Here's Everything You Need To Know About India's Separate Social Stock Exchange Under The NSE?

In a landmark decision, the National Stock Exchange (NSE) has got the Securities Exchange Board of India's (SEBI) approval to set up the Social Stock Exchange (SSE) as a separate segment.

FM Sitharaman Had Proposed Creation Of SSE

Earlier, Finance Minister Nirmala Sitharaman, in her Union Budget speech of 2019-20, had proposed the creation of a social stock exchange, under the regulatory ambit of SEBI, for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective, so that they can raise capital as equity, debt, or as units like a mutual fund.

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As per the NSE¡¯s press release last week, the government of India, through a gazette notification, declared a new security, "Zero Coupon Zero Principal (ZCZP)" under the Securities Contracts (Regulation) Act, 1956.

The new instrument ZCZP can be publicly or privately issued by a not-for Profit (NPO) upon registering with the Social Stock Exchange segment of the NSE to raise funds, subject to the fulfilment of eligibility criteria. Currently, the regulations set the minimum issue size at Rs 1 crore and the minimum subscription application size at Rs 2 lakhs. A subscription to the ZCZP would be like a philanthropic donation.

Now let¡¯s dig deeper to learn about the soon-to-be introduced Social Stock Exchange (SSE).

1. What is the Social Stock Exchange (SSE)?

The Social Stock Exchange (SSE) is a separate segment of the existing stock exchange that can help social enterprises raise funds from the public through the stock exchange mechanism. SSE will act as a medium between social enterprises and fund providers, and that can help them select those entities that are creating measurable social impact and reporting such impact.

Certain types of social enterprises, i.e., not-for-profit organisations (NPOs) that meet the registration criteria, can register on SSE and undertake to make continuous disclosures on their social impact. Such NPOs may or may not choose to raise funds through SSE; they would, however, continue to make disclosures, including on social impact, to stock exchanges.

2. What is a social enterprise in the context of a social stock exchange?

As per the NSE, the Social Stock Exchange identifies the following two forms of social enterprises that are engaging in the activity of creating positive social impact and that meet the primacy of their social intent:

i. Not-for-profit organisation

ii. For-profit social enterprise

In order to establish primacy of social intent, any entity [be it a not-for-profit organisation (NPO) or for-profit social enterprise (FPE)] should meet all three criteria mentioned under Regulation 292E(2) of the ICDR Regulations. Briefly, these criteria require that the entity must indulge in activities prescribed under Regulation 292E(2)(a), and that the entity must target underserved or less privileged population segments or regions that have recorded lower performance in the development priorities of the central or state governments. Further, in order to be identified as a social enterprise, it must demonstrate that 67% of its activities qualify as eligible activities for the target population. This shall be demonstrated by either of the following:

i. At least 67% of its revenue from the immediately preceding 3-year average of revenues comes from providing eligible activities to members of the target population;

or ii. At least 67% of the immediately preceding 3-year average of expenditure has been incurred for providing eligible activities to members of the target population;

or iii. members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of the total customer base and/or total number of beneficiaries. However, corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure, and housing companies, except affordable housing, shall not be eligible to be identified as a social enterprise.

3. Which social enterprises are not eligible to get registered or raise funds through an SSE?

A social enterprise shall not be eligible to register or raise funds through the Stock Exchange/Stock Exchange if ¨C

a) any of its promoters, promoter group or directors or selling shareholders (in case of for profit social enterprise) or trustees are debarred from accessing the securities market by SEBI

b) if any of the promoters or directors or trustees of the Social Enterprise is a promoter or director of any other company or Social Enterprise which has been debarred from accessing the securities market by SEBI;

c) if the Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower;

d) If Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower.

e) If any of its promoters or directors or trustees is a fugitive economic offender

f) if the Social Enterprise or any of its promoters or directors or trustees has been debarred from carrying out its activities or raising funds by the Ministry of Home Affairs or any other ministry of the Central Government or State Government or Charitable Commissioner or any other statutory body

4. What is a not-for-profit organisation in the context of Social Stock Exchange?

A not-for-profit organisation is an entity that meets the criteria to be identified as a social enterprise and is any of the following entities:

i. a charitable trust registered under the Indian Trusts Act, 1882 (2 of 1882);

ii. a charitable trust registered under the public trust statute of the relevant state;

iii. a charitable society registered under the Societies Registration Act, 1860 (21 of 1860);

iv. a company incorporated under Section 8 of the Companies Act, 2013 (18 of 2013);

v. any other entity as may be specified by SEBI;

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5. What are the ways in which a Not for profit organization can raise funds through SSE?

