisations’ sustenance rested strongly on donations and funding from the countries north of the Tropic of Cancer (their tax laws enabled the funds to flow to the developing economies for social and environmental activities) or corporates and business houses brimming with accumulated wealth. But the main bone of contention lay ahead. One needed to ask the question, “Is this model of philanthropy sufficient to counter the glaring issues of our society?” The preceding question paves the way for a more reformative approach to address the issue of capital accessibility in the following way
- Harnessing of capital through impact investment
- Institutionalisation of methodology for measuring and communicating social return
- Capacity building to make Social Enterprises grow and absorb capital growth and expand its social impact.
In the spirit of financial inclusion and capital accessibility, the SEBI, in September 2021, approved the creation of the Social Stock Exchange in India. The Social Stock Exchange is a novel concept in India and such a platform is meant to serve the private and non-profit sectors by channelling greater capital to them. The idea of SSE was first floated by the Finance Minister of India Ms Nirmala Sitharaman in her Budget Speech of 2019-20.
The Social Stock Exchange is a market-oriented approach to social problems. It is a place where securities or other funding structures are “listed” in addition to a set of procedures that act as a filter, selecting only those entities that are creating measurable social impact and reporting such impact. Moreover, it acts as a platform for listing social enterprises, and voluntary and welfare organisations so that they can raise capital
The aim of the initiative is to help social and voluntary organisations which work for social causes to raise capital as equity or debt or a unit of a mutual fund. It provides alternative sources of financing for social welfare projects while showcasing India’s independence from foreign aid. SSE already exists in countries such as Singapore, the UK, and Canada among others. These countries allow firms operating in sectors such as health, environment and transportation to raise capital.
What is a social enterprise?
Social enterprise can be defined as a non-loss; non-dividend paying company created and designed to address a social problem. Here are some traits of a social enterprise:
- Specific positive social impact is the primary reason for the entity’s existence (vs. ancillary or secondary development, such as a company’s CSR program)
- The business model reflects responsible entrepreneurship and growth for staff and overseers,
- Beneficiaries/customers, overall community/environment
- Has a market orientation
- Embraces for-profit, as well as not-for-profit approaches,
What are the new rules as per the SEBI guidelines?
Under the new rules, SSE will be a separate segment of the existing stock exchanges, according to the three separate notifications issued by the Securities and Exchange Board of India (SEBI).
- In its circular, the regulator specified minimum requirements to be met by an NPO for registration with SSE,
- Disclosure requirements for NPOs raising funds through the issuance of zero-coupon zero principal instruments (ZCZP)
- Put in place annual disclosure requirements that need to be made by NPOs on such exchanges.
“Zero Coupon Zero Principal instrument” means an instrument issued by a Not for Profit Organisation (NPO) which shall be registered with the Social Stock Exchange segment of a recognized Stock Exchange in accordance with the regulations made by the SEBI.
The minimum requirements to be met by a Not for Profit Organisation (NPO) for registration with SSE in terms of Regulation 292F of the ICDR Regulations are as follows:
|Entity is registered as an NPO
|Registration certificate valid at least from next 12 months at the time of seeking registration with SSE
|Entities must be registered in India as one of the below:
|Ownership and control
|Governing document (MoA & AoA/ Trust Deed/ Bye-laws/ Constitution)
|Disclose if NPO is owned and/or controlled by government or private
|Exemption under Income Tax Act
|Registration Certificate under section 12A/12AA/12AB under Income Tax Act, 1961
|Registration Certificate under section 12A/12AA/12AB to be valid for at least the next 12 months. Does not have a notice or ongoing scrutiny by Income Tax.
|Registration with Income Tax as an NPO
|Valid IT PAN
|Age of the NPO
|Min. 3 years
|Deduction under Income Tax Act, 1960
|Valid 80G registration under IncomeTax Act, 1961
|Entity to ensure whether tax deduction is available or not to investors.
|Eligible to be Social Enterprise
|Requirements with Regulation 292E of ICDR Regulations
|As may be specified by SSE
|Minimum Funds Flow
|Annual spending in the past year
|Receipts or Payments from Audited accounts/ Fund Flow Statement
|Must be at least Rs 50 lakhs
|Funding in the past financial year
|Receipts from Audited accounts/ Fund Flow Statement
|Must be at least Rs 10 lakhs
Under the new rules, SSE will be a separate segment of the existing stock exchanges, according to the three separate notifications issued by the SEBI. Social enterprises (SEs) eligible to participate in the SSE will be entities–non-profit organisations (NPOs) and for-profit 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.
