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July 21, 2020

Know Benefits and How Social Stock Exchange will work in India as per SEBI

by Mahesh Mara in Compliance Law, SEBI

Know Benefits and How Social Stock Exchange will work in India as per SEBI

SEBI extends deadline for public comments on social stock exchange till August 15

The social sector refers to partially non-profit sector whose main aim is to achieve social development and providing basic needs to the people. India will require massive investments in the coming years to be able to meet their human development goals. This cannot be done through government expenditure alone. Private enterprises working in the social sector are also required to contribute. Currently, social enterprises are very active in India. However, they face challenges in raising funds.

However, now India’s social sector is set for a period of growth. The Indian Finance Minister Nirmala Sitharaman, in her budget speech in July 2019, proposed a Social Stock Exchange (SSE) for social enterprises and voluntary organisations working for social welfare to help them raise capital through debt, equity and mutual funds. The proposed exchange will be under the regulation of Securities and Board Exchange of India (SEBI). The working group was set up by SEBI in September 2019 under the chairmanship of Ishaat Hussain, director at SBI Foundation and former finance director at Tata Sons.

In view of the situation arising due to the COVID-19 pandemic, SEBI on July 14 extended the deadline till August 15 for sending public comments on a report on social stock exchange which allows for direct listing of non-profit organisations.

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What do you mean by a Social Stock Exchange (SSE)?

  • The exchange will function as an electronic fund-raising platform for social purpose organisations.
  • SSE would allow for listing social enterprises and voluntary organisations working for the realisation of social welfare objective so they can raise capital as equity, debt, grants, or performance-linked payments.
  • It will lists funding channels for the social sector and offer a set of procedures that act as a filter, letting in only those organisations that are creating measurable social impact and reporting such impact.
  • It will function on the lines of major stock exchanges like BSE and NSE. However, the purpose of the SSE will not be profit, but social welfare.

How do SSE’s work?

  • The SSE shall be a separate segment under the existing stock exchanges.
  • SSE will not be only a place where securities or other funding structures are “listed” but also a set of procedures that act as a filter, selecting only those entities that are creating measurable positive social impact and reporting such impact.
  • The SEBI working group lays out several funding instruments providing a wide scope of options to “donor” investors looking to invest with an objective to create a social impact.
  • To participate in the SSE, an organisation can legally be incorporated in any way, as long as social impact is a part of its operations and strategy.
  • The group formed under SEBI has outlined a minimum reporting standard that must be mandated.

Benefits:

  • The SSE will enable the routing of grants to nonprofits in a variety of ways, and help aggregate donations from multiple individual donors.
  • Working Group has made it simpler for smaller organizations to list on the exchange by enabling aggregator mechanisms
  • The SSE will enable the routing of risk capital (or venture or commercial capital) to nonprofits via specialised funding structures.
  • Philanthropies, retail donors, CSRs, impact investors and mainstream equity investors can come together on the SSE as they would have access to a wider pool of funds.
  • Funders have the option of selecting projects based on impact rather than legal status
  • A clear set of guidelines leads to the validation of impact measures. The Group has set out a comprehensive reporting framework on social impact, in terms of reach, depth, and inclusion.
  • Data validation and its benefits in unlocking funds for the development sector may be comparable to what the credit-rating instruments did for debt and bond markets. Such impact data not only improves transparency and enables stronger matching of funds but also forms the basis for more innovative finance instruments.
  • The Working Group has suggested liquidity mechanisms for grant structures as well. The concept of listing a ‘zero-coupon zero-principal’ bond can allow for the exit of early-stage donors of a project when the project shows proof of concept and impact, and other donors are willing to support it.
  • Organizations, funding agencies, and philanthropy funds can look for ways to invest in impactful programmes that create livelihoods and opportunities.

In the current context of the COVID-19 pandemic, there is a severe need for social capital to rebuild the livelihoods in the country. The SSE is envisioned as one of the possible solutions to this pressing problem, as it will unlock large pools of funding and enable commercial capital to partner with social capital.  By allowing for a platform that caters to the needs of funders and beneficiaries, the SSE is a positive step in that direction. A set of rules that promotes incentive-led instruments will nudge the SSE on the path to becoming a vehicle for positive growth.

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