Both the BSE and the NSE have received clearance from the Securities and Exchange Board of India (Sebi) to set up social stock exchanges (SSEs) as a separate segment recently. Ashley Coutinho takes a look at how this will help create an ecosystem for social investing in the country
What is the genesis of social stock exchanges?
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SSEs aim to facilitate raising funds for non-profit organisations (NPOs) and for-profit social enterprises (FPEs), and help standardise social impact reporting and disclosures. It presents not-for-profit organisations with a new structured and formalised avenue for raising funds. SSEs will function as a distinct division of the conventional stock exchanges.
Sebi’s criteria for recognition as a social enterprise for listing
To be recognised as a social enterprise, organisations need to demonstrate that 67% of their activities are from those laid under Sebi’s framework. This includes activities such as eradicating hunger, poverty; promoting health care, education, gender equality and financial inclusion.
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To list on an SSE, a not-for-profit organisation must be registered as a charitable trust under the relevant state law, or the Societies Registration Act 1860, or the Indian Trusts Act 1882, or it can be a company incorporated under Section 8 of the Companies Act 2013. It must have audited spending of at least Rs 50 lakh and funding of at least Rs 20 lakh in the past financial year. Under the Sebi framework, it should have been in operation for at least three years per its registration certificate.
Who can invest?
Institutional and non-institutional invest-ors can invest in . Retail investors can invest only in securities from for-profit social enterprises. Foreign investors can’t take the SSE route.
Zero coupon zero principal (ZCZP) bonds can be used by the NPOs to raise funds on the SSEs. Sebi has included social impact funds (SIFs) as part of category-I AIFs, and SIFs can be used by FPEs to raise funds. This will align the social impact focus of the VC industry with that of the stock exchanges. The rules allow retail funding by SIFs in SSE-listed social enterprises via issue of social units for Rs 2 lakh per investor.
ZCZPs will be issued only by an NPO registered on an SSE. In July, the ZCZPs were declared as securities under the Securities Contracts (Regulation) Act, 1956. Such bonds will allow raising money from corporate or individual donations. Entities borrowing via ZCZP bonds don’t have to pay interest or return the principal. Relevant disclosures will improve NPO accountability.
Getting social stock exchanges up and running still needs work…
Various proposals approved in the SSE framework will require amendments to the tax and company laws. The FDI policy at present does not allow investment in ZCZP bonds. The Foreign Contribution Regulation Act provisions will need to be relaxed for the purpose of the issue of social units by SIFs and issue of ZCZP bonds by social enterprises.
Putting the necessary infrastructure in place in terms of social auditors, framing of social audit standards and information repositories may take some time.
“Investment in SEs will be required to be recognised as a permitted mode of ‘foreign contribution’ under the Foreign Contribution Regulation Act and allied rules, since a large part of the donations in India are received from foreign sources,” said a note by Vinod Kothari Consultants.
There is no clear guidance on how the trading will be possible on these SSEs. “For the ZCZP bonds, the SSE framework states that the trading potential of these units shall be limited. The nature and extent of such limitation has not been clarified yet, and therefore, how these units will be traded cannot be predicted,” the note added.