MC Explained: How does a Social Stock Exchange work?

"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 issuance of instruments such as Zero Coupon Zero Principal (ZCZP) via a public issue or private placement," the NSE said in a statement.

Here is a look at what are SSEs and how they would help the fight against COVID-19.

Also read: Section 11 of Electricity Act is back. What is the clause and what can it do?

What is an SSE?

An SSE allows the listing of non-profit or non-government organisations on stock exchanges, providing them with an alternative fund-raising structure. It may be listed on BSE or NSE. Countries like the UK, Canada and Brazil have SSEs.

“The fund-raising is proposed through several instruments such as zero-coupon-zero-principal bonds, social venture funds and mutual funds. The duration of listing of an entity would depend on its objectives and future plans,” Moin Ladha, Partner, Khaitan & Co, said.

What is the size of the market?

India has over 31 lakh NPOs – more than double the number of schools and  250 times the number of government hospitals, which amount to one NPO for 400 Indians.

What are the objectives of SSEs?

According to the draft SEBI report, a Social Stock Exchange may be helpful in rebuilding the livelihoods of people who are affected during pandemics like COVID-19.

“The SSEs will aim at unlocking large pools of social capital, and  encourage blended finance structures, so that conventional capital can partner with social capital to address the urgent challenges of COVID-19.”

How will it work and what are the eligibility criteria?

The SSE shall be a separate segment under the existing stock exchanges. It is a set of processes as much as a place. This means that the SSE will not be only a place where securities or other funding structures are “listed” but also a set of procedures that act as a filter, selecting only those entities that are creating measurable positive social impact and reporting such impact.

What instruments will NPOs offer on SSEs?

The Sebi working group report lays out several funding instruments such as zero-coupon-zero-principal bonds, social venture funds, and mutual funds, “providing a wide gamut of options to “donor” investors looking to invest with an objective to create a social impact. This initiative may also enable companies to be able to deploy CSR funding by connecting directly with social organisations,” Ladha said.

Can you give an example?

The Cancer Fund by HDFC Mutual Fund is one example. It operates as a standard mutual fund, with the exception that the returns generated are channelled towards the financing of NPOs. Its investors get their money back from HDFC MF, but any interest or gains that are made are donated to the NPO.

What are the tax benefits?

Investors will get Section 80G benefits which allow all investments in securities/instruments of NPOs listed on SSE to be tax deductible, and corporates to deduct CSR expenditure from their taxable income, among other things. Investment by companies will be considered as part of their Corporate Social Responsibility (CSR) initiatives.

What about transparency and reporting standards?

Information Repositories will provide credible, standardised information about the NPOs. IRs are expected to create an appropriate financial reporting standard so that NPOs can then adhere to them. The new standards are expected to be in place before the end of 2020. Similarly, social auditors will perform an independent verification of impact reporting. While in the immediate term, NPOs need only self-reporting, from the intermediate term onwards, social auditors can take over this function.