In the ever-evolving finance and corporate governance landscape, the Social Stock Exchange (SSE) emerges as a potentially transformative force. This article embarks on a journey into the unexplored realm of Social Stock Exchanges, unravelling the conceptualisation, development, and paradigm shift they bring to the world of capital markets.
To begin, the article seeks to define the essence of a Social Stock Exchange — a marketplace where profit-making and social impact converge. This exploration delves into the purpose, structure, and unique role that SSEs play in aligning financial markets with social responsibility. Shifting the focus to the Indian context, the article provides a detailed progress report on the development of Social Stock Exchanges within the nation.
A critical aspect of understanding SSEs lies in decoding the regulatory framework that governs them. This article dedicates a section to unpacking Chapter X-A of the Issue of Capital and Disclosure Requirements (ICDR), shedding light on the legal underpinnings shaping SSEs and their implications for companies seeking to list. The eligibility criteria for listing on a Social Stock Exchange represent a paradigm shift from traditional exchanges. This section examines how these criteria differ, placing emphasis not only on financial performance but also on measurable social impact metrics. The article highlights the evolving nature of evaluation standards for businesses in this space.
This article serves as a compass through uncharted territory, navigating the conceptualisation, regulatory intricacies, and global trends surrounding Social Stock Exchanges. As businesses grapple with societal challenges, the emergence of SSEs offers a promising avenue for investors and enterprises alike to contribute meaningfully to positive social change.
What is a Social Stock Exchange?
The overarching goal of fostering “Social Development” through Social Enterprises (SEs) encompasses multiple objectives. These enterprises aim to address social issues that fall beyond the scope of government policies and programs. By providing solutions that are often beyond the reach of official initiatives, SEs play a crucial role in addressing unmet societal needs. Key challenges include the lack of transparency and accountability within social enterprises, hindering their ability to attract financial support and impeding social development. Social Stock Exchanges (SSEs) have emerged as regulated platforms to address these challenges, facilitating collaboration between social enterprises and donors.
SSEs enhance accessibility for both social enterprises and donors, serving as a structured environment that mitigates concerns related to transparency. The focus is shifted from profit-making to prioritising social impact, emphasising the fundamental goal of bettering society.
In essence, advancing social development through SEs involves overcoming government limitations, addressing unmet social issues, fostering transparency, and creating a regulated platform, such as SSEs, that promotes collaboration with a primary focus on social impact.
Social Enterprises (SEs) have become instrumental in driving social development in India. The imperative to achieve the UN Social Development Goals has underscored the need for dedicated social funds. However, SEs often encounter challenges due to a shortage of funds.
The current landscape witnesses a pronounced focus from corporations on Environmental, Social, and Governance (ESG) principles and an unprecedented emphasis on Public-Private Partnerships (PPPs). This surge in corporate interest aligns with the evolving role of stock exchanges in India, transforming into robust fundraising platforms.
As the concept of leveraging financial markets for social causes gains traction globally, India is also actively embracing this approach to align with and fulfil its commitment to the Social Development Goals. The maturation of this concept worldwide underscores its relevance and effectiveness, prompting India to adopt it as a strategic tool for advancing social development objectives.
Development of Social Stock Exchanges in India: A Progress Report
The evolution of Social Stock Exchanges (SSEs) in India unfolded through a series of significant milestones:
| September, 2019 | The Budget Speech of 2019 laid the groundwork by proposing the creation of SSEs under the regulatory purview of the Securities and Exchange Board of India (SEBI). |
| June, 2020 | SEBI took a proactive step by constituting a Working Group (WG) to delve into the intricacies of SSEs and formulate a comprehensive regulatory framework. |
| May 2021 | Building on the efforts of the WG, a crucial turning point occurred when the Working Group submitted its detailed report outlining the framework for establishing and operating SSEs. |
| September, 2021 | Further progress was made as SEBI approved the creation of SSEs, solidifying the regulatory foundation for these specialised platforms. |
| July, 2022 | Demonstrating commitment to the vision of SSEs, SEBI amended existing regulations such as ICDR (Issue of Capital and Disclosure Requirements), LODR (Listing Obligations and Disclosure Requirements), and AIF (Alternative Investment Funds). These amendments incorporated the specific framework required for the functioning of Social Stock Exchanges. |
The concept of Social Stock Exchanges (SSEs) took root in India during the Budget Speech of FY 2019-20 and has materialised into a tangible reality with the establishment of a comprehensive regulatory framework in 2022. The NSE and BSE, being nationally prominent stock exchanges, have received recognition as SSEs in India, thereby creating a structured pathway for registering and listing “social enterprises.”
As of October 4, 2023, both the NSE and BSE have seen the registration of a notable number of Not-for-Profit Organizations (NPOs) on their SSE segments—18 with NSE and approximately 19 with BSE. While fundraising through SSE is not obligatory for NPOs, efforts have been initiated to ease specific requirements for these registered NPOs to facilitate fundraising.
FPEs Seeking ‘Social Enterprise’ Recognition on SSEs:
Despite the growing traction among NPOs, the focus on for-profit entities (FPEs) seeking recognition as “social enterprises” on SSEs appears limited. Chapter X-A of the ICDR Regulations outlines provisions for FPEs to be identified as social enterprises, but the operational machinery for this recognition remains unspecified by SSEs.
Fundraising avenues for FPEs are currently extended through conventional channels, including the main board, SME exchange, or debt segment. However, the lack of access to the “social enterprise” identifier poses a notable gap in SSE offerings for FPEs.
Moreover, the question arises regarding FPEs that may prioritise the recognition of being a “social enterprise” without an immediate need for capital market fundraising—a privilege presently accorded to NPOs. The absence of clear guidance raises uncertainties about the feasibility of such branding exercises on SSEs for FPEs not actively raising funds through capital markets.
As SSEs continue to evolve, addressing these aspects will be crucial to ensuring inclusivity and effectiveness in promoting both NPOs and FPEs committed to social impact within the Social Stock Exchange framework. For further details on the regulatory ecosystem and proposed flexibility-centric recommendations, refer to “Social Stock Exchanges: Philanthropy on the Bourses” and “Flexibility-Centric Recommendations Proposed for SSE Framework,” respectively.
Social Stock Exchanges: Unpacking Chapter X-A of ICDR
In this regulatory landscape, Chapter X-A of the Issue of Capital and Disclosure Requirements (ICDR) takes centre stage, providing a framework for Social Stock Exchanges (SSEs). Key definitions crucial to navigating this terrain include those pertaining to Draft Fund Raising Documents and Final Fund Raising Documents.
A notable inclusion in these definitions is the delineation of For-Profit Social Enterprises. These companies or corporate bodies operate for profit yet have a distinct social mission. Importantly, this category excludes Section 8 Companies from its purview.
On the other side of the spectrum, Not-for-Profit Organizations are a pivotal component. These entities, constituting social enterprises, fall into various forms such as Charitable Trusts, State Charitable Trusts, Charitable Societies, Section 8 Companies, and any other entities specified by the regulatory Board.
This nuanced categorisation sets the stage for understanding the diverse landscape of social enterprises within the ambit of Social Stock Exchanges, shedding light on the regulatory intricacies that govern their fundraising documents and operational structures.
Scope of Chapter X-A: Navigating the Applicability and Governance of Social Stock Exchanges
- Not-for-Profit Organizations (NPOs):
- Registration Only: NPOs seeking sole registration with SSE fall under the purview of Chapter X-A.
- Registration and Fundraising: The chapter outlines the applicable regulations for NPOs aspiring to both register and raise funds through SSE.
- For-Profit Social Enterprises (FPEs):
FPEs aiming to be recognised as Social Enterprises within the SSE framework will find guidance within Chapter X-A.
- Access to Social Stock Exchange:
SSEs extend access to both Institutional Investors and Non-Institutional Investors, with SEBI retaining the authority to permit additional investor classes.
- Social Stock Exchange Governing Council (SSE GC):
SSEs are mandated to establish an SSE GC to provide oversight and governance. SEBI will specify the Terms of Reference for the SSE GC, ensuring clarity in its role and responsibilities.
- Engagement in Social Activities:
A qualifying SE must actively participate in at least one of the 16 designated social activities.
- Targeting Underserved Populations:
The SE’s focus should be on serving underserved or less privileged population segments or specific regions.
- Minimum 67% Allocation to Eligible Activities:
At least 67% of the SE’s activities should qualify as eligible activities for the target population. This qualification is substantiated through criteria such as revenue generation, expenditure, or the number of beneficiaries.
- Entities Ineligible for SE Identification:
The identification as SE excludes certain entities from consideration. These include:
- Corporate Foundations
- Political or Religious Organizations or Activities
- Infrastructure and Housing Companies
If a For-Profit Entity fulfils these conditions, it becomes eligible for identification as a “social enterprise” on SSEs. Importantly, being a “social enterprise” does not negate the profit-earning motive entirely; instead, it necessitates the primacy of a “social objective.”
In broader terms, international definitions from organisations like the OECD and the European Union emphasise that a social enterprise operates with the main objective of social impact rather than profit maximisation. It engages in entrepreneurial and innovative strategies to address social issues while responsibly managing its activities in an open manner, involving various stakeholders.
Registration Prerequisites for Not-for-Profit Organizations (NPOs) in the Context of Social Stock Exchanges (SSEs):
To engage with Social Stock Exchanges, NPOs must adhere to specific registration prerequisites, recognise the pivotal role of formal registration in the fundraising process:
- Mandatory Registration:
NPOs are obligated to undergo registration before embarking on any fundraising activities.
- Registration Options:
NPOs have the flexibility to choose between two options: opting for registration only or opting for both registration and fundraising through SSEs.
- Minimum Requirements by SEBI:
SEBI sets forth minimum requirements that NPOs must fulfil to qualify for registration with SSEs. These requirements serve as the foundational criteria for engaging with the SSE framework.
- Possibility of Additional Requirements:
SSEs retain the authority to specify additional requirements beyond the minimum standards mandated by SEBI for the registration of NPOs. This flexibility allows for tailoring the registration process to the specific dynamics of the Social Stock Exchange ecosystem.
Social Impact Fund (SIF)
- Definition of SIF:
A Social Impact Fund (SIF) now signifies an Alternative Investment Fund (AIF) primarily investing in securities, units, or partnership interests of social ventures or securities of social enterprises. Such funds are required to meet specific social performance norms as prescribed by the fund.
- Social Unit Clarification:
The term ‘Social Unit’ denotes units issued by Social Impact Funds or the schemes within these funds. Investors opting for social units commit to receiving solely social returns or benefits without any financial returns against their contributions.
- Issuance of Social Units:
Social Impact Funds or their schemes retain the option to issue social units, providing flexibility in structuring investment offerings aligned with social impact goals.
- Minimum Coupon Size:
Each scheme within a Social Impact Fund is mandated to have a minimum coupon size of at least 5 Crores, ensuring a robust financial foundation for the fund’s initiatives.
- Investment in NPOs:
For Social Impact Funds investing in Not-for-Profit Organizations (NPOs), individual investors are required to make a minimum investment of 2 Lakhs, reinforcing a commitment to impactful and meaningful contributions to the social sector.
Eligibility Criteria for Listing on Social Stock Exchange (SSE): A Paradigm Shift
In the ambit of the new regulations, the Social Stock Exchange emerges as a distinctive division within existing stock exchanges, catering specifically to entities with a pronounced commitment to social impact. The following criteria delineate who can be listed on SSE:
- Eligible Entities:
Not-for-profit organisations (NPOs) and for-profit social enterprises are eligible for listing on the Social Stock Exchange, where social intent and impact take precedence as their primary objectives.
- Demonstrated Social Intent:
Entities must emphasise social goals that align with the needs of under-served or less privileged populations or areas.
- Engagement in Social Activities:
Social enterprises seeking listing must actively engage in at least one of the 16 broad social activities outlined by the regulator. These activities span critical areas such as eradicating hunger and poverty, promoting healthcare, supporting education, and fostering gender equality.
- Exclusions from Eligibility:
Certain entities, including corporate foundations, political or religious organisations, professional or trade associations, infrastructure companies, and housing companies (excluding affordable housing), are not eligible for identification as social enterprises on SSE.
- Minimum Listing Requirements:
As per SEBI’s framework, the Social Stock Exchange imposes a minimum issue size of ₹1 crore, and the minimum application size for subscription is set at ₹2 lakh.
Advantages of For-Profit Social Enterprises (FPEs) as “Social Enterprises”
Dispelling the common misconception that “profits” and “social impact” are incompatible, it’s crucial to recognise that a social enterprise, especially in the context of For-Profit Entities (FPEs), is not confined to a charitable model. The term “profit objective” doesn’t diminish the inherent social benefits derived from the activities of FPEs. As highlighted in Forbes’ article “The For-profit Social Enterprise Is The Impact Model Of The Future,” building a successful company and fostering positive social impact are not mutually exclusive; both can coexist harmoniously.
Enumerating the benefits of designating FPEs as “social enterprises” reveals a sustainable framework for delivering social benefits:
- Self-Sustainability Model:
Unlike Not-for-Profit Organizations (NPOs) reliant on donations, FPEs operate on a self-sustainability model. They generate profits while concurrently creating social impact, reinvesting these profits—either wholly or partially—back into furthering their social objectives.
- Access to Impact Investors:
FPEs have the advantage of engaging with “impact investors” who go beyond traditional philanthropy. These investors provide financial support with the expectation of both measurable social returns and financial returns. This access to diverse financial products enables FPEs to scale up, expand activities, and invest in research and innovation.
- Financial Viability and Social Impact:
The integration of profitability with social impact ensures the financial viability of FPEs. This dual focus facilitates long-term sustainability, allowing FPEs to navigate challenges and continue delivering tangible social benefits.
Rising Trend: For-Profit Social Enterprises (FPES) Gaining Global Popularity
A comprehensive 2022 report jointly conducted by the British Council and Social Enterprise UK, titled “More in Common: The Global State of Social Enterprise,” provides insights into the prevalence of social enterprises across 27 countries worldwide. Notably, the report highlights the legal structures adopted by social enterprises, revealing a substantial inclination towards the incorporation of private companies.
Key Findings:
- Dominance of Private Companies:
The report indicates that over half of the social enterprises in countries such as UAE, Singapore, Vietnam, Thailand, and notably India opt for the legal form of private companies.
- Flexibility Driving Popularity:
A study from the Pune International Centre, conducted in March 2022, delves into emerging patterns of social enterprises. It suggests that the popularity of the private company structure may stem from the flexibility it offers in utilising profits or surplus.
- Diverse Profit Utilization:
Across the surveyed countries, there are varied approaches to profit generation among social enterprises. While some direct a significant portion of profits towards business growth and development, others distribute profits among shareholders or allocate rewards to staff and beneficiaries.
These trends underscore a global shift towards recognising and embracing the potential of For-Profit Social Enterprises (FPES). The flexibility and adaptability inherent in the private company structure seem to be key drivers, allowing social enterprises to effectively balance profitability with social impact, contributing to a dynamic and evolving landscape of social entrepreneurship worldwide.
Conclusion
In the ever-evolving landscape of social entrepreneurship, the global understanding of “social enterprise” may exhibit nuances across jurisdictions. However, a unifying thread persists—the paramount emphasis on social intent. Notably, For-Profit Enterprises (FPEs) are increasingly acknowledged as legitimate contributors to the realm of social enterprises, reaping multifaceted benefits.
The contemporary business paradigm underscores the convergence of profit generation and social impact creation, marking a departure from traditional dichotomies. Stakeholders are progressively embracing a “values-based” approach, recognising that FPEs prioritising social impact are poised for enduring value creation.
Crucially, larger profits within FPEs translate into a substantial funding reservoir, amplifying their potential to catalyse social change. In this context, allowing FPEs access to Social Stock Exchanges (SSEs) emerges not merely as a pathway for fundraising but as a strategic move to recognise their social objectives.
While empirical data on FPE preferences for Social Stock Exchange registration awaits validation, the prospect is tantalising. The assumption that FPEs would opt for SSE registration, given the opportunity, aligns with the growing synergy between profit-driven enterprises and societal contributions.
In this conclusion, the trajectory is clear—social entrepreneurship transcends traditional boundaries, and FPEs, recognised as social enterprises, stand at the forefront of a transformative journey where profit and social impact intertwine for sustained and meaningful value creation.
Frequently Asked Questions (FAQs)
A Social Stock Exchange is a distinct trading platform designed for enterprises prioritising social impact. It provides a unique avenue for both Not-for-Profit Organizations (NPOs) and For-Profit Social Enterprises (FPEs) to register, list, and potentially raise funds while highlighting their commitment to social objectives.
Unlike traditional stock exchanges focused solely on financial returns, SSEs emphasise enterprises committed to social impact. They offer a platform where investors align with organisations based on their social objectives, contributing to a values-driven investment landscape.
Yes, FPEs can be acknowledged as social enterprises on SSEs. The criteria typically revolve around demonstrating the primacy of their social intent, engagement in eligible activities, targeting underserved populations, and showcasing a significant commitment (67%) to social activities.
While fundraising is not compulsory on SSEs, registration offers FPEs recognition for their commitment to social objectives. The platform provides an avenue for branding and acknowledgement, aligning with the global shift towards socially conscious business practices.
Social Stock Exchange registration offers FPEs visibility in the socially conscious investment landscape. It aligns with a values-based approach favoured by stakeholders, potentially attracting impact investors and fostering a positive brand image.
As of now, empirical data is limited, but the assumption is that FPEs, given the opportunity, might opt for SSE registration. The platform signifies a strategic move for recognition and is in sync with the contemporary narrative where profit and social impact seamlessly coexist.
SSEs provide FPEs with a self-sustainability model. Profits can be reinvested to further social objectives, ensuring sustained social impact without relying on traditional donation-based funding.
Global reports, such as the one by the British Council and Social Enterprise UK, indicate a rising trend of social enterprises, including FPEs, choosing legal structures like private companies. This shift underscores the increasing recognition and popularity of FPEs globally.
SSEs play a pivotal role in steering the business narrative towards values-based practices. They encourage enterprises to prioritise social impact alongside financial gains, aligning with the growing preference for ethical and socially responsible business models.
While Social Stock Exchange frameworks vary, regulatory challenges may include aligning with specific eligibility criteria and demonstrating a clear commitment to social impact. Engaging with SSEs necessitates adherence to evolving regulatory standards, ensuring transparency and accountability in achieving social objectives.
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