According to the SEBI, the social enterprises will have to engage in a social activity out of 16 broad activities listed by the same. The eligible activities include
- eradicating hunger, poverty, malnutrition and inequality;
- promoting healthcare, supporting education, employability and livelihoods;
- gender equality empowerment of women and LGBTQIA+ communities;
- supporting incubators of social enterprise.
Asia has been identified as the birthplace of several successful and large social enterprises (SE) such as BRAC, Grameen Bank, Self-Employed Women’s Association of India (SEWA) and the Population and Community Development Association (Thailand). But the above-mentioned enterprises are exceptions rather than the norms. Most of the SE in Asia are small-to-mid-sized, with neither unlimited access to capital nor the required recognition of their impactful work.
Transitioning from grant dependency to commercial viability
The graph illustrates a gradual shift of the organisations from donor dependency to financial sustainability and independence. Giving it capitalistic undertones, the SEs are transforming towards succinct commercial interventions in a bid to preserve their main goal of societal and environmental emancipation.
Challenge faced by Asia:
- Comprising 60% of the world’s population, it is vulnerable to economic downturns, social upheaval and environmental degradation.
- Reliance on philanthropy and foreign aid has its limitations as they are
- Increases dependency on donors and therefore, one has to bear with their idiosyncrasies for a steady
- There is an absence of a legal criterion to differentiate between a social enterprise and a normal enterprise.
- No framework for social impact assessment.
- Lack of resources with NGOs so as to maintain their financial records.
- Could lead to the emergence of a new set of intermediaries.
- Misuse or diversion of funds
- The lack of consistent methodologies for assessing the social impact, as well as the drivers and metrics of such impact, is one of the key issues currently hampering growth in this sector.
According to Jacqueline Novogratz, CEO of Acumen Fund, Social Enterprises need capital because they:
- tend to work in markets where people make $1-$3 per day and they have to make all their decisions within that income level
- the geographies where they work often have poor infrastructures, such as roads, electricity and water
- they are often creating markets and this requires trust from the community, and building trust takes time.
Out of the eight SSEs, four are active– Canada, Jamaica, Singapore and India and four– Brazil, Portugal, South Africa and the UK are no longer in operation. The following table shows the establishment of Social Stock Exchanges across the globe and what they have accomplished:
|Name of SSE
|Data and Statistics
|Only for non-profits. Publicity of listed projects. Investment in the form of “social shares”
|Raised Rs 19 million (~$3.6 million USD) for more than 188 projects in its 15 years of operation
|Directory of verified businesses having a social impact. Only for-profit companies are eligible for the Annual review of the impact report. No trading
|400 million euros raised till 2015
|Social Venture Connexion (SVX)
|Primary offering platform (secondary trading not allowed). Networking platform returns include social/ environmental and financial returns
|Mobilised capital aggregating to around $350 million with a network of around 500+ organisations and 1200+ investors
|Impact Investment Exchange (IIX)
|FPEs and NPOs marketing of social projects social/ environmental returns along with financial returns
|Data not available
|NPOs and social businesses. Tax benefits to investors’ social/ financial returns. Impact investment exchange
|Funds raised – $2.7 million with 15 listed projects as of 2009
|Available for NPOs only. Crowdsourcing platform. No financial returns. Audit and reporting requirements
|$240,103 as of 2020
UK SSX was developed to provide a platform to small and mid-cap companies (with a social impact lens) which were not able to raise sufficient capital through the stock exchanges on which they were listed. It adopted the structure of a secondary listing platform through which investors could screen for impact-oriented organisations and invest in their securities through their listing on other stock exchanges. It acts more as a directory connecting social enterprises with potential investors,
Angel investors and venture capitalists (partially borne from the dot-com and other high-wealth creation companies in the 1990s) entered the market looking to invest in innovative start-ups.
