Decrypting India's New Stock Exchange

The economic imperative of India is to feed, clothe, educate and empower its population of over a billion people all while preserving the natural, cultural and social heritage of India. In order to achieve this objective, our finance minister, Nirmala Sitharaman first floated the idea of a social stock exchange in India in the budget speech of 2019-20 following which SEBI set up a working group under the chairmanship of Ishaat Hussain (Director of SBI foundation) to examine and make recommendations on the structure and mechanics of the Social Stock Exchange in India.

Following the report of the working group, the Securities Exchange Board vide its circular dated 19.09.2022 outlined a detailed framework for the functioning of the Social Stock Exchange (SSE) in India. SSE is a fundraising platform like BSE and NSE which is dedicated to providing a platform to the companies having a social intent to raise funds for the realization of their social welfare objective.

A Social Impact Company includes the Not for Profit Organizations (NPOs) registered under the public trust statute of the relevant state, a charitable trust registered under the Societies Registration Act, of 1860, a charitable trust registered under the Indian Trust Act, of 1882, and a company incorporated under section 8 of the Companies Act, 2013. Not only this, but a Social Impact Company also includes a for-profit organization that has a social intent and 67% of their business is related to activities laid under the framework including activities such as eradicating hunger, and poverty, promoting health care, education, gender equality, woman empowerment, etc.

The NPOs registered with the SSE will issue a zero coupon zero instrument bond which is a debt security or donations through mutual funds scheme that instead of paying interest trades at a deep discount and enables the investor to render profit at its maturity when the bond is redeemed at its full face value. To give effect to this framework, the zero coupon zero capital is also listed as one of the “security” in the Securities Contracts (Regulation) Act, 1956 which are issued by NPOs specifically.

One of the challenges that have to be addressed is that the NPOs which get themselves listed at the SSE lose their ability to issue equity, debt, or any other units since they are not body corporates and the “return” is in the form of social impact.

On the other hand, a For-Profit Organization (FPO) have the liberty to use its existing structure to raise funds such as debt and equity but it will have to demonstrate that they are in the business of creating a positive social impact which will enable them to attract the investment made specifically for social impact.

The entities listed on SSE as their initial prescribed disclosures must cover their vision, and target. Strategy Connexion (SVX)”, governance, management, operations, finance, social impact and risks, etc, and within 60 days from the end of the financial year, the entity will be required to make prescribed disclosures including governance and financial aspects. Additionally, a statement of the utilization of funds will also be required to be submitted to SSE within 45 days from the end of each quarter. Not only this but an SSE will also have to submit an Annual Impact Report (AIR) within 90 days from the end of the Financial year.

Undoubtedly, the introduction of a Social Stock Exchange is a welcome step in the securities market as it would not only improvise visibility and knowledge for the existing stakeholders interested in making a social impact but it will also be a mechanism to regulate the NPOs so that they utilize the fundings for social purposes that they were created for. The Social Stock Exchange could bridge the gap between social enterprises looking to raise funds to meet their ESG requirements and the stakeholders looking to invest in a social impact company.

By - Prapti Allagh