After the landslide win of India’s right wing Prime Minister, Modi, the Indian capital market is witnessing quite a boom while the regulatory affairs of the capital markets in India is undergoing several reforms. One of the reforms which has been decided upon by the capital market regulator of India, known as the Securities and Exchange Board of India (SEBI) in its September 28, 2021 board meeting, was the regulatory set up of a Social Stock Exchange (SSE) in India.
The Indian capital market including its stock market is governed completely by the regulations passed by SEBI. As such, this decision by SEBI has the potential to open a huge fundraising landscape for companies engaged in a social mission in India.
Page Contents
What is a Social Stock Exchange and Why is it Important?
The concept of a Social Stock Exchange (SSE) is rather new. It is a mechanism that allows companies engaging in work for the betterment of the society to raise finance in an environment that is quite similar to that of a stock market.
However although the object is the same, considering the nascent stage of this concept, different countries are engaging with this in diverse ways. For example, in the UK, the Social Stock Exchange functions mostly as an information platform providing information on businesses that are listed on the London Stock Exchange and have passed the social impact test laid down by the SSE.
In South Africa, the SSE is known as SASIX (South African Social Investment Exchange) and works exactly like a stock exchange. It also allows investors to search for and pick the companies that are working on issues that matter to the investors.
The Indian Social Stock Exchange (SSE) Framework
In India, companies engaged in social work usually had to register as Section 8 companies. As they did not have the option to get funds from the stock market, the modus operandi was to register as a private limited company and get funds from the routes available to a private company.
1. SEBI approved a framework for the creation of the Social Stock Exchange (SSE), which is laid down hereunder-
2. The Social Stock Exchange (SSE) shall operate as a separate segment of existing stock exchanges.
3. Non Profit Organizations (NPO) and For-Profit Social Enterprises (FPE) which have as their main goal both social intent and social impact shall be eligible to participate in the Social Stock Exchange (SSE) if they undertake in a social activity out of 15 activities that shall be listed by SEBI.
4. The NPOs that are eligible for participation in the Social Stock Exchange (SSE) and are registered with SSE shall be allowed to raise funds through equity, zero coupon zero principal bonds, social impact funds, development impact bonds as well as Mutual Funds.
5. Social Venture Funds will be renamed Social Impact Funds under SEBI (Alternative Investment Funds) Regulations (SIFs). The corpus for such funds will be lowered from Rs. 20 crore to Rs. 5 crore. In addition, the reference to “muted returns” will be dropped.
6. SEBI would make appropriate changes to its regulatory framework to require early and ongoing disclosures for Social Enterprises including areas of governance, financial, and social impact.
7. As per the framework social impact auditing, i.e. social auditing, will be compulsory for Social Enterprises which aim to raise funds or get themselves registered on SSE. While at first only reputed institutions with expertise in social audit and employing social auditors qualified with the certification course conducted by NISM shall be allowed to carry out social audits, ICAI shall have a distinct sustainability directorate which shall operate as a self-regulatory organization for Social Auditors. SEBI shall create a capacity building fund of around Rs. 100 Crores with the help of SIDBI, NABARD as well as stock exchanges.
Working report by SEBI on SSE
Considering the growing demand for an SSE in India, SEBI created a working group to analyze Social Stock Exchange (SSE) and submitted its report on June 1, 2020. While thereafter another technical group was constituted to provide comments on the first report, it is the first report that is of more importance. The report provided for a structure for Social Stock Exchanges (SSE) to operate in India. The report also recommended that the SSE be instituted under national exchanges such as the National Stock Exchange and the Bombay Stock Exchange.
However, it is worth noting that the analysis does not solely focus on a framework to ease capital exchange, but instead takes a more comprehensive approach to creating an enabling ecosystem to promote the growth of the country’s social impact sector. Currently, India has a number of ways for funding the social sector (both non-profit and for-profit social enterprises). These include, among other things, Corporate Social Responsibility (CSR), impact investing, Socially Responsible Investing (SRI), and philanthropic or government contributions.
The SSE aspires to integrate all of these various routes into a single national platform and to develop a consistent framework for reporting and evaluating social and financial outcomes. Thus, the SSE may help unlock more resources for social impact investment by –
1. Increasing the visibility of social enterprises,
2. Institutionalizing innovative fund-raising instruments, and
3. Instilling trust in funders by developing a consistent standard for reporting and assessment. The SSE aspires to efficiently deploy fundraising instruments and structures made available by regulatory guidelines to social entrepreneurs that will also be dependent on the nature of the social enterprises.
How Social Enterprises Shall be Affected by the Social Stock Exchanges
With the establishment of the Social Stock exchanges, NPOs shall be able to raise money via zero coupon or zero principal bonds, Social Venture Funds (a category 1 Alternative Investment Fund), Pay-for-Success models as well as Mutual Funds.
On the other hand For Profit Enterprises (FPEs) shall be able to raise capital through listing of equity as well as social venture funds which shall require the minimum reporting and disclosure standards that are applicable to all FPEs receiving funding via AIFs. FPEs shall also be able to raise capital in the manner as allowed for NPOs as well.
As India has a policy of corporate social responsibility, which is mandatory under Section 135 of the Companies Act, 2013, SSEs allow for several innovative models for deployment of the CSR funds as also marked by the 2020 SEBI report.
The report has also made certain recommendations which aims to bring in the CSR funds into better circulation for the social enterprises via the SSEs, as laid down below-
1. Allow SSE financing to account for a company’s CSR commitments.
2. Use CSR funds for pay-for-success models, in which CSR funds are successfully allocated and payment is given only once a positive social impact is achieved.
3. Allowing for an exchange of CSR expenditures between companies that have an excess of CSR expenditures and those that are deficient in their CSR expenditures.
4. Allow corporate expenditure on SSE capacity building to count toward their CSR requirements.
Wrapping it Up
As can be seen, the introduction of this concept can bring in a much needed boost for non-governmental organisations in India to receive funds directly from businesses and that too, in a much transparent manner. Plus, this move is surely going to even further the attractiveness of investing in India in 2021 and beyond.
Hope you found the article insightful. If you have any questions, drop in a comment and I’ll get back to you.
Author Bio
