This article is written by Deepanshu Agarwal who is pursuing a Certificate Course in Securities Laws, Insider Trading and SEBI Litigation from LawSikho.

Introduction

The finance minister of India ‘Nirmala Sitharamanin’ in her FY 2019 budget session has proposed the idea for creation of a social stock exchange (“SSE”) for listing of social enterprises & voluntary organizations. This move has been made to take the social enterprises closer to the masses in order to raise capital & enhance societal welfare at large.

In pursuit of the same, a working group was constituted by the Securities & Exchange Board of India (“SEBI”) in September 2019 under the chairmanship of Mr. Ishaat Hussain. The committee submitted its report on June 1, 2020. This post analyses the idea of SSE, its need & key highlights of the report.

What Is Social Stock Exchange?

The social stock exchange or SSE is a platform for social enterprises, voluntary group & welfare organizations (hereinafter called as ‘social enterprises’) to get listed in order to raise capital from the investors. It is a revolutionary concept for the social enterprises to raise money in furtherance of the goal of social welfare. It is a platform for meeting of those who are willing to contribute for a social cause (impact investors) with those who are really working for the same (social enterprises).

What Is A Social Enterprise?

In general, a social enterprise is like a traditional business organization but with a different aim i.e. social welfare. The profit generated from these enterprises are not distributed back to the investors but reinvested into the social programs. The profit is therefore, imperative for the sustainability of the enterprise as it helps in fulfilling the ultimate purpose. It also helps the enterprise to execute long-term social programs & to ensure availability of required technology & skilled professionals. It is important to be noted that a social enterprise can also be highly profitable.

Albeit, the working report has not clearly defined as to what is a social enterprise & its definition has been kept subjective. The report refrains from providing a one-size-fits-all approach to define social enterprise. However, it prescribes a minimum reporting standard to be fulfilled by the enterprises in addition to disclosing the impact it wishes to create (on a self-declaration basis) in order to qualify as a social enterprise.

An example of social enterprise is Bangalore-based Company named as ‘SELCO’. The company delivers sustainable energy solutions to facilitate progress related to health, education, livelihoods, financial inclusion & so on thus, leading to overall improvement in quality of life. The company has earned handsome profits over past years with an average annual growth rate of 20% & reinvests its profits back into the business. It understands the ground problems in India & then assesses how energy can resolve it.

Who Are Impact Investors?

Broadly speaking, impact investments are unique form of investments made with a purpose to make quantifiable social, economic & environmental impression while at the same time also making profit & enhance publicity. As of now, impact investment sector is growing in India which means that investments will also increase. The investors making this type of investments are known are impact investors.

What Is the Minimum Reporting Standard (“MRS”)

In the immediate term, the social enterprises are required to report the social problem intended to be addressed, target segment, the extent of target segment served, approach to solving the problem, members of the governing body, prior funding history, financials & registrations & pass through the assessment mechanism to be developed by SEBI. These requirements are necessary to be fulfilled to qualify as a social enterprise which would also get enhanced overtime. Thus, the MRS requirement being made mandatory for listing on SSE would increase the trust of investors upon such social enterprises as the listed entities would directly come under the purview of SEBI.

Who Can Participate In SSE?

The social sector enterprises, which are mainly classified into Non-profit organizations (“NPO’s”) & For-profit enterprise (“FPE’s”), & fulfill the above mentioned MRS requirements, are eligible to participate in the SSE. FPE’s are like body corporates which also create some social impact & NPO’s are typically the companies, trusts, & societies registered under section 8 of the companies act (i.e., formation of companies with charitable objectives). The main difference between these two types of organizations is that unlike the NPO’s, FPE’s can also raise capital through equity.

How Can the NPO’s & FPE’s raise money through SSE?

NPO’s are restricted by law to raise money through debt & equity. Despite that, the working group has prescribed listing of zero-coupon zero principal bonds on SSE for fundraising by NPO’s. These bonds will carry tenure equal to the duration of the project that is being funded, & at tenure, they will be written off the investee’s books. This kind of instrument is apt for the investors who wish to create a social impact & do not demand their money to be returned back to them. However, it is not the case that there is no risk is such investments. It is possible that the social impact the NPO is promising to cast may not be fulfilled in the end. For FPE’s, they can also raise the funds through the equity route. 

