Social Stock Exchange: What it is? How it works? Big questions answered about new financing paradigm

Social Stock Exchange in India: Social Stock Exchange (SSE) is a new idea in India. The idea was floated by Finance Minister Nirmala Sitharaman in her Budget Speech 2019-20. 

SSE, basically, is for the listing of Not for Profit Organisation (NPO) on stock exchanges. NPOs are establishments that work for the welfare of the society or community and are set up as charitable associations. SSE aims to provide them with an alternative fund-raising instrument.

Countries like the UK, Canada and Brazil have already SSEs

The concept of SSE gained momentum during the pandemic, bringing the spotlight on the need for social capital for enterprises and voluntary organisations that are working for social welfare.

SSE, touted to be a novel concept, under the regulatory ambit of the Securities and Exchange Board of India (SEBI) will serve private and non-profit sector providers by channelling greater capital to them.

SEBI had late last year approved the creation of SSE. It cleared a framework for SSE for fund raising by social enterprises.

Example of SSE

One example of SSE is the Cancer Fund by HDFC Mutual Fund. It operates as a standard mutual fund. The only exception here is that the returns generated are channelled for the financing of NPOs. In simple words, any profit generated is donated to the NPO. The investor gets his money back from the Asset Management Company.

SSE: Tax benefits

Investors can claim a deduction under Section 80G. Under Section 80G of the Income Tax Act, a taxpayer is allowed to claim a deduction for making contributions to certain relief funds and charitable institutions.

The government in the run up to setting up SSE recently declared 'zero coupon zero principal instruments' as securities. Zero coupon zero principal instrument means an instrument issued by a NPO which will be registered with the SSE.

These instruments will be governed by rules drafted by the SEBI, according to an official notification issued by the government last week.

SSE participation eligibility 

Social enterprises eligible to participate in the SSE should be entities having social intent and impact as their primary goal.

Also, such an intent should be demonstrated through its focus on eligible social objectives for the under served or less privileged populations or regions. The social enterprises should engage in a social activity out of the list of 15 broad activities approved by the regulator.

With regard to fund raising, it has been proposed that eligible NPOs may raise funds through equity, zero coupon zero principal bonds, mutual funds, social impact funds and development impact bonds.