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

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: