Recent Developments in Social Stock Exchange

The National Stock Exchange (NSE) has recently received approval from the Securities and Exchange Board of India (SEBI) to launch Social Stock Exchanges (SSEs).

• NSE now has the authority to establish a new platform and list suitable entities.
• The SSE will offer a new platform for social enterprises to generate funds for social initiatives.
• The SSE will promote transparency in fund generation.
• Organizations engaged in social initiatives will gain greater visibility and will be able to raise donations more easily.

Understanding Social Stock Exchange

The Social Stock Exchange is a platform that allows non-profit organizations to be listed on stock exchanges, providing an alternate fundraising structure. With over 31 lakh non-profit organizations in India, outnumbering schools and being 250 times the number of government hospitals, the potential for SSEs in India is immense.

According to the SEBI report draft, an SSE could play a significant role in reviving the livelihoods of individuals affected by the COVID-19 pandemic. Experts believe that SSEs could unlock large amounts of social capital and promote a mixed financial structure. This would allow conventional capital to collaborate with social capital to address the serious challenges posed by the pandemic.

Fund-Raising Mechanism in SSE

Social Stock Exchanges aim to utilize fundraising instruments and structures effectively under specific guidelines. These instruments vary depending on the type of social enterprise seeking funding.

The instruments for non-profit social enterprises include:

• Zero coupon zero principal bonds: These allow NPOs to list directly on the SSE by issuing bonds. These bonds are a viable option for unlocking funds from donors, philanthropic foundations, and CSR spenders.
• Social Venture Funds (SVF): An SVF is a category 1 Alternative Investment Fund (AIF) that is permitted by SEBI to issue securities or units of social ventures to investors.
• Mutual funds: An asset management company could offer closed-end mutual fund units to investors. The returns could be directed towards suitably chosen NPOs by the fund which acts as the intermediary.
• Pay-for-success models: These models through lending partners or through grants are effective mechanisms to ensure a more efficient and accountable deployment of capital.

For for-profit social enterprises (FPEs), the instruments include:

• Equity listing: FPEs would list equity on the SSE subject to a set of listing requirements, including operating practices (financial reporting and governance) and social impact reporting.
• Social Venture Funds (SVFs): AIFs and SVFs already exist for FPEs but do not require social impact reporting.

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Advantages of Social Stock Exchange

Establishing an ecosystem that allows the SSE to thrive in India will bring numerous benefits:

• Social impact reporting: Common minimum standards for reporting on social impact have been proposed for both classifications (FPEs and NPOs), to reduce information asymmetry.
• Tax benefits: To increase the reception of these funding models amongst various classes of investors, the committee has also recommended several tax exemptions, benefits, and other supportive regulatory clarifications.
• Rigorous regulatory scrutiny: Listing of FPEs on the SSE must not be based only on self-reporting social impact. To ensure that only bonafide FPEs are able to associate with SSE, SEBI, in consultation with the existing specialist entities, should work out a mechanism for assessing credentials of the social impact dimensions self-declared by the FPEs.

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