Social Stock Exchange
What is a Social Stock Exchange?
Social Stock Exchange can be defined “as a regulated platform that connects the charitable foundations and social organizations with donors to make it easier to support, diversify and grow the social enterprises’’. The most important role that SSE shall play is to act as a facilitator of social financing and create a common platform for social enterprises, donors and investors.
The Social Stock Exchange (SSE) is a platform which allows social enterprises, be it `Not For Profit Organization’ or `For Profit Social Enterprise’ to raise funds. Additionally, not for profit organization may choose to merely register with SSE and not raise funds.
“SSE can be a separate segment of a recognized stock exchange having nationwide trading terminals permitted to register especially Not for Profit Organizations (NPOs) and to list their securities in accordance with the provisions of the SEBI regulations.
The social intent must be the first and primary objective of all social enterprises that plan to list their securities on SSE.
History of Social Stock Exchange
The concept of Social Stock Exchange came into existence in the year 2003 and Brazil has first introduced and launched Social Stock Exchange. The other countries which have introduced SSEs are:
- South Africa (in the year 2006),
- Portugal (in the year 2009),
- Canada (in the year 2013),
- Singapore (in the year 2013),
- United Kingdom (in the year 2013) and
- Jamaica (in the year 2019).
However, three out of the seven Social Stock Exchanges have only survived and functioning. They are in Canada, Singapore and Jamaica.
Objective of SSE
The main objective of SSE is to act as a bridge between social organisations and investors looking to support social impact on a platform that provides transparency. The SSE shall aim at unlocking a large pool of social capital and encourage blended finance structure so that the conventional capital can partner with social capital to meet the concerns and challenges of the Society.
The main financing sources for India’s social sector are Corporate Social Responsibility (CSR), impact investment, philanthropy, and SSE enables these diverse channels to come together on a common platform. There is a uniform framework in reporting, measurement, and standards.
Rationale of Social Stock Exchange
The resources made available through Corporate Social Responsibility (CSR), philanthropic investing etc are not uniformly accessed by social enterprises. The rationale of SSE is that it bridges the gap between the private sector and non-profit sector for utilisation of these resources and channelling greater capital.
Models of SSE
There are two models of SSE—
(1) Matchmaking platform, which is a dedicated platform, set up separately from the existing exchanges, with the purpose of bringing together investors and investees and
(2) Alternative investment instruments listed on an existing stock exchange.
Who are the Stakeholders of Social Stock Exchange?
The different stakeholders of the social stock exchange are:
- Trading Members
- Non-Profit Organisations (NPOs)
- For-Profit Enterprises (FPEs)
- Market Infrastructure Institutions (MIIs)
- Social Auditors
- Information Repositories
- Regulators and Investors.
Governing Council for SSE’s
SEBI has specified that every Social Stock Exchange shall constitute a Social Stock Exchange Governing Council (SGC) to provide oversight and guidance to facilitate the smooth functioning of the operations of the Social Stock Exchange, with regard to registration, fund raising and disclosures by Social Enterprises.
The Social Stock Exchange Governing Council shall have a balanced representation drawn from various categories of stakeholders such as Philanthropic and social sectors, Non-profit organizations, Information Repositories, Social Impact Investors etc.
Registration process on Social Stock Exchanges
Social Stock Exchange shall notify the conditions as applicable, for the purpose of registration, on social enterprise from time to time as on the date of filing of documents with the SEBI.
Besides this, Social Stock Exchange shall also direct social enterprises to follow the rules framed by the Social Stock Exchange Governing Council (SGC), some of the important ones are:
(a) to establish the primacy intent of social impact out of the 17 Social Development Goals for being eligible to qualify for on boarding the Social Stock Exchange and access the SSE for fund-raising.
(b) The activities must focus on underserved or underprivileged populations or geographic areas or regions that have recorded lower performance in the development priorities of national/state governments.
