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Chapter XVIII - Social Stock Exchange

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Made publicly available in the spirit of open access by its author, Noshir Dadrawala (CEO, Centre for Advancement of Philanthropy), and collaborators CAP and Forbes Marshall.

On 5th July, 2019 the Finance Minister of India Nirmala Sitharaman announced: "It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. I propose to initiate steps towards creating an electronic fund-raising platform - a social stock exchange (SSE) under the regulatory ambit of Securities and Exchange Board of India (SEBI) 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."

A Working Committee was formed in September 2019 which gave its report in June 2020 followed by the formation of a Technical Committee in September 2020 which gave its report in May 2021. The Government of India formally notified the Social Stock Exchange in July 2022.

Social enterprise

The concept of a social enterprise was developed in the UK in the late 1970s. Social enterprises stand at the junction of business and the voluntary sector. Social enterprises seek to balance activities that provide financial benefits with social goals, such as housing for low-income families or skill-building and livelihood. Because profit-maximisation is not the primary goal or driver, a social enterprise operates differently than a standard profit driven company.

Although the term 'social enterprise' has no legal meaning or definition, India's Social Stock Exchange should be given credit for recognising social enterprises and giving this term the much-required legitimacy. Any social enterprise (non-profit or for-profit) seeking to register on the Social Stock Exchange in India must first establish that 'social impact' is its primary purpose. This is tested by applying three filters:

  1. Area/s of focus: Sixteen broad areas of welfare and development have been identified in sync with Corporate Social Responsibility (CSR) activities specified under Schedule VII of the Indian Companies Act 2013 and Sustainable Development Goals 2030

  2. Quantum of Social Work: The enterprise must have at least sixty- seven per cent of its revenue, expenses, or beneficiaries dedicated for the areas of focus

  3. Beneficiaries: The enterprise should target underserved or less privileged population segments or regions recording lower performance in development (aspirational districts)

Corporate foundations, political entities, religious organisations, professional bodies, trade associations, infrastructure, and housing companies, except affordable housing, are not eligible to be identified as a social enterprise.

Global success rate

India is not the first to set up a Social Stock Exchange. However, it has the potential to be the only Social Stock Exchange in the world to succeed. Brazil was the first to establish a Social Stock Exchange in the year 2003 for non-profit organisations, followed by South Africa in the year 2006, Portugal in the year 2009 and the UK in the year 2013. However, none of them are active any more. Only the Social Stock Exchanges set up in Singapore and Canada (both in the year 2013), and Jamaica in the year 2019 are somewhat active and that too because they are established for 'for-profit enterprises.'

India's Social Stock Exchange

India's Social Stock Exchange (SSE) is a separate segment of the existing Stock Exchange, to help social enterprise(s) to raise funds from public through the stock exchange mechanism. SSE acts as a medium between social enterprises and fund providers and SSE can help the latter to select entities which are seen to be creating measurable social impact and reporting such impact. Certain type of social enterprises [i.e., not- for-profit organisations (NPOs)] that meet the registration criteria can register on SSE and undertake to make continuous disclosures on their social impact. Such NPOs may or may not choose to raise funds through SSE, however, they would be required to continue making disclosures including on social impact to the stock exchanges.

Currently the SSE is a segment of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Social enterprises are free to register on either one or both the exchanges. Many have already registered and some have even successfully listed and raised funds.

Fundraising platform

The first reality that NPOs (registered either as a public charitable trust or as a society under the Act of 1860 or as a not-for-profit company licensed under Section 8 of the Indian Companies Act 2013) need to understand is that the SSE is simply a fundraising platform and not a tap under which it can put its fundraising bucket to automatically fill up. Registration on the SSE will enhance credibility and visibility. However, to raise funds the NPO must make a proper pitch.

Zero Coupon Zero Principal Instrument (ZCZP)

A few organisations have already raised funds with 'Zero Coupon Zero Principal Instrument' (ZCZP). Zero coupon means the social investor will not be paid any interest and zero principal means the social investor will not be paid back his principal amount. In other words, a ZCZP is a non-refundable grant to the NPO for its project, programme, or activity. The investment must be in dematerialised form and for which the donor must have a demat account. Even if the NPO decides not to fundraise through the ZCZP instrument, there is a definite benefit in registering on the BSEs or NSEs (or both) SSE. The NPO will be seen by donors as a socially impactful entity and which has passed through due-diligence tests as per Security and Exchange Board of India's (SEBI) norms.

Need to incentivise social investments through SSE

A social investor investing in an NPO through ZCZP is only entitled to the standard fifty per cent tax deduction. The government of India should consider incentivising social investments through SSE by allowing social investors to enjoy one hundred per cent or an even higher tax deduction.

Secondly, as of now, a citizen of a foreign country or a foreign company cannot invest in ZCZP instrument without violating norms of the Foreign Contribution Regulation Act (FCRA) 2010. Under FCRA a 'foreign source' (which includes citizen of a foreign country, including an OCI and certain foreign companies not registered under the Indian Companies Act) cannot fund an NPO unless the NPO is registered under FCRA and the funds are credited only to the NPOs designated FCRA Bank Account with State Bank of India, New Delhi Main Branch.

If the Government of India seriously wants India to achieve what Brazil, South Africa, Portugal, and the UK have failed to achieve, it must work towards incentivising giving through the SSE. The social investor investing through the SSE should not be allowed just a fifty percent but a hundred per cent tax deduction or maybe even a weighted deduction. For example, in Singapore, philanthropic donations to NPOs are eligible for a two hundred and fifty per cent tax deduction.

The Government of India should also make it possible for an NPO not having FCRA registration but registered on the SSE to raise funds from foreign investors through the SSE's ZCZP. If the NPO has been through stringent due diligence and recognised as being socially impactful, year after year, surely the regulators should feel comfortable and confident that the NPO will not misuse the funds raised through ZCZP nor apply the funds for a purpose other than national interest.