Finance Minister in her Budget speech in 2019 introduced the concept of Social Stock Exchange (SSE) in India, as a separate platform to enable non-profit sector to raise funds for itself.
International Scenario
Brazil was the first country to launch an SSE in the year 2003, followed by South Africa in 2006, Portugal – 2009, Canada, Singapore & UK – 2013 and Jamaica – 2019. However only SSE’s based in Canada, Singapore & Jamaica are active, indicating difficulties in sustaining SSEs.
Most of the international platforms have limited transactions, with limited opportunities, and mainly focussed on FPEs, rather than NPOs[1]. In contrast Indian SSE is working towards trading for equities issued by FPE and provides opportunities for NPOs to open up avenues for direct listing. It is also developing set of procedures to enable investors to identify those entities which have measurable social impact.
Legal Framework
We all are aware that SEBI provides an overarching regulatory mechanism for regulating securities market and protecting investors. SEBI was established through SEBI Act 0f 1992. In 2022, SEBI amended its various regulations to introduce overall a framework for Social Stock Exchange[2].
Under the proposed framework, SEBI offers following services under SSE:
- Recognition of a NPO as well as a For Profit Entity (FPE) to be recognised as a Social Enterprise
- Allows listing of a NPO without raising of funds
- Allows raising of funds by a NPO
Criteria for recognition an entity as Social Enterprise
A NPO or FPE can be classified as a Social Enterprise. To be classified as one, following criteria has to be fulfilled.
- Primacy of Social Intent needs to be established through engaging in certain social causes. These could be any of the activities covered under SDGs or even protection of national heritage, art and culture, promotion of rural/nationally recognised/para-Olympic/Olympic Sports, supporting non-profit ecosystems, and several other socio related activities.
- Entity should be focussed on serving under-served or less privileged population or backward regions, with minimum 2/3rd of its average revenues of last 3 years coming from serving such populations or 2/3rd of average expenditures of last 3 years focussed on target population.
- Corporate Foundations, political religious organisations, professional or trade associations, infrastructure or housing companies (exception low-housing activities) will not be eligible to be recognised as social enterprise.
Registration of NPO / Social Enterprise at SSE
Registration Requirements
A NPO can register itself on SSE as per S.292(F) of ICDR Regulations. To do the same it needs to fulfil following requirements.
- A NPO must have been registered for at least 3 years. Its registration as NPO (Society, Trust, S.8, etc.) must be valid for next 12 months at the time of seeking registration with SSE. PAN should confirm the legal status of the NPO.
- If entity owned by Govt, indicate the same, or state if it is a private entity.
- 12A/12AA/12AB registration, valid for at least 12 months.
- Should have a valid 80G registration to be able to give IT deduction to investors.
- NPO should have a minimum spending of around Rs 50 lakh during last FY and receipts at least around Rs 10 lakh.
- NPO should have at least 2/3rd of its spending on social projects, to be classified as a social enterprise.
Benefits of registration on SSE as a Social Enterprise
- Improved market access: By registering on SSE as a Social Enterprise, a NPO gets access to a common and structured meeting ground between Social Enterprises and investors/donors with inbuilt regulation for providing sanctity and accountability of finances.
- Synergy between investors and investee in social aims:In view of flexibility of investments and capital that would be available on an SSE, the canvas of choice would be much wider allowing investors and investees with similar missions and visions to connect seamlessly
- Performance based philanthropy: Performance of the enterprises listed on an SSE would be monitored thus it will instil a culture of performance driven philanthropy.
- Minimal registration cost: SSE saves cost for both issuer and investor/donor by charging minimal fees for registration and listing.
- Additional avenue for Social Enterprises: Central and State governments till date have the biggest onus of achieving sustainable development goals. SSE will provide an alternate avenue for raising funds thereby encouraging new and existing social enterprises.
Raising of funds on SSE by an NPO
There are at least two processes through which an NPO can raise funds from SSE.
A: By issue of Zero Coupon Zero Principal Bonds (ZCZP).
B. Donations through Mutual Fund Scheme
C. Any other means as specified by SEBI.
Zero Coupon Zero Principal Bonds (ZCZP)
Effective 15 July 2022, ZCZP instrument has been notified as securities under Securities Contracts (Regulation) Act 1956. It is to be issued by a NPO registered with the SSE segment of a recognised Stock Exchange. A conventional bond provides a fixed interest and full repayment of original amount invested in the Bonds, after the duration of the bond’s life. However, in case of a ZCZP bond,there is neither any interest payment nor refund of principal, instead issuer (a NPO) issues the bond to undertake a specified project / activities, with promise of certain social return. Although it may be noted that there is certain probability of a default, i.e., not being able to deliver the social impact promised. While such failure of non-delivery may not have immediate adverse financial implication, however it is likely to impact future funding of such NPOs. Hence there are sufficient incentives for the NPOs to deliver on its promises.
ZCZP issued will be on SSE, and generally will have a tenure equal to the duration of the project sought to be funded by the NPO. Since there is no return of capital of such bonds, any investment made in these bonds would be charged off as a social investment at the end of the tenure.
As per SEBI’s ICDR regulations ZCZP can be issued to public through a Public Issue or it may be registered at SSE under SEBI (AIF) as a Private Issue. While trading potential of ZCZP is limited, however such listing will ensure periodic disclosure of social impact of the investment and utilisation of funds by the NPO concerned. Such disclosure will help investors to take decision to invest their funds only to credible and legitimate NPOs. It also helps NPOs to indicate its credibility and legitimacy to investors & funders.
Other conditions of ZCZP issue are
- Minimum issue size: Rs 1 crore
- Minimum application size: Rs 2 lakhs
- Minimum subscription: 75% of the amount proposed to be raised
Donations through Mutual Fund Scheme
Such schemes are devised by companies who wish to bring specific philanthropic schemes, which help raise funds for specified causes.
One such scheme has been formulated by HDFC Asset Management Company Limited (HDFC-AMC). Under the scheme, donors contribute certain portion of their income& capital withdrawalof their investments, and the asset management company contributes an equal amount as donated by its investors out of its CSR budget, subject to a ceiling, which in this case was fixed at Rs 16 crore per FY. First such scheme launched by HDFC-AMC in 2011, was under the banner of HDFC Cancer Cure Fund. It was a close-ended scheme which matured in 2014. It has tied up with Indian Cancer Society which supports underprivileged cancer patients. Till Mar’2023 it had disbursed Rs 226 crores providing support to around 13,000+ patients.
Any other means as specified by SEBI
These could include Bonds such as Social Impact Bonds (SIB) or Development Impact Bonds (DIB).
[1]Brazil Stock Exchange lists various social projects on its platform. There is no financial return on investment of these projects, there was no ownership transfer and the platform worked more like a crowd-funding for some ethical investors. South Africa Social Stock Exchange lists equity of social projects being implemented by social entities and provides a mechanism for their subscriptions. To NPOs these offer mainly matchmaking opportunities between NPOs and interested subscribers, but do not offer any new instruments. Hence attract a limited set of investors. Canadian, UK & Singapore models mainly cater to FPEs (For Profit Enterprises). Canadian platform is mainly for discovery and not for trading, while UK platform allows limited trading.
[2]Issue of Capital & Disclosure Requirement Regulations 2018, Listing Obligations & Disclosure Requirements Regulations 2015 & Alternative Investment Fund Regulations 2012