A not-for-profit organization, after registering with the Social Stock Exchange, may raise funds on the Social Stock Exchange through i. Issuance of Zero Coupon Zero Principal Instruments [through private placement or public issuance] ii. Donations through mutual fund schemes [as shall be specified by SEBI] iii. Any other means that SEBI may specify in the future

6. Is it mandatory for a not-for-profit organisation to register in order to raise funds through SSE?

Yes, it is mandatory for a not-for-profit organisation to register with the Social Stock Exchange before it raises funds through the Social Stock Exchange. However, a not-for-profit organisation may continue to raise funds through any other means permissible under the law, whether or not it is registered with the Social Stock Exchange.

7. What are the criteria for registration on SSE with respect to not-for-profit organizations?

SEBI, in its circular dated September 19, 2022, has prescribed certain minimum requirements in order for a not-for-profit organisation to register on the Social Stock Exchange. In brief, these criteria include the mandatory age of the NPO as 3 years, a valid certificate u/s 12A/12AA/12AB of the Income Tax Act, a valid 80G registration, a minimum of INR 50 lakhs in annual spending and a minimum of INR 10 lakhs in fund in the past year, etc. Social stock exchanges are also permitted to prescribe additional requirements in order for a not-for-profit organisation to register on them.

8. Is it mandatory for the not-for-profit organisations registered with SSE to seek listing?

Under Regulation 292F of the ICDR Regulations, not-for-profit organisations that are registered with a social stock exchange are not required to seek listing; however, they must seek registration with a social stock exchange before raising funds through one. A not-for-profit organisation may choose to register on a social stock exchange without raising funds through it. It can also continue to raise funds through any other means.

9. What structured finance products are available for not-for-profit organisations through the SSE mechanism?

Below is the list of securities or modes of raising finance for NPOs:

Development Impact Bonds-These are structured finance products where upon completion of a project that meets pre-agreed social metrics at pre agreed rates, the service provider of the project receives grants from the donor, who is called the "outcome funder." The basic principle of a DIB structure is that a grant is made to an NPO after it delivers on pre-agreed social metrics at pre-agreed costs and rates. The donor who makes the grant when the social metrics are achieved is termed an "outcome funder."

Given that the outcome funder makes the payment on a post facto basis, the NPO needs to raise funds to finance its operations. Such a funder is termed a "risk funder." A risk funder not only enables the financing of operations on a prepayment basis but also undertakes the risk of non-delivery of social metrics by the NPO. To compensate for this risk, a risk funder typically earns a small return if the social metrics are delivered.

10. Is it mandatory to register "for-profit social enterprises" in order to raise funds through SSE?

No, before raising funds through the SSE, a "for-profit social enterprise" does not need to register with the Social Stock Exchange. However, a for-profit social enterprise shall comply with all provisions of the ICDR Regulations and the AIF Regulations [as applicable for its fund-raising modes] before it can raise funds through SSE.

11. How can a 'For profit social enterprise raise' funds through Social Stock Exchange?

As per the NSE website, a For Profit Social Enterprise may raise funds through

i. Issue of Equity Shares (On Main Board, SME Platform or innovators growth platform of stock exchange as the case may be)

ii. Issue of Equity Shares to an Alternative Investment Fund including Social Impact Fund

iii. Issue of Debt Instruments

iv. Any other means that SEBI may specify in future If for-profit-organizations issue equity shares on Main Board, SME Platform or innovators growth platform of stock exchange as the case may be, it shall also need to meet the eligibility criteria for the respective platform as mandated under the SEBI (ICDR Regulations) 2018.

Similarly, for issuance of equity shares to AIFs, issuance of Debt Securities etc. would require compliance with respective SEBI Regulations.

12. Can retail investors can invest in securities issued by Social Enterprises in the SSE Platform?

Retail investors are permitted to invest only in securities offered by for-profit social enterprises under the Main Board. In all other cases, only institutional investors and noninstitutional investors can invest in securities issued by social enterprises.

To know more about the registration of not-for-profit organisations, Zero Coupon Zero Principal Instruments, Social Auditor, Social Impact Assessment, and other general FAQs, click here.

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