Funding Social Impact: Onboarding The Social Stock Exchange

Introduction

The concept of Social Stock exchange developed on the premise that the development of the social sector would have a positive impact on the economic development of India. This innovative segment of the existing stock exchange's aims to unlock social capital by providing a regulated environment for both Non-Profit Organisations (NPOs) and For-Profit Social Enterprises (FPSEs) so as to raise funds from the capital market. Both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have been provided with SEBI's in principle approval to set up a separate segment known as the 'Social Stock Exchange' (SSE). While the objective of this segment of the stock exchange is to raise capital too, the major distinction which arises herein is the utilization of the capital raised. With the introduction of SSE in India, capital markets will play a pivotal role in driving both economic growth and societal development.

Need for this Segment

With the objective of taking the capital markets closer to the masses and meeting various social welfare objectives relating to inclusive growth and financial inclusion, the hon'ble finance minister proposed for the setup of the social stock exchange. Through listing of social enterprises and voluntary organizations they too could raise capital as equity, debt or as units like a mutual fund.

Role played by SSE

This segment has the ability to play an integral role in the promotion of social welfare as it helps in bridging the funding gap for social enterprises. By enforcing transparency and accountability it would resolve the fund crunch faced by such entities and improve visibility and knowledge, among all stakeholders, especially funders, issuers and customers about their contributions. The exchange platform would provide flexibility of investments and capital available on the SSE and the canvas of choice would be much wider, allowing investors and investees with similar missions and visions to connect seamlessly. The exchange imposes minimalistic registration costs for both the issuer and the investor/donor for the purposes of listing and registration.

Hence, the SSE serves as a mediator between social enterprises that need funding and investors who are willing to contribute towards social causes.

Eligibility criterions for Listing

For an entity to access funds from SSE, it shall be recognised as a social enterprise. The Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) defines the term social enterprise to mean either an NPO or a FPSE meeting the eligibility conditions as prescribed under regulation 292E.¹Both the BSE and NSE provide for the same eligibility criterions for an entity to be listed in their respective exchange which is in consonance to regulation 292. Therefore, the eligibility criterions for social enterprise to get listed on an exchange is as follows:

Predominance²
At least 67% of the immediately preceding 3 year average of revenues comes from providing eligible activities to members of the target population, or;
At least 67% of the immediately preceding 3 year average of expenditures has been incurred for providing eligible activities to members of the target population, or;
Members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3 year average of the total customer base/beneficiaries.
Demonstrating primacy of social intent³

The eligibility criterions of both the stock exchanges in consonance with ICDR outline the 17 varied activities which are identified as eligible activities based in which the above criterion is admeasured. The performance of these activities demonstrates social intent of the respective social enterprise.

Target Market⁴

Social Enterprise shall target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state governments.

Excluded Entities⁵

It is pertinent to note that corporate foundations, political or religious organizations or activities, professional or trade associations, and infrastructure or housing companies, except those involved in affordable housing shall not be eligible for identification.

Funds raised by Social Enterprises

Both NPOs and FPSEs are identified as Social Enterprises and the means through which funds are raised vary between them. This is mainly because while securities issued by NPOs are traded and listed on the SSE, securities of FPSEs are listed and traded on the main board, small and medium enterprises platform or the innovators growth platform.⁶ Hence, only an NPO can raise funds through the Social Stock exchange platform.

An NPO can raise funds through⁷:

issuance of Zero Coupon Zero Principal instrument (ZCZP) to eligible investors subject to ICDR regulations.
donations through schemes of mutual fund as stated by the Securities and Exchange Board of India (SEBI).
any other means as specified by SEBI from time to time.

Institutional investors, non-institutional investors, and retail investors can all participate in the SSE to invest and raise funds through these exchanges.⁸

Registration requirements for an NPO

Before an NPO can raise funds through SSE, the most essential requirement is that it shall be registered with the SSE. Once registered, it is on the NPO's discretion whether or not to raise funds through it.⁹ An NPO seeking to register with the SSE shall fulfill the following requirements:

