Transforming Finance for Social Good: The Emergence of Social Stock Exchanges in India

Insights by: Sunny Raheja, Gagandeep Singh Vig and Sarthak Kasliwal

Introduction

In the dynamic landscape of India, where diversity and adaptability converge to tackle formidable challenges such as poverty, climate change, and socio-economic issues, a groundbreaking initiative is taking shape. Social Stock Exchanges (SSEs) are emerging as a visionary force, not just in the realm of finance, but as catalysts for transformative change. These exchanges are more than a financial innovation; they represent a commitment to empower local communities and bring about profound social impact. In this era of unprecedented socio-economic transformation, the birth of SSEs is a testament to India’s unwavering dedication to fostering inclusivity and resilience. The Government and regulatory bodies have played pivotal roles in instilling structure and regulation into the previously uncharted territory of social enterprises. Today, India finds itself at a crucial crossroads, where the spirit of innovation converges with a profound commitment to address pressing challenges.

SSEs in India are revolutionizing social impact funding by providing a platform for Social Enterprises (SEs) to raise capital while ensuring it is directed toward genuine social objectives. This comprehensive overview highlights SSE roles, regulatory frameworks, and the drive for social accountability, emphasizing their transformative potential in building a more inclusive and resilient Indian society.

The Birth of Social Stock Exchanges

To effectively tackle these pressing issues, the government has embarked on collaborations with corporate entities and philanthropic organizations. In this collective endeavour, a myriad of entities within the social sector has emerged, all united by a shared aspiration to engender a significant and positive impact on society. In this context, the concept of SSEs has gained global recognition. These exchanges provide a way to fund projects with a strong social mission, contributing to a better and more inclusive future for the nation.

To foster greater inclusivity in economic growth and promote financial inclusion, the esteemed Finance Minister presented an initiative in the 2019-20 Budget speech. This proposal involved the establishment of SSE with the overarching objective of making the idea of social welfare more accessible to the general population. This innovative platform would operate electronically and fall under the regulatory oversight of the Securities and Exchange Board of India (SEBI).  She said “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”.

Role and Functions of SSEs

SSEs play a pivotal role akin to traditional stock exchanges where businesses list their securities. Much like conventional exchanges facilitate capital generation for corporations, SSEs offer a platform for SEs to secure the capital they require.

In this regard, the Central Government exercised its authority and, as of July 16, 2022[1], introduced a novel financial instrument called the “Zero Coupon Zero Principal instrument” (ZCZP), which has been officially recognized as a security. ZCZPs are to be issued by Non-Profit Organizations (NPOs) and registered with SSEs in compliance with regulations stipulated by the SEBI.

Consequently, the primary roles of SSEs can be classified as follows:

1. Fund Mobilization for Social Enterprises: SSEs serve as a means for SEs to raise the necessary capital for their operations.
2. Promotion of Capital Formation for Social Enterprises: They actively promote and facilitate the accumulation of capital for SEs.
3. Safety and Security of Raised Funds: SSEs ensure the security and responsible utilization of the funds gathered by SEs.
4. Nationwide Accessibility for Social Enterprises in Capital Formation: SSEs offer a nationwide presence for SEs, enabling them to participate in the capital formation process.
5. Funds for Developmental Purposes: SSEs contribute to funding social and developmental initiatives.

Given that SSEs are specifically designed to provide a platform for SEs to acquire essential capital while guaranteeing that both the sourcing and application of funds are exclusively directed toward genuine social objectives, SSEs are fundamentally focused on promoting, overseeing, and regulating this distinct segment.

