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Last month, the Securities and Exchange Board of India (SEBI) notified a framework for listing on the Social Stock Exchange (SSE) that would provide social enterprises with an additional avenue to raise funds or donations. Developed on the basis of recommendations from a working group and technical group formed by SEBI, the SSE would now be a separate segment of a recognised stock exchange.

Social enterprises having social intent and impact as their primary goal would be eligible to participate in the SSE, and these entities would include both non-profit organisations (NPOs) and for-profit social enterprises. 

However, there are certain conditions based on which various entities would be deemed as social enterprises.

As per the framework, the eligibility criteria for being identified as a social enterprise would include demonstrating participation in activities for eradicating hunger, poverty, malnutrition, and inequality; promoting education, employability and livelihoods; promoting gender equality, empowerment of women and LGBTQIA+ communities; protection of national heritage, art and culture; slum area development; disaster management; promoting the welfare of migrants and displaced persons, among others.

There are multiple other conditions that the framework has prescribed. However, before delving deeper into the framework for SSE and its impact, let’s take a look at the broader concept. 

What Is SSE?

Like bond and equity trading platforms, SSEs are also trading platforms, but they allow only businesses that have a motive to make social impact to raise capital by attracting socially-conscious investors willing to fund such businesses.

It not only enables the social businesses to address the issue of funding crunch but also helps interested investors to get to know and fund such businesses whose names could often go unnoticed. 

SSEs are present in countries including Brazil, the UK, Singapore, Portugal, Canada, and South Africa. While the idea and motive are the same, the framework for these SSEs vary from one nation to the other.

In India, Finance Minister Nirmala Sitharaman first floated the idea of SSE during her Budget Speech for the financial year 2019-20. “It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion,” Sitharaman said.

Her proposal was to create an electronic fundraising platform or a social stock exchange under the regulatory ambit of SEBI for listing social enterprises and voluntary organisations working for the “realisation of a social welfare objective” so that they could raise capital as equity, debt, or as units like the mutual funds.

Post that, SEBI constituted a working group on SSE under the chairmanship of Ishaat Hussain on September 19, 2019. The working group included experts such as TV Mohandas Pai, chairman of Manipal Global Education; Vineet Rai, founder and chairman of Aavishkaar Venture Management Services; Amit Chandra, chairman of Bain Capital; among others.

The working group held its first meeting on October 1, 2019, and decided to follow a consultative approach. It again met in March and May of 2020 to finalise the report.

The panel released a comprehensive report on June 1, 2020, stating that the SSE in India can be housed under the existing stock exchanges – the BSE and the National Stock Exchange (NSE). 

In the report, the working group noted that the SSE will provide capacity building support to the NPOs, a majority of which are smaller organisations.

Besides, its recommendations were also motivated by “a very urgent concern” about the economic damage that Covid-19 had posed, especially to the poorest Indian households and a large section of the informal sector. 

The latest notifications on the SSE followed approval by the SEBI board for the framework in September last year.

Speaking to Inc42, Aavishkaar’s Rai said that the aim of creating the SSE is not to have a stock exchange but to find a mechanism whereby the social sector businesses can raise capital in a more accountable and transparent manner through a securities exchange.

For willing citizens to donate or invest in the social enterprises, the latter would first have to float a bond specifying the nitty-gritty of raising capital just like a listed company floats shares for people to buy them. Following that, once the documents for raising capital are approved, they would be marketed and available to the people willing to invest, explained Rai.

“From a social sector perspective, this is a great step in bringing transparency into the entire system and creating a formal channel for raising capital for social causes,” said Siddarth Pai, managing partner of venture capital firm 3one4 Capital.

What All The Framework Covers?

SEBI’s framework for SSE has several separate guidelines and covers crucial aspects like how the social enterprises can raise funds, SSE’s governing council, ineligibility for raising funds, among others.  

Corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies, except affordable housing, will not be eligible to be identified as a social enterprise, according to the framework.

Speaking about the 17 criteria chosen for recognising an entity as a social enterprise, which includes empowering women, improving rural livelihood, and more, Rai explained that the broad areas are reasonably aligned with sustainable development goals, which are global initiatives that the government has to follow.

After being recognised as a social enterprise, if any of its promoters, promoter group or directors or selling shareholders or trustees are debarred from accessing the securities market by the SEBI, they would also not be eligible to raise funds on the SSE.

Besides, if an entity or any of its promoters or directors or trustees is a wilful defaulter or a fraudulent borrower or a fugitive economic offender, they would also be barred from raising capital through the SSE.

As per the framework, every SSE will constitute a governing council to oversee its functioning. The composition and terms of reference for such a body would be specified by the SEBI from time to time.

The for-profit entities may raise funds through issuance of debt securities, equity shares on the main board, SME platform or Innovators Growth Platform or equity shares issued to an Alternative Investment Fund (AIF), including a social impact fund.

On the other hand, the NPOs will have to mandatorily register with the SSE before raising funds through the exchange and they will be able to raise funds through the issuance of zero coupon, zero principal instruments to institutional investors, donations through mutual fund schemes, and others.

According to Rai, SSE has been ideated to find ways for enabling Indians to help other Indians by creating securities around donation and that’s where the idea of zero coupon, zero principal bond came up.

However, the NPOs will be required to file a draft fundraising document with the SSE and the latter would provide its observation on the document within 30 days from its filing or on receipt of any clarification. This process reiterates that the system of funding social sector enterprises would be more transparent as the documents will be available publicly and under SEBI’s regulations, the experts believe.

Steps Ahead

From a startup perspective, there are a variety of new business models they can end up supporting by helping these companies tap the market, helping them in terms of reporting back to their investors. Using technology, they can help companies involved in social businesses bring down their administrative costs, thereby enabling them to allocate more money to an actual social cause, said Pai.

“This is also a great foresight from the securities regulator to take the onus upon themselves to create a formal mechanism akin to how people raise IPO funding and apply that to the social sector,” he added.

Meanwhile, Rai said that the most important aspect of the SSE is that it aims to convert the act of giving or donations into security, which is pathbreaking.

The creation of SSE is a “pioneering innovation” but this innovation will only be successful if institutions of all kinds are able to convince people with capital to participate through the exchange into the new products, believes Rai.

“So, the framework for creating an SSE is the first step while there is a lot more to be done for success to come through,” he added.