The Thai government too has set up the National Village and Urban Development Fund for investment, employment and income generation in the country.
Along the same lines are Singapore’s Social Innovation Park Ltd (SIP) a not-for-profit organization that incubates social entrepreneurs and innovators worldwide to bring positive innovations to lives and societies
Furthermore, investigations in India and the Philippines – as well as in South Africa, Brazil, Kenya, and other countries – reveal no shortage of market-based approaches that claim to be profitable or financially self-sustaining. On closer inspection, many are struggling financially and most serve a thousand people at maximum.
Following the western trend, India (one of the first Asian countries to see the emergence of for-profit social enterprises and continue to lead the pack) saw its first social venture capitalists in 2002. The setting up of Aavishkaar India Micro Venture Capital aimed to provide financial and managerial support to rural and semi-urban entrepreneurs in India. Aavishkaar takes equity positions for their investment and has been known to build deep and successful partnerships with SEs.
Clearly, this is an example of where for-profit and nonprofit business methods have converged successfully. It also manifests a shift from traditional development aid efforts to a more market-driven and independent venture to bring change.
India has at least 3.1 million non-profit organisations (NPOs), more than double the number of schools and 250 times the number of government hospitals, according to an estimate in a June 2020 report by Sebi’s SSE working group. Broadly, the idea behind the exchange is to enable NPOs to raise money from the market by registering and listing on the SSE. (Source- Livemint)
Recognising the positive impact of SEs, governments have begun to contribute towards fostering the sector. In India, for instance, there are at least three large federal sources for financial assistance:
- Council for Advancement of People’s Action and Rural Technology (CAPART). It works under the Ministry of Agriculture and provides funds for rural and agricultural development.
- Small Industries Development Bank of India (SIDBI)
- National Innovation Fund (NFI)
In order for social enterprises in India to gain credibility as a distinct field, it needs to build an
authoritative identity based on proven credibility and engagement with stakeholders
across the ecosystem. Capacity building, both in social impact measurement as well as in
general areas of management, remains a key challenge for the sector, but it is one that is
by no means insurmountable. As a facilitating and an instrumental tool, capacity building has a major role to play in planning, management, leadership, governance, transparency, and outcome measurement
As social enterprises emerge as an incredible alternative to traditional for-profit and non-profit organisations, balancing impact with sustainability and performance with mission alignment are important fundamental challenges for SEs against this backdrop of opportunity.
The Global Impact Investor Network (GIIN) defines “Impact Investments” as those that “seek to generate both financial return and social and/or environmental value – while at a minimum returning capital, and, in many cases, offering market-rate returns or better.”
In the context of a comprehensive ecosystem, the United States and European countries are far ahead of their Asian counterparts. In most western countries, the impetus to assist in impact investing and cultivating the SE sector has come from the government. In the process are comprehensive regulatory changes that are already showing a positive impact on the sector.
The lack of proper standards in India has led to a covert duplication of the FPOs and NPOs. With the proliferation of the intermediaries, the risks of information asymmetry have led to the diminishing of the investors’ confidence thereby, defeating the purpose of the Social Stock Exchanges. Proper identification of the metrics and methodology of social impact measurement is an urgent task that we must take into consideration as it impinges on transparency and discipline of the sector and communicates social mission achievement and justifies innovative business models.
Impact investment integrates financial, social and environmental considerations into decision-making.
In today’s world, an intersectional study of a subject has become crucial to understand its pros and cons. The plethora of information available, we need to make a conscious choice with a well-established framework. With the onset of new-age technology and the internet-of-things (IoT), there is a lot of potential for intervention in humanitarian development. India’s economic imperative is to feed, clothe, educate and empower more than a billion people, in ways that conserve and grow its natural, cultural and social heritages. It cannot expect to accomplish this lofty objective on the strength of conventional commercial capital alone.
Having an in-depth understanding of these social enterprises’ work, we aim to build a strong methodological platform for reporting and measuring the impact of social interventions. Our ongoing effort lies in devising a platform that investors can refer to and make an informed choice of putting their money into.
External Reference links
SEBI framework for SSE https://www.sebi.gov.in/sebi_
Gazette notifying the SSE by GoI https://egazette.nic.in/