Social Enterprise

The term “social enterprise” in the context of SSE is defined by the ICDR Regulations. These regulations specify that a “social enterprise” can be a Non-Profit Organization (NPO) or a For-Profit Entity (FPE) that meets certain eligibility criteria outlined in Chapter X-A of the ICDR Regulations. To qualify as a “social enterprise,” an entity, whether an NPO or an FPE, must demonstrate the primary focus on social impact. This is achieved by meeting three cumulative conditions:

1. The entity must engage in one or more eligible activities as specified in clause (a) of sub-regulation (2) of regulation 292E of the ICDR Regulations.
2. The entity must target underserved or less privileged population segments or regions that have lower performance in the development priorities of central or state governments.
3. The entity must show that at least 67% of its eligible activities are provided to the targeted population. This can be demonstrated through one of the following three conditions: a. At least 67% of the immediately preceding 3-year average of revenues is earned from providing eligible activities to members of the target population. b. 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. c. Members of the target population, to whom 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.

When these conditions are met by an FPE, it qualifies as a “social enterprise.” In simpler terms, being a “social enterprise” does not mean eliminating the profit motive entirely. It merely requires that the primary focus is on achieving social objectives.

On a broader scale, international definitions of a “social enterprise” align with this idea. For instance, the OECD defines a social enterprise as a private activity conducted in the public interest, organized with an entrepreneurial approach, where the primary purpose is not profit maximization but rather the achievement of economic and social goals. Social enterprises are recognized for their ability to bring innovative solutions to the problems of social exclusion and unemployment.

Similarly, the European Union defines a social enterprise as an operator in the social economy whose main objective is to create a social impact rather than generate profits for owners or shareholders. These enterprises operate in a businesslike and innovative manner, using their profits primarily to achieve social objectives. They are managed in an open and responsible manner and involve employees, consumers, and stakeholders affected by their commercial activities.

Recognition to FPEs as “social enterprise” Top of Form

Acknowledging FPEs as “social enterprises” on SSEs is a subject addressed in Chapter X-A of the ICDR Regulations. This chapter is applicable to FPEs aspiring to be recognized as “social enterprises.” While the regulations do indeed provide a framework for FPEs to attain this status, SSEs have not yet established the mechanisms necessary for this recognition.

In terms of fundraising, FPEs can access the capital markets through traditional avenues, such as the main board, SME exchange, or debt segment. However, these FPEs are still not afforded access to the “social enterprise” designation. Furthermore, there may be FPEs that do not require access to the capital markets for fundraising purposes. Instead, they seek recognition solely as a “social enterprise,” a privilege currently available to NPO.

Presently, there is a lack of clear guidance regarding whether SSEs can facilitate this branding exercise for FPEs that do not intend to raise funds through the capital markets. The question remains open as to whether SSEs can serve as a platform for building the brand and reputation of such FPEs with a strong social focus, independent of fundraising activities.

Regulatory Framework Overview

The Central Government, in a notification dated July 16, 2022, has instituted a requirement that only NPOs listed on a designated stock exchange will be permitted to raise funds through the ZCZP (Zero-Coupon Zero-Principal) bonds. These securities must also be registered within the SSE segment of a Stock Exchange, in accordance with regulations set forth by SEBI. To facilitate this, SEBI has introduced a new chapter[2], Chapter IX–A, which encompasses Regulations 91A to 91F. These regulations define the operational framework for SSEs, effective from July 25, 2022.

On the same date, SEBI also announced amendments to the SEBI (ICDR) Regulations (Third Amendment) 2022 (“ICDR Regulations”)[3], introducing a separate chapter, Chapter X-A, dedicated exclusively to Social Stock Exchanges. These revised regulations primarily address the eligibility criteria for Social Enterprises (SEs) seeking listing, the mechanisms available for SEs to raise funds, the procedures for issuing securities to generate funds, disclosure and reporting requirements, and other obligations that SEs must fulfil.

In order to ensure transparent, efficient, and effective monitoring and regulation of this specific segment, SEBI has outlined various reporting obligations for SEs. These reports may be periodic, while others are triggered by specific events.

SEBI LODR Regulations

The amendments have inserted ‘Zero Coupon Zero Principal Instruments’ in the definition of Securities and notified a new chapter IX-A which deals with obligations of social enterprises. Chapter IX-A of SEBI (Listing Obligations and Disclosure Requirements) Regulation 2015 (“SEBI LODR Regulations”) contains the new regulations 91B, 91C, 91D, 91E and 91F and these new regulations provide as under:

Regulation	Obligation	What should be disclosed
Regulation 91B	For Profit Social Enterprise.	Disclosure requirements are to adhere to the guidelines specified in the SEBI LODR Regulations that are applicable to entities whose designated securities are listed on the Main Board, SME Exchange, or the Innovators Growth Platform, as relevant.
Regulation 91C	Not-for-Profit Organization.	Not-for-Profit Organizations are obligated to provide annual disclosures to the Social Stock Exchange(s) regarding matters specified by SEBI. These disclosures must be made within 60 days from the conclusion of the financial year, or within any other timeline designated by SEBI.
Regulation 91D	Both For Profit Social Enterprise and Not for profit Organizations	Entities falling under both the FPEs and NPO categories must establish a materiality policy for communicating intimation and disclosures to Stock Exchanges. A designated Key Managerial Personnel is required to be identified for determining materiality, and their contact information must be disclosed to the Stock Exchange. Any events that have an impact on the realization of planned outcomes must be disclosed no later than 7 days after their occurrence. Disclosures concerning these events must be made available on the Social Enterprise’s website.
Regulation 91E	Both For Profit Social Enterprise and Not for profit Organizations in respect of social impact	Social Enterprises, whether for-profit or not-for-profit, that are registered with or have raised funds through a Social Stock Exchange, must submit an annual impact report in the prescribed format to the Social Stock Exchange. This report should be subjected to auditing by a Social Audit Firm employing a Social Auditor.
Regulation 91F	Not-for-Profit Organization	Not-for-Profit Organizations that are listed are required to provide quarterly statements to the Social Stock Exchange(s) detailing the utilization of funds raised until the issue proceeds have been entirely utilized or until the intended purpose for which the funds were raised has been achieved.

SEBI ICDR Regulations

The ICDR Regulations brought significant amendments in the regulations governing SEs in India. These changes include the following key features:

1. Independent Registration of SEs: Unlike traditional securities issued by companies to raise capital, these amendments introduce a unique feature. They allow the registration of a SE independently, irrespective of whether the SE is planning to raise funds by issuing ZCZP instruments or not.

2. Primacy of Social Intent: The regulations emphasize that all SEs, whether categorized as NPO or FPEs must establish the primacy of their social intent. This means that their primary purpose should be to serve a social cause. The regulations stipulate three conditions for identifying an enterprise as a SE:

• The SE must be engaged in at least one of the 16 specified social activities or other areas as identified by SEBI or the Government of India.
• The SE must target underserved or less privileged populations or regions with lower development indicators.
• At least 67% of the SE’s activities should benefit the target population, which can be demonstrated through various financial and operational criteria.

SEBI ICDR Regulations

The ICDR Regulations brought significant amendments in the regulations governing SEs in India. These changes include the following key features:

1. Independent Registration of SEs: Unlike traditional securities issued by companies to raise capital, these amendments introduce a unique feature. They allow the registration of a SE independently, irrespective of whether the SE is planning to raise funds by issuing ZCZP instruments or not.

2. Primacy of Social Intent: The regulations emphasize that all SEs, whether categorized as NPO or FPEs must establish the primacy of their social intent. This means that their primary purpose should be to serve a social cause. The regulations stipulate three conditions for identifying an enterprise as a SE:

• The SE must be engaged in at least one of the 16 specified social activities or other areas as identified by SEBI or the Government of India.
• The SE must target underserved or less privileged populations or regions with lower development indicators.
• At least 67% of the SE’s activities should benefit the target population, which can be demonstrated through various financial and operational criteria.

3. Eligibility Requirements: The following two types of entities are eligible for raising funds through SSE:

• A FPEs whose designated securities are listed on the applicable segment of the Stock Exchange.

•  A NPO that is registered on the SE.

• SSE may specify additional eligibility requirements for the registration of Not-for-Profit Organizations.

4. Fundraising Instruments: NPOs can issue ZCZP instruments for fundraising. The issuance of these securities is currently restricted to FPEs. NPOs can also raise funds through Mutual Fund schemes and other means specified by SEBI.

