Social Stock Exchange

Why in news?

• The National Stock Exchange of India (NSE) has received in-principle approval from the Securities Exchange Board of India (SEBI) to set up Social Stock Exchange (SSE) as a separate segment of the NSE.

Evolution of social stock exchange:

• Union finance minister first floated the idea of social stock exchange for India in union budget speech for 2019-2020.
• Following the budget announcement, SEBI has set up a working group in September 2019 to examine and make recommendations on the structures and mechanics of a social stock exchange.

How it works?

• Social Stock Exchanges (SSE) are dedicated platforms that allow investors to purchase stakes in social enterprises, volunteer groups and welfare organizations.
• The SSE will function as a common platform where social enterprises can raise funds from the public.
• They comes under the regulatory ambit of SEBI.
• Contrary to most capital market exchanges that allow firms to be listed when they meet certain business criteria, a social stock exchange generally screens enterprises on the basis of their ‘social impact’ before listing them.
• It falls under the broad purview of ‘impact investment’ (It is a form of funding that aims to drive measurable social benefits while also generating monetary returns)
• Arguably, social stock exchanges have the potential to offer innovative solutions that utilize equity investments to create social impacts.
• The SSE can be housed within the existing stock exchange such as the Bombay Stock Exchange (BSE) and/or National Stock Exchange (NSE).
  • This will help the SSE leverage the existing infrastructure and client relationships of the exchanges to on-board investors, donors, and social enterprises (for-profit and non-profit).
• However, the purpose of the Social Stock Exchange will be different - not profit, but social welfare.

The need for Social Stock Exchanges:

• India needs massive investments in the coming years to be able to meet the human development goals identified by global bodies like the UN.
• This can’t be done through government expenditure alone. Private enterprises working in the social sector also need to step up their activities.
• Currently, social enterprises are very active in India. However, they face challenges in raising funds.
• One of the biggest hurdles they face is, apparently, the lack of trust from common investors
• As per a survey conducted by Brookings India, 57 per cent of the social enterprises identify access to debt and equity as a barrier to growth and sustainability.

Social Enterprises in India – an overview

• The enterprises that create social impact can be broadly categorized into two:
  • For-Profit Enterprises (FPEs) - which include companies registered under the Companies Act, sole proprietorships, partnership firms, HUFs and limited liability partnerships
  • Non-Profit Social Enterprises (NPOs) - which include Section 8 companies, trusts and societies.
• The key difference between these two categories is that they source different kinds of capital. Specifically, FPEs can raise equity while NPOs cannot

Instruments available for issue:

• For Non-Profit Social Enterprises (NPOs):
  • Zero coupon zero principal bonds, Social Venture Funds (SVFs), Mutual Funds etc.
• For ‘For-Profit Social Enterprises (FPEs)’:
  • Equity and Social Venture Funds (SVFs)
• For Section 8 Companies:
  • Equity and Debt

PRACTICE QUESTION:

Consider the following statements regarding Social Stock Exchanges:
1. It is a platform which allows investors to buy shares in social enterprises.
2. India will be the first country to have a social stock exchange.
Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer