the story So Far: On 22 February, the National Stock Exchange of India received final approval from the market regulator Securities and Exchange Board of India (SEBI) to set up a Social Stock Exchange (SSE). Finance Minister Nirmala Sitharaman, while presenting the Union Budget in 2019, had proposed steps to bring stock exchanges under the ambit of a market regulator. It had argued that it was time to “take its capital market closer to the masses and meet various social welfare objectives for inclusive growth and financial inclusion.” The proposal was approved in September 2021.
What is Social Stock Exchange?
The SSE will function as a separate segment within the existing stock exchange and help social enterprises raise funds from the public through its mechanism. It will serve as a medium for enterprises to access finance for their social initiatives, gain visibility and provide greater transparency about funds raised and utilised. Retail investors can invest only in securities offered by for-profit Social Enterprises (SEs) under the Main Board. In all other cases, only institutional investors and non-institutional investors can invest in securities issued by SEs.
What about qualification?
Any non-profit organization (NPO) or for-profit social enterprise (FPSE) that establishes a primacy of social intent will be recognized as a social enterprise (SE), making it eligible to be registered or listed on the SSE Will give
Seventeen laudable criteria listed under Regulation 292E of SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018 mandate that enterprises should serve to eradicate hunger, poverty, malnutrition and inequality; promoting education, employment, equality, empowerment of women and LGBTQIA+ communities; working towards environmental sustainability; inter alia, safeguarding national heritage and the arts or bridging the digital divide. At least 67% of their activities must be directed towards achieving the specified objective. To be established by calculating whether, in the immediately preceding three-year period, 67% of its average revenue came from eligible activities, the expenditure (in the same proportion) was incurred to achieve the objective or the target population was 67 The total beneficiary base Of%. Corporate foundations, political or religious organizations or activities, professional or trade associations, infrastructure and housing companies (except affordable housing) will not be recognized as SEs.
Additionally, an NPO will be considered ineligible if it is dependent on corporates for more than 50% of its funding.
How do NPOs raise money?
NPOs can raise funds either through private placement or public issue by issuing zero coupon zero principal (ZCZP) instruments or by donating from mutual funds. SEBI had earlier recognized that NPOs by their very nature have a primacy of social impact and are non-revenue generators. Thus, there was a need to provide NPOs direct access to the securities market to raise funds. ZCZP bonds differ from traditional bonds in that they have a zero coupon and no principal payment at maturity. The latter provides for a fixed interest (or repayment) on the funds raised through various contractual agreements, while the ZCZP will provide no such return, instead promising a social return.
It is mandatory that the NPO is registered with SSE to facilitate the issuance. The instrument should have a specific tenure and can be issued only for a specific project or activity to be completed within a specified period as mentioned in the fundraising document (to be submitted to the SSE). It must also demonstrate requisite expertise through its performance in similar projects in the past, thus, gaining investor confidence and dealing with concerns about potential defaults.
The minimum issue size for issue of ZCZP is currently set at Rs 1 crore and the minimum application size for subscription is set at Rs 2 lakh.
The NPO can choose to register on the SSE and raise funds through other means than not through it. However, they will have to make necessary disclosures about it.
What about completion of projects?
Another structured finance product available for NPOs is Development Impact Bonds. On completion of a project and delivered at pre-agreed costs/rates on pre-agreed social metrics, the grant is given to the NPO. Donors who make grants based on achieving social metrics will be referred to as ‘Outcome Funders’.
Since the above payment is on post facto basis, the NPO will also have to raise funds to finance its operations. This is done by a ‘risk funder’ who, while enabling the financing of operations on a pre-payment basis, also bears the risk associated with non-delivery of social metrics. He usually earns a small return if the metrics are delivered.
How do FPOs raise money?
For-Profit Enterprises (FPEs) are not required to register with social stock exchanges before raising funds through SSEs. However, while raising through SSE it should comply with all the provisions of ICDR Regulations. It can raise money by issuing equity shares (on the Main Board, SME Platform or Innovators Growth Platform of the stock exchange) or by issuing equity shares to Alternative Investment Funds including Social Impact Funds or by issuing debt instruments.
What disclosures need to be made?
SEBI regulations state that a social enterprise must submit an annual impact report in a prescribed format. The report should be audited by a social audit firm and submitted within 90 days from the end of the financial year.
The listed NPOs are required to submit, on a quarterly basis, particulars category-wise about the funds raised, how they have been utilized and the unutilized balance. The latter need to be furnished until the proceeds are fully utilized or the objective is achieved.
- On 22 February, the National Stock Exchange of India received final approval from the market regulator Securities and Exchange Board of India (SEBI) to set up a Social Stock Exchange (SSE). Finance Minister Nirmala Sitharaman, while presenting the Union Budget in 2019, had proposed steps to bring stock exchanges under the ambit of a market regulator.
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The SSE will function as a separate segment within the existing stock exchange and help social enterprises raise funds from the public through its mechanism.
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SEBI regulations state that a social enterprise must submit an annual impact report in a prescribed format. The report should be audited by a social audit firm and submitted within 90 days from the end of the financial year.