5. Usage for Specific Projects: SEs can issue ZCZP instruments for a specific project or activity that must be completed within a specified duration, as outlined in the fundraising document.

6. Conditions for Issuing ZCZP Instruments: The regulations set forth conditions for the issuance of ZCZP instruments, including the following major requirements:
   • ZCZP instruments must be issued in dematerialized form.
   • The minimum issue size must be Rs. 1.00 Crore.
   • The minimum application size must be Rs. 2.00 Lakhs.
7. Ineligibility of SEs to Raise Funds Through SSE: Certain entities are not eligible to be recognized as SEs, and the following types of organizations fall into this category:

• Corporate Foundations
• Political or Religious Organizations or Activities
• Professional or Trade Associations
• Infrastructure and Housing Companies (with the exception of affordable housing initiatives)

Additionally, not all SEs are eligible to raise funds through SSE. The following conditions outline the ineligibility of certain SEs to register or raise funds through an SSE:

1. If any of its promoters, promoter group members, directors, or selling shareholders (in the case of FPEs) or trustees have been debarred from accessing the securities market by SEBI.
2. If any of the promoters, directors, or trustees of the Social Enterprise also serve as promoters or directors of another company or Social Enterprise that has been debarred from accessing the securities market by SEBI.
3. If the Social Enterprise or any of its promoters, directors, or trustees are classified as willful defaulters or fraudulent borrowers.
4. In the case where any of the promoters, directors, or trustees of the Social Enterprise are fugitive economic offenders.
5. If the Social Enterprise or any of its promoters, directors, or trustees have faced restrictions in carrying out their activities or raising funds by governmental bodies such as the Ministry of Home Affairs, other ministries of the Central Government or State Government, the Charitable Commissioner, or any other statutory authority.

Requirements for NPO Registration

To register as an NPO on SSE, certain requirements and criteria must be met. These requirements, as outlined by SEBI in a circular[1] dated September 19, 2022, are as follows:

1. Operational Duration: The NPO must have been in operation for a minimum of 3 years before it is eligible to register on the Social Stock Exchange.
2. Income Tax Act Certification: The NPO should possess a valid certificate under sections 12A, 12AA, or 12AB of the Income Tax Act. These sections pertain to the tax-exempt status of charitable and not-for-profit organizations.
3. 80G Registration: The NPO must have valid registration under section 80G of the Income Tax Act. This registration allows donors to claim deductions on contributions made to the organization.
4. Minimum Annual Spending: The NPO should have a minimum annual spending of INR 50 lakhs.
5. Minimum Fund Balance: The NPO is required to maintain a minimum fund balance of INR 10 lakhs in the past year.
6. Additional Criteria: The specific SSE where the NPO intends to register may have its own additional criteria for registration, which the NPO must meet.

Investment by investors

In terms of investments, under the SSE framework, there are restrictions on who can invest in securities issued by social enterprises. The following categories of investors are permitted:

1. Institutional Investors: Institutional investors are allowed to invest in securities issued by social enterprises.
2. Non-Institutional Investors: Non-institutional investors are also eligible to invest in these securities.

However, it’s important to note that retail investors are only permitted to invest in securities offered by FPEs that are listed on the Main Board of the stock exchange. Retail investors are not allowed to invest in securities issued by other types of social enterprises on the SSE.

