Social Stock Exchange: Paving the way for opportunities and organized approach towards predetermined social objectives with the amplification of stock exchanges
A need for an independent, conspicuous social economy with a peculiar and sustainable structure with ample funding opportunities has been felt for a long time. Amplification of the stock exchange mechanism for availing of capital by the social ventures has been explored several times by the various regulatory authorities including the securities market regulator in India i.e. SEBI and the circular dated 21 September 2021 can be regarded as the fruition of the same.
A novel concept of ‘Social Stock Exchange’ or ‘SSE’ has been put forth by virtue of the said circular which aspires to establish a platform for the social entities to procure funding for the defined social activities.
The ‘Social Stock Exchange’ will be immersed as a separate division on the prevalent stock exchanges which in other words can be regarded as a distinct platform to enlist and facilitate the trading of various securities, and instruments issued by the predefined social entities while at the same time expedite the process of streamlining funding avenues for the subject entities.
In common parlance, NGOs are categorized under the periphery of social entities but the question to ponder is whether only NGOs should be the Social Entities or the broader perspective for the same should be established. Thus in order to have an inclusive view and to ultimately meet the ends of the initiative, along with NPOs (Not for Profit Organizations), FPSEs (For-Profit Social Enterprises) which cast a positive impact on society are also considered for the purposes of SEs (Social Enterprises).
Social Enterprise:
Not for Profit Organization
1. Charitable Trust
2. Charitable Society
3. Company registered under Section 8
4. Any other entity as may be specified
For Profit Social Enterprise
1. A Company registered under the Companies Act but does not include a Section 8 company
2. Any Body Corporate operating for profit
Statutory Guidelines
1. With regard to minimum requirements to be met by an NPO, SEBI insists that NPO needs to be registered as a charitable trust and should be registered for at least three years, must have spent at least ₹50 lacks annually in the past financial year, and should have received a funding of at least ₹10 lakh in the past financial year.
2. Both NPOs and FPSEs shall establish the primacy of social intent. As per Regulation 292E(2) of SEBI (ICDR) Regulations, the SE shall be indulged in at least one of the following activities
- eradicating hunger, poverty, malnutrition, and inequality;
- promoting health care including mental healthcare, sanitation, and making available safe drinking water;
- promoting education, employability, and livelihoods;
- promoting gender equality, empowerment of women and LGBTQIA+ communities;
- ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation;
- protection of national heritage, art, and culture;
- training to promote rural sports, nationally recognized sports, Paralympic sports, and Olympic sports;
- supporting incubators of Social Enterprises;
- supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building;
- promoting livelihoods for rural and urban poor including enhancing the income of small and marginal farmers and workers in the non-farm sector;
- slum area development, affordable housing, and other interventions to build sustainable and resilient cities;
- disaster management, including relief, rehabilitation, and reconstruction activities; (xiii) promotion of financial inclusion;
- facilitating access to land and property assets for disadvantaged communities;
- bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection;
- promoting the welfare of migrants and displaced persons; (xvii) any other area as identified by the Board or Government of India from time to time
3. Section 292G stipulates instruments that can be issued by Social Enterprises.
4. An NPO can raise funds through the following means
- Zero coupons zero principal instruments
- Donations through mutual fund schemes
- Any other means as may be specified by the Board
5. FPSEs can raise funds through the following means
- Issuance of equity shares
- Issuance of debt securities
- Any other means as may be specified by the Board
6. Regulation 292F provides that A Not for Profit Organization shall mandatorily seek registration with a Social Stock Exchange before it raises funds through a Social Stock Exchange.
7. The following requirement shall be satisfied
1. At least 67% of its revenue of the immediately preceding 3-year average of revenues comes from providing eligible activates.
2. at least 67% of the immediately preceding 3-year average of expenditure has been incurred for providing eligible activities to members of the target population.
