Achieving welfare through social stock exchange

Back in 2019 during the Union Budget, the Finance Minister had proposed to initiate steps for creating a stock exchange under the market regulator exclusively catering to social enterprises. She had argued then that it is time to take our capital markets closer to the masses and meet various social welfare objectives to inclusive growth and financial inclusion.

The proposal was cleared in September '21 and accordingly, on 22nd February, 2023, Securities Exchange Board of India (SEBI) has given final approval to National Stock Exchange (NSE) to set up a Social Stock Exchange (SSE) to operate as a separate segment from December 2023.

The SSE is a platform that connects interested investors with the organizations operating in the social impact space. It provides a transparent and regulated marketplace (exchange) to transact the various securities issued by the Non-Profit Organizations (NPO) and For-Profit Social Enterprises (FPE). The objective of the SSE thus is to provide a new avenue for these organizations, which have intent and/or operate in social impact, to raise funds. Apart from transparency of capital allocation, mobilization and utilisation, it also brings the visibility to these organisations.

The SSE helps the Social Enterprises (SEs) to tap a larger pool of investors to fund their increased operations and expansion. Also helps these organizations to expand their supporter base and raise awareness through these exchanges. For the investors, this is a new asset class with better transparency in the way the contributed money is utilized to ensure that these entities operate aligned to their values of supporting the social and environmental causes.

The SSE would identify these organisations that qualify under the categories of NPO and FPE must demonstrate at least 67 per cent of their activities targeted at the underserved or less privileged regions or populations recorded in the development priorities of either central or state govts. These qualified entities can initiate the fund mobilization process by issuing separate instruments like Zero Coupon Zero Principal (ZCZP) bonds.

These securities are different from the traditional bonds and could be issued by these entities through either public issue or private placement. Though trading isn't permissible in these ZCZP bonds category, these can be transferred such as to legal heirs. As per the NSE circular both institutional and non-institutional investors can invest in these securities issued while the retail investors are allowed to invest only in the securities issued by the For-Profit Social Enterprises. Currently foreign investors aren't allowed to invest in any of these securities through the SSE.

For FPEs, the process of issue and listing of issue and listing of securities shall be same as applicable for the issue and listing of securities under the existing process of exchange (based on the eligibility criteria for the Main Board, the Small & Medium Enterprise (SME) platform, or the innovators Growth Platform, as applicable, in addition to the criteria provided to be eligible as SEs.

The minimum issue price allowed in these securities is Rs 1 crore and the minimum subscription into these issues is at Rs 2 lakh. Though, the SSE concept is new to India, many countries including USA, UK, Canada and Brazil have operational platforms helping such social enterprises to tap into public capital.

Overall, this is a step forward in building a sustainable, transparent and regulated financial system that tackles the various difficulties of the SE segment in accessing funds. For investors also it provides an access to reach out to those organizations whose work is relatable to their social causes and support them financially to make a difference.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])