Strengthening social accountability

1. Social Impact Reporting: The SSE promotes a standardized approach to reporting social impact, benefiting both FPEs and NPOs. It sets common minimum standards for reporting on social impact, reducing information disparities. Moreover, it encourages the establishment of a “capacity building fund” to enhance the reporting capabilities of NPOs. Over time, the SSE envisions the emergence of a new category of auditors known as “social auditors” who will independently verify the impact reporting of NPOs. This ensures greater transparency and accountability in the social sector.
2. Tax Benefits: To encourage wider participation and investment in SSE funding models across various investor classes, the SSE offers recommendations for tax exemptions, benefits, and regulatory clarifications. These incentives not only make the SSE an attractive option for investors but also foster financial support for social initiatives.
3. Rigorous Regulatory Scrutiny: The SSE maintains a high standard of credibility by requiring rigorous regulatory scrutiny. Listing FPEs on the SSE is not solely based on self-reported social impact. Instead, SEBI, in collaboration with specialized entities, is tasked with developing a mechanism to assess the credentials of FPEs concerning their self-declared social impact dimensions. This scrutiny ensures that only genuine and socially responsible FPEs can engage with the SSE, safeguarding the integrity of the platform.
4. Enhancing the Public Accountability of NPOs: The registration of NPOs on the SSE provides a reassuring level of confidence that these social enterprises will be better positioned to achieve their intended goals while upholding public accountability.
5. Empowering Non-Governmental Organisations (NGOs) and NPOs: A fully functional SSE creates opportunities for NGOs and NPOs to expand their social initiatives. It also offers a more dependable source of financing with integrated accountability frameworks. Registered entities stand to benefit from support in the form of capacity-building funds, financial instruments, impact reporting frameworks, and assistance with regulatory compliance.
6. Mitigating Information Asymmetry: The proposal for minimum reporting criteria addresses information disparities for both NPOs and FPEs. These criteria encompass initial disclosures on general governance and financial matters, as well as ongoing annual disclosures related to the social impact generated by these organizations. This initiative aims to create a more transparent and balanced information landscape.

Concluding remarks

In the burgeoning landscape of social enterprises, Social Stock Exchanges (SSEs) stand as a pioneering force, shaping the contours of economic growth and social change in India. Their emergence is more than just a financial development; it’s a visionary transformation of the nation’s socio-economic fabric. The Government and regulatory bodies have fulfilled their crucial roles in bringing order and structure to the previously unregulated social enterprise sector.

Today, India finds itself at a critical juncture where diversity and adaptability are converging to create innovative solutions for some of the most pressing challenges we face. SSEs are not just a financial instrument; they represent a commitment to empower communities, address poverty, tackle climate change, and promote gender equality. They symbolize a unified resolve to build a more inclusive and resilient society.

The establishment of SSEs is a relatively recent global development, and India’s approach to SSEs differs from many other countries in that it is government-initiated, potentially leveraging public funds to support it. This presents a unique opportunity for the sector. While the success of these initiatives depends on the effective implementation of policies and the willingness of social enterprises to adapt to the new regulatory environment, it’s important to remember that resistance to change is a common human behaviour. Professionals, such as Advocates and Company Secretaries, have a pivotal role in educating and supporting social enterprises in this transition, ensuring they understand the benefits of functioning within the newly set legal parameters.

The potential benefits include a broader impact, an equal playing field for NPO, and a more formalized and regulated environment. However, the growth of social enterprises and the success of SSEs will depend on their ability to adapt, comply with regulations, and operate professionally. This transformation is an opportunity for practitioners to offer their expertise and, in turn, contribute to the socio-economic development of the nation. The impact of this collective effort will be felt on a national scale, ultimately leading to a more prosperous and socially responsible society.

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[1]  SEBI Circular, Framework on Social Stock Exchange, bearing reference no. SEBI/HO/CFD/PoD-1/P/CIR/2022/120, available at: https://www.sebi.gov.in/legal/circulars/sep-2022/framework-on-social-stock-exchange_63053.html

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[1] The Businessline Article, Zero coupon, zero principal bond declared securities,dated July 17, 2022, available at:https://www.thehindubusinessline.com/economy/policy/zero-coupon-zero-principal-bond-declared-securities/article65650626.ece

[2] Chapter IX-A, Page 91 – Page 93, Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, dated July 25, 2022, available at: https://www.sebi.gov.in/legal/regulations/jul-2022/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-july-25-2022-_61405.html

[3] Chapter X-A, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022, dated July 25, 2022, available at:https://www.sebi.gov.in/legal/regulations/jul-2022/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-third-amendment-regulations-2022_61171.html