What is Social Stock Exchange? Know how it benefits social enterprises

New Delhi: The Securities and Exchange Board of India (SEBI), the market regulator, has granted its ultimate authorization for the National Stock Exchange of India (NSE) to introduce its Social Stock Exchange (SSE) as a distinct segment.

The SSE will offer a platform for social enterprises, including Non-Profit Organizations (NPOs) and For-Profit Social Enterprises (FPEs), to secure funding for their social endeavours. Additionally, it will guarantee transparency in both the collection and utilization of funds.

“Any social enterprise, NPOs or FPEs, that establishes its primacy of social intent can get registered/listed on SSE segment,” NSE said in a media release on February 23, 2023.

During her Union Budget speech for the fiscal year 2019-20, Finance Minister Nirmala Sitharaman had put forth a proposal to establish an SSE, supervised by SEBI, for the listing of social enterprises and voluntary organizations dedicated to achieving social welfare goals. This initiative aimed to enable them to raise capital in the form of equity, debt, or units, similar to a mutual fund (MF).

What is a Social Stock Exchange?

A Social Stock Exchange is a platform designed to assist social enterprises in raising funds from the public. It operates in a manner analogous to a conventional stock exchange that enables companies to secure capital from the public. Social stock exchanges can potentially offer investors greater transparency regarding a company’s social impact and its commitment to advancing social welfare objectives.

In what ways can a Social Stock Exchange benefit social enterprises?

Social enterprises require financial resources to conduct their social welfare activities and generate meaningful social impact.

As stated by NSE, the SSE will establish a fresh avenue through which social enterprises can fund their social initiatives, enhance their visibility, and introduce greater transparency into the process of raising and utilizing funds for these social endeavours.

What are the methods through which social enterprises can secure funding on the Social Stock Exchange?

To initiate the process of raising funds on the Social Stock Exchange, a social enterprise must initially complete its registration on the platform. Following registration, it can commence fundraising activities by issuing financial instruments, including Zero Coupon and Zero Principal bonds.

“For eligible NPOs, the first step for onboarding starts with the registration on the Social Stock Exchange segment. Post registration, NPOs can initiate the fund mobilisation process by the issuance of instruments such as Zero Coupon Zero Principal (ZCZP) via a public issue or private placement,” said NSE.

“Currently, the regulations have prescribed the minimum issue size as ₹1 crore and the minimum application size for subscription at ₹2 lakhs for ZCZP issuance,” NSE said.

“For FPE, the process of issue and listing of securities shall be same as applicable for issue and listing of securities under the extant processes of the exchange (based on eligibility criteria for the main board, SME Platform or innovators growth platform, as applicable in addition to the criteria provided to be eligible as social enterprises),” it added.

What is a ‘Zero Coupon Zero Principal’ instrument?

Zero Coupon Zero Principal (ZCZP) is a financial instrument issued by NGOs on a Social Stock Exchange (SSE) to secure funding. Historically, social organizations have relied on donations as their primary source of funds. However, the SSE provides a more streamlined way for them to raise capital using stock exchange mechanisms.

It’s essential to note that when fundraising through ZCZP, the borrower is not obligated to pay interest or repay the principal amount. In essence, ZCZPs are similar to donations.

Why should we donate through ZCZP?

If ZCZPs are akin to donations, what’s the advantage of choosing them over direct donations? The reason lies in the transparency offered by ZCZPs. Traditional donations often lack clarity regarding how social enterprises utilize the donated funds, which has raised concerns about potential misuse and reports of fraud.

By opting for ZCZPs, when a social enterprise raises funds, it becomes accountable for regular audits of its social activities and must report these findings to the social exchange. This transparency benefits all stakeholders involved, providing assurance that the funds are being used as intended for the betterment of society.