For a social enterprise to raise funds through the SSE, it should be involved in one or more of the 17 enlisted activities as provided under Regulation 292E(2)(a).¹⁰
Legal Requirements
The entity must be registered as an NPO for a minimum of three years and having a valid registration certificate for the next 12 months. The entity must be registered in India as the following:
charitable trust registered under the public trust statue of the relevant state, or;
charitable trust registered under the Societies Registration Act, 1860, or;
charitable trust registered under the Indian Trusts Act, 1882, or
company incorporated under section 8 of the Companies Act, 2013
The governing documents of the NPO (MoA & AoA/ trust deed/ byelaws/Constitution) shall explicitly state whether the organization is owned and controlled by a governmental entity or a private entity.
The organisation has a registration certificate under section 12A/12AA/12AB of the Income Tax Act, 1961 (IT act), having validity for atleast next 12 months. There should also be no notice or ongoing scrutiny by the income tax. Details regarding pending notices or scrutiny cases from all regulatory and statutory authority shall be disclosed at the time of making the application for the registration.
The organisation should be registered with the Income Tax as an NPO and have a valid IT PAN.
The entity must ensure to disclose whether donations/investments being made in the same can be claimed as tax deduction under section 80G under the 1961 Act.
All these requirements shall be in addition to the abovementioned eligibility criterions necessity for listing.
Minimum Fund Flows
The annual spending in the past financial year must be at least Rs. 50 lakhs.
The funding in the past financial year must be at least Rs. 10 lakhs.

Issuance of ZCZP

As ZCZP are the primary instruments through which funds are raised in the SSE, it is crucial to understand the procedure involved in issuing such instruments to the general public.

Procedure for Issuance of ZCZP

Post the fulfilment of registration requirements and listing criterions, the NPO issues ZCZP. The procedure which must be followed by the NPO as per the ICDR regulations and SEBI circular (SEBI/HO/CFD/PoD-1/P/CIR/2023/196) is as follows:

The NPO shall file a draft fund raising document with the Social Stock Exchange where it is registered along with the fees as specified by the respective SSE along with an application seeking in-principle approval for listing of its ZCZP on the Social Stock Exchange. The SSE too shall specify the details required to be disclosed by the NPO.
The NPO and SSE shall make available the draft fund raising document on their respective websites for a period of atleast 21 (twenty-one) days for public comments.
The SSE shall provide its observations on the document within a period of 30 days from the date of filing the same. In case any clarification is sought by the SSE from the NPO, then the observations shall be given on a later date.
The NPO shall incorporate the observations given by SSE and file the final fund raising document to the SSE prior to the opening of the issue.

Additional conditions for issuance of ZCZP

ZCZP to be issued in dematerialized form.
Shall be non-transferrable from the original subscriber till the expiry of the tenure of the said instrument.
Minimum Issue Size shall be Rs. 50 (Fifty) lakhs.
Minimum Application Size be Rs. 10,000 (Ten Thousand).
Minimum Subscription to be achieved shall be 75% of the funds which have been proposed to be raised through ZCZP. In case of undersubscription, i.e., below 75%, the funds shall be refunded.
The SSE can specify additional norms in respect of the issue procedure as per its requirements and discretion.

Initial disclosures while issuing ZCZP

The ICDR regulations¹¹ along with SEBI circular (SEBI/HO/CFD/PoD-1/P/CIR/2023/196) provides for the minimum initial disclosure requirements for NPO raising funds through the issuance of ZCZPs. The disclosures to be made are:

The SSE shall under the guidance of the SSE governing council (SGC) mandate the structure of the draft fund raising document and the final fund raising document which shall be published on the SSE's website.
The SSE shall ensure that minimum disclosures are hereby done. Some of the essential disclosures to be made are:
Vision: NPO's activities, interventions and programmes are in line with aims and objects stated in its constitution.
Target Segment: The NPO must demonstrate a clear understanding of its target segment, including how the problem impacts them. The organization's approach must be inclusive and explicitly outline how it will improve the lives of its beneficiaries.
Strategy: Strategy formulation towards accomplishing vision should consider capabilities and learning from challenges.
Governance: NPO shall disclose its governing body, its composition and board meetings held by it.
Management: relevant details of the Key Managerial Personnel should be effectively disclosed.
Social Impact: Details of past social impact must be disclosed.
Risks: Any impending risks must be disclosed and ways to mitigate the same too must be provided therein.

Hence, the issuance process of ZCZP ensures transparency and clarity for its investors.

Post Listing Disclosures by SSEs

The SEBI (LODR) regulations¹² provides for disclosures to be made by social enterprises in lieu of listing in the segment to SSEs. They are as follows:

Make annual disclosures to the SSE on matters specified by SEBI within 60 days from the end of the financial year or such period as specified by SEBI.¹³
Disclose to the exchange in which SSEs, it is registered/listed.¹⁴
Disclose any event that may materially impact their planned achievement of outputs or outcomes to the SSEs where it is registered/listed, maximum within 7 (Seven) days or within SEBI specified period from the occurrence of such events.
Submit an Annual Impact Report (AIR) which shall be assessed by a social impact assessment firm. ¹⁵ The AIR shall herein consist strategic intent and planning, approach taken by the enterprise and impact score card.
A statement of utilization of funds raised on the exchange on a quarterly basis.¹⁶

Hence, the above are certain disclosures which are essential to be complied with by social enterprises as provided under the SEBI(LODR) regulations, 2015.

