The new term – Social Stock Exchange (SSE), has been making rounds on the internet these days. But what does it actually mean and how does it work? Well! This write-up will help you understand the Social Stock Exchange better.
On December 27, 2022, BSE received final clearance from the markets regulator – SEBI, to establish a Social Stock Exchange (SSE) as a separate segment. The new exchange will aid in fundraising for both for-profit and nonprofit organizations.
The decision to set up a new stock exchange comes after the SEBI’s notification of a framework for SSE in July, which gave social entrepreneurs a new way to raise money. The social stock exchange’s features and operation are detailed below:
What Is Social Stock Exchange (SSE)?
The Social Stock Exchange (SSE) is a proposed segment of a recognized stock exchange that allows Nonprofit Organizations (NPOs) to list on stock exchanges. This will enable both for-profit and nonprofit organizations to raise funds. Finance minister Nirmala Sitharaman introduced the SSE concept in her Budget Speech for 2019–20.
According to the SEBI report, a Social Stock Exchange might help restore the lives of those impacted by the COVID-19 epidemic.
In order for conventional capital and social capital to work together to solve the significant challenges of COVID-19, SSEs will attempt to unleash large pools of social capital and promote a mixed financial structure.
How Will Social Stock Exchange (SSE) Work?
The SSE will allow the listing of both for-profit and nonprofit organizations. However, its operation will be distinct from that of traditional stock exchanges. SSE will operate in accordance with SEBI regulations as well.
The SSE will enable social entrepreneurs to directly issue zero-coupon or zero-principal bonds. Zero-coupon bonds are interest-free debt securities. The fact that these bonds are traded at a significant discount generates profit when they are redeemed for their full face value at maturity.
The organizations could use zero-coupon bonds to access money from donors, charitable foundations, and corporate social responsibility (CSR) spenders.
The SSE will open to for-profit social businesses and nonprofit organizations (NPOs). However, for-profit social organizations can list on the platform with stricter reporting criteria.
What Are The Advantages Of Social Stock Exchange (SSE)?
The Social Stock Exchange (SSE) is expected to offer these below-mentioned benefits:
Social Impact Reporting:
The minimum requirements for reporting on social effects have been proposed to lessen information asymmetry for both classes (FPEs and NPOs). Meanwhile, the working group recommends running a “capacity development fund” to improve NPOs’ capability for reporting.
Additionally, it is anticipated that over time, a brand-new class of auditors called social auditors would independently verify NPOs’ impact reporting.
The committee has also suggested several tax exemptions, advantages, and other helpful regulatory clarifications boost the acceptance of these funding arrangements among different classes of investors.
Strict Regulatory Oversight:
FPEs cannot be included on the SSE solely based on self-reported social effects. To ensure that only genuine FPEs are permitted to affiliate with SSE, SEBI should develop a system for evaluating the legitimacy of the social impact aspects that the FPEs self-declare. This system should be done in conjunction with the existing specialized bodies.
Eligibility Criteria For Listing On Social Stock Exchange (SSE)
The markets regulator SEBI issued a comprehensive framework for the SSE in July, including the minimal requirements for businesses to register with the exchange.
According to SEBI regulations, social enterprises must take part in one of the 16 broad social activities that the regulator has listed, which include
- Eradicating poverty, malnutrition, hunger, and inequality
- Advancing healthcare
- Assisting with education
- Employability and livelihoods
- Empowering women and LGBTQIA communities
- Supporting social enterprise incubators.
Meanwhile, the non-eligible corporations include corporate foundations, professional or trade groups, political and religious organizations, infrastructure corporations, and housing businesses, except those that provide affordable housing.
SEBI currently sets the minimum issue and minimum application sizes for subscriptions at Rs. 1 crore and Rs. 2 lakhs, respectively.
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Minimum Reporting Standards For Social Enterprises
The Indian benchmarking elements have set the minimum reporting standards according to various national and international measurement frameworks. Meanwhile, the minimum reporting standards for social enterprises include the following:
Section 1- Goal Setting & Strategic Intent
- Solving social problem
- Serving the target segment
Social Impact Scorecard
- To what extent of target segment served
- The median intensity of individual
- Dimensions of social equity, income and diversity
Section 3- General information
- Members of the governing body
- Financials, Registrations or licenses
- Highlighting prior funding history
What Are NPOs In The Context Of SSE?
Generally, a not-for-profit organization (NPO) is an organization that is indulged in social services without any scope of making money. Meanwhile, the criteria for NPOs to be identified as social enterprise is as follows:
- Any charitable trust registered under the Indian Trusts Act, 1882 (2 of 1882) or the public trust statute of the relevant state
- A charitable society registered under the Societies Registration Act, of 1860 (21 of 1860)
- Any company registered under section 8 of the Companies Act, 2013 (18 of 2013)
The entry of social stock exchanges is unquestionably a positive development for the securities exchange market that will increase the visibility and knowledge of all parties involved, particularly the funders, issuers, and clients of these social enterprises.
To maximize the positive social impact and integrate environmental, social, and governance (ESG) considerations into the pursuit of profits and growth, the social stock exchange will be anticipated to fill the funding gap for such social enterprises. Thus, it will create the necessary social investment ecosystem.
Can An NPO Raised Funds Without Registering through Social Stock Exchange?
No, NPOs can’t raise funds without registering with Social Stock Exchange. However, they may continue raising funds through any other means permissible under the law.
Can Foreign Investors Invest In SSE Like FII’s, FPI’s or NRI Investors?
No, they are not allowed to invest like FII, FPI or NRI investors.
How Can For-Profit Organizations Raise Funds Through SSE?
For-Profit Organizations can raise funds through
- Issuance of Equity Shares (On the Main Board, SME Platform or innovators’ growth platform of the stock exchange as the case may be)
- Issuance of Equity Shares to an Alternative Investment Fund
- Issue of Debt Instruments