Understanding The Social Stock Exchange: A Primer

All of us are aware that the concept of Social Stock Exchange stemmed up from the Budget speech of Hon Finance Minister Mrs. Nirmala Sitharaman. By 2022, SEBI granted node for setting up a Stock Exchange for Social Enterprise.

Many of us are members of social and charitable institutions. Those social institutions have big dreams, big goals and of course, big projects but all struggle when it comes to funding those projects.  Here comes the significance of the Social Stock Exchange in the modern era.

A Social Stock Exchange (SSE) presents you with an innovative idea which helps those eligible social enterprises to raise funding via stock exchange for their eligible activities / projects.  Here the focus primarily rests on social intent.

I can imagine a whole host of questions popping up in your minds…

How does the Social Stock Exchange help? Maybe only for big social clubs!

Whether our social institution forms part of social enterprises?

Even if it forms parts there is another jargon of eligible activities, whether our activities are eligible?

We shall cover to an extent all the above aspects…

Before that let us make sure what the stock exchange really does. Stock exchange is a platform where people can buy and sell securities of publicly traded companies. The companies make primary issues in the form of Initial Public Offer and Further Public Offer in stock exchanges and ensures liquidity to buyers by providing a secondary medium for exchange of securities. The primary issue is made by companies following certain requirements set by Securities and Exchange Board of India and Stock exchanges.  Initial Public Offering is the first step a company enters on a public platform i.e., stock exchange either as a fresh issue or offer for sale.Fresh issue is listing of securities for the first time while an offer for sale is offloading existing securities of promoters / major shareholders into public.Further Public offer is subsequent issues of securities of the company which again may be a fresh issue or offer for sale.Here securities mean shares or any other securities which are compulsorily or optionally convertible shares.

Hence, stock exchanges present an opportunity for the company to raise funds and at the same time, allows the investor community to participate in the investment process.  The common man can purchase the securities of the company irrespective of its size with benefits of returns including capital appreciation. The market price of the securities is determined by supply and demand, and of course, the Company performance, industry trends, and global economic conditions – all contribute to it.Companies can use the money raised from selling securities to fund their growth and expansion plans. These are all available for Companies other than Social Enterprises.

With the advent of Social Stock Exchanges, the Non-Profit Organizations are endowed with a splendid opportunity to list in Social Stock Exchanges thereby giving an opportunity to participate in the social cause.

Can it be allowed freely? Then it will be chaos.  Hence there is a framework, a couple of checkpoints with stringent eligibility norms.

When we mention Social Enterprise, there could be a probability of being carried away with the notion that it considers only the non-profit enterprise…It is not so.  It includes both non-profit as well as profit making organizations.Profit making organizations have umpteen opportunities to list through normal stock exchanges as well as social stock exchanges. You might have noticed there are many social enterprises focusing on social causes and at the same time, make profit too.So, both types of organization with social intent, can be listed on social exchange platforms.Here the write up deals primarily about listing of the non-profit organizations.

The frameworks endow opportunity to non-profit entities with a previous track record of three years:

1. Charitable trust registered under the Public Trust Statutes / the Indian Trusts Act 1882
2. Charitable society registered under the Societies Registration Act, 1860
3. Companies incorporated under Section 8 of the Companies Act, 2013

Also, such entities should have mandatorily registered under 12A/12AA/12AB (with validity of 12 months) and 80G of the Income Tax Act, 1961

The social intent of such non-profit social enterprise is being classified into 16 broad social activities to give a wider coverage which include eradicating hunger, poverty, malnutrition and inequality, promoting healthcare, supporting education, employability and livelihoods, gender equality, empowerment of women and supporting incubators of social enterprises etc.The Social Enterprise shall target underserved or less privileged population segments or regions recording lower performance.  This is ensured through a 67% hurdle i. e 67% of its activities are eligible to serve the target population.Social Enterprise to touch or cross the 67% hurdle to avail list in the Social Stock Exchange.

Board also stipulated few financial norms based on past financial year Audited Receipts / or Fund Flow Statement:

1. Minimum Annual spending in the past financial year - Receipts or Payments from Audited accounts/ Fund Flow Statement must be at least Rs. 50 lakhs 
2. Funding in the past financial year - Receipts from Audited accounts/ Fund Flow Statement must be at least Rs. 10 lakhs

These entities are kept outside the purview of Social Stock Exchange - Corporate foundations, Political or religious organizations or activities, Professional or trade associations, Infrastructure, and housing companies, except affordable housing.

Now let us say you are eligible to list… Do you know who can invest in your social enterprise listed in the Social Stock Exchange?

Only two categories of investors have access to social stock exchange, Institutional investors and Non-Institutional Investors.  In simple terms Institutional investors are primarily big financial institutions like LIC, Pension Fund or Scheduled Commercial Banks while Non-Institutional Investors are primarily corporates and high net worth individuals.  Retail individual investors cannot participate in the social stock exchange.

How the Non-Profit Social Enterprise is allowed to structure their issue is specified in the SEBI Issue of Capital Disclosure Regulations, 2018.  Instrument allowed for issue is Zero Coupon Zero Principal instruments. Certain other means available to NPOs may include social venture funds, development impact bond structure, and donations through Mutual Funds. Just to give more clarity, Zero Coupon Zero Principal Instruments are those instruments with no payment of interest and no payment of principal also.  Issue can be made only through Dematerialized form and physical mode is not available.  Minimum issue size stipulated is 1 crore and Minimum Application size is Rs. 1 lakh.

There is also a Minimum Initial Disclosure requirement stipulated in ICDR to raise funds through social stock exchanges:

1.         Disclose the Social enterprise’s Vision & Mission, Target Segment of Investors, Strategy & Governance, and its Operations including Management, Finance, Compliance, Credibility, Social Impact, Risk etc.

2.         Structure of the draft fund-raising document/ final fund-raising document shall be as per the guidance of SSE Governing Council.

This package comes along few mandatory disclosures too as per SEBI Listing Obligations and Disclosure Requirement Regulations, 2015:

1.         Annual disclosure on Corporate Governance, Financial Aspects and additional parameters by NPO Social Enterprise on Social Stock Exchange which have either raised funds through SSE or are registered with Social Stock Exchange within 60 days from the end of the financial year.

2.         Duly Audited Annual Impact Report (covering both qualitative and quantitative aspects) by all NPO Social Enterprises which have registered or raised funds in Social Stock Exchange within 90 days from the end of financial year.  This report encompasses Strategic Intent and Planning, Approach, Impact Score Card and any additional parameters as it deems fit.  This report is audited by Social Auditors.

3.         Listed NPO shall submit a statement of utilization of funds to SSE within 45 days from the end of quarter.

Conclusion

The concept laid down by the Indian government is in line with the global stock exchanges.  An inclusive development – sustainably and social welfare is the core moto and impetus behind this fabulous initiative by creating avenues for Social Entrepreneurs to raise capital and take it further heights.