8. Social Stock Exchange Governing Council:
Regulation 292D encompasses provisions regarding Social Stock Exchange Governing Council. It shall be bestowed with oversight of the exchange and shall look after complying with norms and disclosure requirements.
9. Social enterprises shall adhere to minimum reporting standards. The main elements include 1) Strategic intent and goal setting 2) Social impact scorecard 3) General information
10. A listed NPO shall submit to the SSEs the following statements in respect of utilization of the funds raised, on a quarterly basis:-
(a) Category-wise amount of monies raised;
(b) Category-wise amount of monies utilized;
(c) Balance amount remaining unutilized.
11. Presently SEBI has mandated a Social Audit in relation to the Annual Impact Report as specified in Regulation 91E (2). Such audit is aimed to evaluate, assess and ensure the correctness and authenticity of the social impact of a SE.
12. ICDR Regulation has specified the conditions to be fulfilled by a SE for issuing ZCZP which include 3 major conditions: –
1. Zero Coupon Zero Principal Instruments shall be issued in dematerialized form only
2. The minimum issue size shall be Rs. 1.00 Crore
3. The minimum application size shall be Rs. 2.00 Lakhs.
13. Presently NRIs and foreign investors are prohibited to invest in securities issued by SSEs.
Why SSE could be a groundbreaking initiative in the realm of fundraising for social objectives?
1. SSE unearths a brimful of opportunities for social enterprises to avail funding in a more regularized way. Due to it they are able to attract ethical investors to participate in the social approaches in a very organized manner.
2. It will culminate in unified efforts towards social endeavors with the overall capacity of the SEs going manifolds.
3. It promotes a transparency regime among social enterprises and NGOs which aids in good corporate practices which ultimately leading to good corporate governance.
4. It facilitates a very apt usage of liquidity prevailing in the economy as it can be channelized towards social welfare.
5. Social enterprises are brought under statutory monitoring while providing them with a very reliable and safe platform for raising capital.
6. SSE aims to cast an all-inclusive approach wherein a vast number of investors can contribute towards a social objective in an organized and collective manner.
7. It adds to the sense of comfort for the investors as they are ensured their invested amount is secured through the regulatory regime and ends in availing of social objectives.
8. Further another momentous benefit of SSE is that it provides SEs with a Pan-India presence.
Role of SSE in a nutshell:
1. Mobilization of funds for Social Enterprises
2. Monitoring of investments through disclosure regime
3. Providing an efficient platform for investors to invest for social motives
4. Establishing an alternative economy for Social Enterprises
5. Facilitating Pan India presence for SEs which increases prospects of funding
Current Scenario with Respect to Social Stock Exchange
1. Social Stock Exchange has been set up in both National Stock Exchange and Bombay Stock Exchange.
2. Work towards awareness is underway with keen attention towards the concept’s three key elements – stock exchange, social enterprise, and investor.
3. An Advisory Committee has been set up to ensure that proper implementation of the scheme is carried out.
Roadblocks:
1. Creating an ecosystem and obtaining participation of the Social Enterprises mostly which are of small size is a big challenge.
2. A regulatory regime may be seen as a challenge for the SEs but in the long run, this will not be the case.
3. Time may take to bed a concept that a social objective can be achieved in an organized way under regulatory monitoring.
Way Forward:
The government has made a tremendous effort to put forth a properly structured approach to form a basis for the initiative of SSE. However, the success substantially depends on the implementation of all the elements of the scheme. Here comes the role of professionals to ease this process and create awareness about the same.
SEs in order to avail the benefits of listing and issuing the instruments through the medium of SSE will need to regularize their functioning with increased transparency and adherence to the disclosure regime shall require paramount attention from their side.
Social Stock Exchange happens to be a step in creating a pathway towards a structured, sustainable and inclusive approach towards the achievement of social objectives but the successful implementation becomes a key to bringing this concept to fruition.
Author Bio
Great insight towards emerging social stock exchange platform.