Social Stock Exchange (SSE)

Description

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Context

SEBI granted its final approval, for introducing Social Stock Exchange (SSE) as a separate segment on BSE.
Also, On December 19, the National Stock Exchange of India (NSE India) received an in-principle approval from the Securities Exchange Board of India (Sebi) to set-up SSE as a separate segment.

What is an SSE?

An SSE allows the listing of non-profit or Non-Government Organisations (NGOs) on stock exchanges, providing them with an alternative fund-raising structure. It may be listed on BSE or NSE. The idea of SSE was first floated by Finance Minister Nirmala Sitharaman in her 2019-20 Budget speech. Countries like the UK, Canada and Brazil have SSEs.
The fund-raising is proposed through several instruments such as zero-coupon-zero-principal bonds, social venture funds and mutual funds.

What are the objectives of SSEs?

A Social Stock Exchange may be helpful in rebuilding the livelihoods of people as the investments will have a social impact.
The SSEs will aim at unlocking large pools of social capital, and encourage blended finance structures, so that conventional capital can partner with social capital to address the urgent social issues.

Example

The Cancer Fund by HDFC Mutual Fund is one example. It operates as a standard mutual fund, with the exception that the returns generated are channelled towards the financing of Non-Profit Organizations. Its investors get their money back from HDFC MF, but any interest or gains that are made are donated to the NPO.

What instruments will NPOs offer on SSEs?

The SEBI working group report lays out several funding instruments such as zero-coupon-zero-principal bonds, social venture funds, and mutual funds, “providing a wide gamut of options to “donor” investors looking to invest with an objective to create a social impact. This initiative may also enable companies to be able to deploy CSR funding by connecting directly with social organisations.

Eligibility to participate in SSEs

Social enterprises eligible to participate in the SSE will be Not-for-Profit organisations (NPOs) as well as for-profit social enterprises.
Social enterprises eligible to participate in the SSE will be entities - NPOs and for-profit social enterprises - having social intent and impact as their primary goal. Also, such an intent should be demonstrated through its focus on eligible social objectives for the underserved or less privileged populations or regions.
The social enterprises will have to engage in a social activity out of 16 broad activities listed by the regulator- SEBI. Some of the eligible activities include:

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
Promoting welfare of migrants and displaced persons.
Promotion of financial inclusion
Slum area development, affordable housing
Protection of national heritage, art and culture
Supporting incubators of Social Enterprises
Disaster management, including relief, rehabilitation and reconstruction activities

Further, the organisations will have to prove that over 67% of their business is related to activities like above to be recognised as a Social Enterprise.
Corporate foundations, political, religious organisations, professional or trade associations, infrastructure and housing companies will not be eligible for listing on the SSEs. However, the affordable housing segment will be eligible for the same.
With regard to minimum requirements to be met by a NPO, NPO needs to be registered as a charitable trust and should be registered for at least three years, must have spent at least Rs 50 lakh annually in the past financial year and should have received a funding of at least Rs 10 lakh in the past financial year.
NPOs raising funds through the issuance of zero coupon zero principal instruments, need to make disclosure about its vision, disclose target segment (those affected by the problem and how are they affected) and approach to accomplish its planned activities; details of its governing body, composition, dates of board meetings held; and details of key managerial staff.
NPOs need to make disclosure of financial statements for last three financial years, details of past social impact and risks that they see to its work and how it proposes to mitigate these.
In respect of annual disclosure by NPOs on SSE which have either raised funds through SSE or are registered with SSE, such NPOs will have to disclose details of the top five donors or investors in terms of budget, scale of operations, including employee and volunteer strength, governance structure, financial statement, programme-wise fund utilisation for the year and auditors report and auditor details.

How will SSEs work?

The SSE shall be a separate segment under the existing stock exchanges. It is a set of processes that act as a filter, selecting only those entities that are creating measurable positive social impact and reporting such impact.

What are the tax benefits?

Investors will get Section 80G benefits which allow all investments in securities/instruments of NPOs listed on SSE to be tax deductible, and corporates to deduct CSR expenditure from their taxable income, among other things.
Investment by companies will be considered as part of their Corporate Social Responsibility (CSR) initiatives.

What is the size of the market?

India has over 31 lakh NPOs – more than double the number of schools and 250 times the number of government hospitals, which amount to one NPO for 400 Indians.

Significance of SSEs

SSE is a novel concept in India and such a bourse is meant to serve the private and non-profit sectors by channelling greater capital to them. It will also make investing in social ventures easier for morally conscious investors.
This would be set up “under the regulatory ambit of SEBI for listing social enterprises and voluntary organisations working for the realisation of a social welfare”.
The establishment of the Social Stock Exchange is expected to create more opportunities for Social Auditors since the regulation makes it mandatory for social enterprises which are keen to list on the platform and raise money to undergo social audit.

Social auditing is a process for evaluating, reporting on, and improving an organization's performance and behavior, and for measuring its effects on society. The social auditing can be used to produce a measure of the social responsibility of an organization.

The SEBI’s framework defines here a social auditor who is an individual registered under a self-regulatory organisation under the Institute of Chartered Accountants of India (ICAI) or any other agency notified by the board, and one who possesses a certification from the National Institute of Securities Market (NISM).

Further, a Social Audit Firm is any organisation that employs Social Auditors and has a proven record of minimum three years of social impact assessment. These audit firms will be regulated by a self-regulatory organisation (SRO) of the ICAI.