(c) Social Enterprise shall have at least 67% of its activities qualifying as eligible activities to the target population.
There are three criterions:
Revenue Criterion: At least 67% of the immediately preceding 3-year average revenues should have come from providing the eligible activities to members of the target population;
Expenditure Criterion: At least 67% of the immediately preceding 3-year average of the Social Enterprise’s expenditure has been incurred for providing the eligible activities to members of the target population;
Customer base/ beneficiaries Criterion: Members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of the Social Enterprise’s customer base/ beneficiaries.
Essential requirement for registration of `Not for Profit Organisation’ (NPO)
- A NPO shall mandatorily seek registration with SSE before it raises funds through Social Stock Exchange
- A NPO may choose to register on a SSE and not raise funds through it
- Age of NPO should be 3 years
- Registration certificate shall be valid for atleast next 12 months at the time of seeking registration.
- Copy of TAN PAN GST Regn Number Audited financials and IT returns for last 3 years
- Proof of ownership and control – whether private or Government
- Should have valid 80G, 12 AB, 12 A, 12AA and 10 (23C) registration under the Income Tax Act
- Annual spending of NPO should be Rs. 50 lakhs and funding of atleast Rs. 10 lakhs.
Instruments of fund raising
The source of funds for registered `Not for Profit Organisations’ are:
- issuance of Zero Coupon Zero Principal (ZCZP) Instruments to institutional investors and /or non-institutional investors as per SEBI (ICDR) Regulations, 2018
- donations through Mutual Fund schemes as specified by SEBI
- any other means as specified by SEBI from time to time
Zero Coupon Zero Principal (ZCZP) Instruments
- Zero Coupon Zero Principal Instrument (ZCZP) means an instrument issued by a `Not for Profit Organisation’ registered with the Social Stock Exchange segment of a recognised Stock Exchange.
- ZCZPs shall have zero coupon and no principal payment at maturity.
- The ZCZPs shall be issued only for a specific project or activity that are listed under SEBI (ICDR) Regulations.
- The specific project or activity to fall under the list of eligible activities as specified.
- These projects/ activities shall be completed within the duration specified in the fundraising document.
Bond Vs ZCZP: Whereas a conventional bond provides a fixed interest and repayment of the funds raised, ZCZPs do not offer such returns but promise a social return to the funder. Funder’s sense of fulfilment or disappointment has to do with the creation of social impact instead of a financial return. If the funder is disappointed, the NPO will lose the funder’s trust and therefore its donations in the future.
Terms and conditions of issue of ZCZP: Important conditions relating to the issuance of ZCZP are:
Minimum issue size: Rs. 1 crore
Minimum application size: Rs. 2 lakhs
Minimum subscription: 75% of the funds proposed to be raised through issuance of ZCZP Instruments. Funds to be refunded in case the subscription is less than 75% of the issue size.
In case of undersubscription of the total issue size, the manner of raising balance capital, between 75% to 100% and impact of the undersubscription on the social objective should be disclosed in the fund-raising document.
Who can invest in ZCZP
- Qualified Institutional Buyers
- Family Trust or Intermediaries with net worth over Rs. 500 crores registered with SEBI
Non-Institutional Investors: Investors other than
- Retail individual investors
- Qualified institutional Buyers
Termination of listing of ZCZP from a Social Stock Exchange
ZCZP instruments shall terminate in case of:
- Object of the fund raising has been achieved and a certificate in this regard is submitted to the SSE
- Tenure as stated in fund raising document to achieve the object has expired.
The source of funds for a `For Profit Social Enterprise’ registered with Stock Exchange are:
- Issue of equity shares on the main Board, SME Platform or innovators growth platform or equity shares issued to an alternative investment fund including Social Impact Fund
- Issue of debt securities
- Any other means as specified by SEBI
The Author S. Prabhakar, is a Fellow member of the Institute of the Company Secretaries of India, Chartered Secretary from the UK, Lawyer, and Registered Insolvency Professional.
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