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What are Social Stock Exchange (SSE) and its eligibility criteria?

  • Published
    24th Dec, 2022
Context

The National Stock Exchange of India (NSE) has received in-principle approval from the capital markets regulator Securities Exchange Board of India (SEBI) to set up a Social Stock Exchange (SSE) as a separate segment.

Background:

  • Proposals were made by the government in the Union Budget of 2019-20 to create a platform for listing social enterprises and voluntary organizations.
    • Sebi says non-profit organizations that work on eradicating hunger, poverty, and inequality, among other activities, can list on an exchange
  • The Economic Survey 2021-21 highlighted the concept of setting up a social stock exchange (SSE).

About Social Stock Exchange (SSE):

  • SSE will be a separate segment of the existing stock exchanges.
  • SSE is a platform that allows investors to invest in select social enterprises or social initiatives.
  • It may be listed on BSE or NSE.
  • Countries like the UK, Canada, and Brazil have SSEs.
    • These countries allow firms operating in social sectors to raise risk capital.

Risk capital refers to funds allocated to speculative activity and used for high-risk, high-reward investments. Any money or assets that are exposed to a possible loss in value is considered risk capital, but the term is often reserved for those funds earmarked for highly speculative investments.

  • The fundraising is proposed through several instruments such as zero-coupon-zero-principal bonds, social venture funds, and mutual funds.
  • Aim of SSE: The aim is to help social and voluntary enterprises to raise capital in form of equity or debt or a unit of the mutual fund.
  • The government had announced a new security called “zero coupons zero principal” to enable fundraising for not-for-profit organizations.

What are 'zero-coupon, zero-principal instruments?

  • These are financial instruments that any non-profit organization can use to raise funds.
    • Usually, such organizations raise money through donations from individuals or corporates.
  • Those willing to donate money to their cause can buy these securities.
  • It resembles a debt security like a bond.

When an entity issues these securities and raises money, it is not a loan but a donation. So, the borrowing entity does not have to pay interest—therefore zero coupon—and it does not have to pay the principal (zero principal) either.

How does it work?

  • The SSE lists non-profit organizations (NPO) on stock exchanges.
  • NPOs are establishments that work for the welfare of society or the community and are set up as charitable associations.
  • The SSE aims to provide them with an alternative fund-raising avenue.

Need for it:

  • The pandemic highlighted the need for greater capital investments toward voluntary organizations and enterprises working for social welfare.
  • The SSE will help in this aspect by channelling greater capital to such organisations.

But why donate in this complicated manner?

  • This new tool gives more insight into how your donation will be used (Transparency).
    • Organizations listed on the exchange will need to do regular audits of social impact.
    • These will be disclosed to all stakeholders (much like it is done by for-profit entities on regular stock exchanges).
  • Flagging Fund Seekers: If an organization issues these instruments and has few takers, it can be a red flag for other donors.
    • The interested may then want to dig deeper before signing that cheque.
  • Integrating capital markets to social welfare: It can be seen as a government initiative to take our capital markets closer to social welfare.

Eligibility criteria for SSE:

  • Social enterprises that are eligible to participate in the SSE will have to be NPOs and for-profit social enterprises having social intent.

The social enterprises aspiring for SSE will have to engage in 16 broad activities listed by SEBI: healthcare, education, employability, and livelihoods; eradicating hunger, poverty, malnutrition, and inequality and supporting incubators of social enterprise and gender equality empowerment of women and LGBTQIA+ communities.

Entities not eligible under the present rules include:

  • Corporate foundations
  • Professional or trade associations
  • Political and religious organisations
  • Infrastructure and housing companies, except affordable housing.
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