Functioning of Social Stock Exchange 

(Mains gs3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.)

Context:

• Recently, the National Stock Exchange of India received the final approval from the markets regulator Securities and Exchange Board of India (SEBI) to set up a Social Stock Exchange (SSE).

About Social Stock Exchange:

• The SSE would function as a separate segment within the existing stock exchange and help social enterprises raise funds from the public through its mechanism. 
• It would serve as a medium for enterprises to seek finance for their social initiatives , acquire visibility and provide increased transparency about fund mobilisation and utilisation. 
• Retail investors can only invest in securities offered by for-profit social enterprises (SEs) under the Main Board. 
• In all other cases, only institutional investors and non-institutional investors can invest in securities issued by SEs.

Eligibility criteria:

• Any non-profit organisation (NPO) or for-profit social enterprise (FPSEs) that establishes the primacy of social intent would be recognised as a social enterprise (SE), which will make it eligible to be registered or listed on the SSE.
• The seventeen plausible criteria as listed under Regulations 292E of SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018 entail that enterprises must be serving to eradicate either hunger, poverty, malnutrition and inequality; promoting education, employability, equality.
• Others are empowerment of women and LGBTQIA+ communities; working towards environmental sustainability; protection of national heritage and art or bridging the digital divide, among other things.
• further, at least 67% of their activities must be directed towards attaining the stated objective. 
• This is to be established by enumerating that, in the immediately preceding three-year period, either 67% of its average revenue came from the eligible activities, expenditure (in the same proportion) was incurred towards attaining the objective or the target population constitute 67% of the overall beneficiary base. 
• 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.
• Additionally, NPOs would be deemed ineligible should it be dependent on corporates for more than 50% of its funding.

Raising money by NPO’s:

• 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. 
• SEBI had earlier recognised that NPOs by their very nature have primacy of social impact and are non-revenue generating. 
• Thus, there was a need to provide NPOs a direct access to the securities market for raising funds. 
• ZCZP bonds differ from conventional bonds in the sense that it entails zero coupon and no principal payment at maturity. 
• The latter provisions a fixed interest (or repayment) on the funds raised through varied contractual agreement, whereas ZCZP would not provision any such return, instead promising a social return.
• The instrument 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 as mentioned in the fund-raising document (to be submitted to the SSE).
• The minimum issue size is presently prescribed as Rs 1 crore and minimum application size for subscription at Rs 2 lakhs for ZCZP issuance.

FPOs raising money:

• For-Profit Enterprises (FPEs) need not register with social stock exchanges before it raises funds through SSE. 
• 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 (on main board, SME platform or innovators growth platform of the stock exchange) or issuing equity shares to an Alternative Investment Fund including Social Impact Fund or issue of debt instruments.

On completion of projects:

• Another structured finance product available for NPOs is the Development Impact Bonds. 
• Upon the completion of a project and having 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 would be referred to as ‘Outcome Funders’.
• Since the payment above is on a post facto basis, the NPOs would have to also raise money to finance their operations. 
• This is done by a ‘Risk Funder’ who, alongside enabling the financing of operations on a pre-payment basis, also bears the associated risk with non-delivery of social metrics.