A kind of funding structure prescribed for raising capital is the ‘Mutual Funds’ in which the asset management company (AMC) would give mutual fund units to the investors. After some period, the principal amount would be redeemable but the return generated would go into the hands of the selected social enterprises. An example for the same is the cancer fund by the HDFC mutual funds. This project provides aid up to Rs. 5 lakh per patient. The company after getting the money invests the same in conventional assets, mainly debt funds. The interest earned on the funds is then given to the Indian Cancer Society (ICS). As the fund is close ended with tenure of 3 years, the principal amount is given back to the investors after the tenure gets over. In addition, the investors also receive a tax benefit under section 80G of the Income Tax Act for the amount of dividend foregone by them.

Apart from mutual funds, some other structures prescribed for fund raising are the pay-for-success model, grants-in & grants out & Social Venture funds (SVF).

How Would The SSE Work?

The SSE is not only a place where the securities of the social enterprises are listed but is also a procedure where only those entities are selected for listing which create measurable social impact & also report the same. The SSE shall not be a new stock exchange altogether but a separate segment under the existing stock exchanges. Therefore, by listing on NSE or BSE, the SSE can also benefit the onboard investors, donors, & social enterprises from the existing client relationships & infrastructure of the stock exchanges.

What Are The Policy Interventions For Effective Implementation of SSE?

The working report prescribes certain policy interventions for encouraging the use of SSE. Some of these policies are as follows:

• If a company funds to NPO’s, it would be counted under its CSR obligations.
• Zero-coupan zero principal bonds would be notified as a security under the Securities Contract (Regulation) Act, 1956.
• Securities Transaction Tax would not be applicable on trades done on SSE.
• Capital Gains Tax on long term capital gains pursuant to the sale of securities on SSE would be exempted from payment.
• FPEs listed on SSE would enjoy a tax holiday of 5 years.
• The revenue generated by stock exchanges through SSE would be tax-deductible.

Need for SSEin India

India is home to over 31 lakh NPOs – more than double the number of schools & 250 times the number of government hospitals, which amount to one NPO for 400 Indians. This gives us the idea of the importance of funding requirements for such NPO’s. It is to cater to this need that India has come up with the idea of SSE.

Currently, India has many avenues through which the social sector (i.e. both the FPE’s & NPO’s) acquire funding. These are Corporate Social Responsibility (CSR), impact investing, Socially Responsible Investing (SRI), philanthropic/Government grants, etc. The SSE targets to achieve an integration of all these diverse avenues into a common national platform & set up an uniform framework in reporting & measuring financial & social returns. Therefore, the SSE has a significant role to play in unlocking greater capital available for social impact funding by i) enhancing visibility of social enterprises, ii) institutionalizing innovating fund-raising instruments, & iii) building confidence amongst investors by formulating a common standard for reporting & evaluation. 

A Comparison with Other Countries

In the US, the SSE does not facilitate share trading but rather, acts as a mere directory. It provides information about the social enterprises that are listed on the London Stock Exchange subsequent to having passed the ‘social impact test’. Similar is the case in US, Brazil, South Africa & Canada where SSE platform acts as a mere directory between impact investors & social enterprises (only FPE’s). But in India, the working report has provided new instruments & structures for fund raising for both FPE’s & NPO’s. The SSE in India is not only a mere information directory but a stock exchange on which trading can take place as well.

SSE for Covid-19

The Covid-19 global pandemic has totally eroded the life of poor Indian households & has also affected adversely the social welfare sector. Due to a huge downfall in the economy, the circulation of money has hampered severely. It is imperative to rebuild the life of those who have suffered immensely due to the pandemic & for this, SSE can be of a great help as it open doors for the conventional capital to partner with social capital in order to support & fortify social structures that are in danger of collapsing because of Covid19. A ‘COVID-19 Aid Fund’ can be established to finance the work of NPO’s that are providing relief to affected communities.

Conclusion

Slowly & gradually, most of the enterprises are moving towards profit making as their primary motive. In this scenario, the social welfare get defeated. Although India recognizes social responsibility more than the other countries (as India is the first country to mandate CSR activities for corporates), yet it has to go a long way to eradicate the social problems people face till date. The SSE is a good measure to fill the gap between profit making & social welfare. It is yet to be seen as to how the SSE affects the Indian social market. But for that, the government has to effectively define & implement policies in furtherance of the social mission which needs to be fulfilled by SSE.

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