Combining social welfare and capital markets through SSE

Source: The post is based on an article “Combining social welfare and capital markets through SSE” published in The Hindu on 2^nd March 2023.

Syllabus: GS 3 – Indian Economy

Relevance: About Social Stock Exchange

News: Securities and Exchange Board of India (SEBI) has given approval to the National Stock Exchange of India to set up a Social Stock Exchange (SSE). SSE was presented in the Union Budget 2019.

What is a Social Stock Exchange (SSE)?

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Who can invest in SSE?

Retail investors can only invest in securities offered by for-profit social enterprises (FPSEs) under the Main Board.

In all other cases, only institutional investors and non-institutional investors can invest in securities issued by SEs.

What are the eligibility criteria to be listed as a social enterprise?

Any non-profit organisation (NPO) or for-profit social enterprise (FPSEs) that establishes the social intent would be recognised as a social enterprise (SE). This will make them eligible to be registered or listed on the SSE.

Further, seventeen eligibility criteria are listed under Regulations of SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Some of them are that enterprises must be serving to eradicate either a) hunger, b) poverty, c) malnutrition and inequality; d) promoting education, e) employability, among others.

Which organisations are not be eligible as social enterprise?

Corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies (except affordable housing) would not be identified as an SE.

Further, NPOs which are dependent on corporates for more than 50% of its funding are also not eligible to be listed as SE.

How can NPOs raise money?

NPOs can raise money either through issuance of Zero Coupon Zero Principal (ZCZP) Instruments from private placement or public issue, or donations from mutual funds. It must be registered with SSE to issue the bonds.

The ZCZP must have a specific tenure and can only be issued for a specific project or activity that is to be completed within a specified duration.

It must also provide past experience in the social sector in order to acquire investor confidence and tackle concerns about potential default.

Moreover, NPOs may also choose to register on the SSE and not raise funds through it but via other means. However, they would have to make necessary disclosures about it.

What is the difference between ZCZP bonds and conventional bonds?

ZCZP bonds differ from conventional bonds in the sense that it entails zero coupon and no principal payment at maturity.

The conventional bonds provide a fixed interest (or repayment) on the funds raised through varied contractual agreement, whereas ZCZP would not provide any such return, instead promising a social return.

What are other methods through which NPOs can raise money?

Another finance method available to NPOs is the Development Impact Bonds (DIB). DIBs are results-based contracts.

Under DIBs, NPOs initially raise money from ‘Risk Funder’. They finance the project on a pre-payment basis and also bear the risk of non-delivery of social metrics.

After the project has been completed and delivered on pre-agreed social metrices at pre-agreed costs/rates, a grant is made to the NPO.

The donor who makes the grant upon achieving the social metrics is referred to as ‘Outcome Funders’.

How can For-Profit Enterprises (FPEs) raise money?

FPEs need not register with social stock exchanges to raise funds. However, it must comply with all provisions of the ICDR Regulations when raising through the SSE.

It can raise money through issue of equity shares or issuing equity shares to an Alternative Investment Fund (AIF) including Social Impact Fund or issue of debt instruments.

What disclosures are required to be made to SEBI?

SEBI’s regulations state that a social enterprise should submit an annual impact report. The report must be audited by a social audit firm and has to be submitted within 90 days from the end of the financial year.

Listed NPOs are required to provide the details on the quarterly basis about the money raised and utilised.