Proposed Reforms

The concept of SSE originated in the early 2000s wherein such exchanges were setup across different countries in the world including Brazil, Canada, Jamaica, Portugal, Singapore and United Kingdom. Of these countries, today only Canada, Singapore and Jamaican SSEs are functional. Some of the main reasons for such exchanges to shut down its operations were low enthusiasm, awareness and training of various stakeholders. For the Indian SSEs to not fall in this trap, SEBI has been constantly making amends and changes in the framework of SSEs to maximize efficiency while making it inclusive and investor friendly for various stakeholders.

In lieu of the same, SEBI released a consultation paper on January 20,2025 proposing changes and amends for this segment of the exchange. Some of the major reforms suggested by SEBI are as follows:

Expansion of definition of NPO as provided under Regulation 292A(e),¹⁷ to expand the list of legal structures which are permissible to be recognized as NPOs under this regulation such as trusts registered under Indian Registration Act, 1908 (particularly for states not having a Trusts act), charitable societies registered under the society registration statute of the relevant statute and companies registered under Section 25 of Companies Act, 1956.
Increasing the tenure of registration of NPOs in the SSEs to 2 (Two) years or such duration as may be decided by SEBI without raising funds through SSE. The rationale being is to create a pool of NPOs to learn about the SSE ecosystem and in time list their projects.
Modifying the target segment in Regulation 292E(2)(b)¹⁸ to include cultural and environmental ecosystem entities in addition to social entities.
The annual self disclosures as provided under regulation 91C would be bifurcated on the basis of financial and non financial basis and revise the timeline of disclosures in regard to financial aspects to October 31after the end of the financial year.
Submission of social impact report under regulation 91E(1)¹⁹ includes reporting for listed projects and for significant non-listed projects which shall account for 67 (Sixty-seven)% of programme expenditure in the previous financial year. The nom listed significant projects shall be on self-reported basis.
While issuance of ZCZPs, the project/programme proposal too shall be included.

These are some of the essential proposed changes which are herein suggested by SEBI to increase the efficiency and impact of this segment on the socio-economic aspect of our economy.

The CSR conundrum

For a long time, companies have been significant contributors to social enterprises through Corporate Social Responsibility (CSR) initiatives aimed at supporting social causes. With the rise of SSE in India, a question arises about whether investments made by corporates through SSEs would be considered as CSR. The current legislations clearly distinguish between the two: CSR funds are donations or contributions made by entities subject to Section 135 of the Companies Act, 2013, while SSE investments involve purchasing ZCZP bonds, which are financial instruments linked to the duration of the project for which they are invested. Despite their fundamentally different structures, both CSR and SSEs share a common goal i.e., supporting social enterprises working towards social causes.

Hence, as SSEs continues to evolve, there may be an opportunity for legislators to reconsider the relationship between these two areas and potentially create a more integrated framework for social impact investing.

In Sum

The Social Stock Exchange (SSE) represents a significant step towards channeling capital market resources into social impact initiatives in India. By providing a regulated platform for Non-Profit Organizations (NPOs) and For-Profit Social Enterprises (FPSEs) to raise funds, the SSE addresses the critical funding gap often faced by organizations dedicated to social welfare. The SSE fosters transparency, accountability and enhancing credibility of an organization, attracting investors to inject funds towards causes promoting societal welfare. Strict eligibility criterions ensure that listed entities genuinely prioritize social impact, while clear guidelines for fundraising mechanisms like ZCZP instruments ensure investor protection. The SSE acts as a crucial link between social enterprises and investors, promoting a more equitable and inclusive society. The SEBIs recommended changes and amends to the regulations of this segment aim at making it a hub for unlocking social capital in India. Ultimately, the SSE has the potential to unlock significant social capital, driving sustainable development and maximizing the positive impact of social enterprises across India.

Footnotes

1. Regulation 292A(h) of the SEBI(ICDR) Regulations, 2018.

2. Regulation 292E(2)(c) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

3. Regulation 292E(2)(a) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

4. Regulation 292E(2)(b) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

5. Regulation 292E(3) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

6. Regulation 292G of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

7. Regulation 292G(a) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

8. Regulation 292C of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

9. Regulation 292F(1) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

10. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

11. Chapter X-A of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

12. Chapter IXA of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015.

13. Regulation 91C Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015.

14. Regulation 91D of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015.

15. Regulation 91E of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015.

16. Regulation 91F of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015.

17. Regulation 292A(e) of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

18. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

19. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

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