Market regulator the Securities and Exchange Board of India (Sebi) has given its final approval to the National Stock Exchange of India (NSE) to launch its Social Stock Exchange (SSE) as a separate segment.
SSE will provide a platform for social enterprises, such as Non-Profit Organizations (NPOs) or For-Profit Social Enterprises (FPEs), to raise funds to finance their social initiatives. It will also ensure transparency in fund mobilisation and utilisation.
"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.
Union Finance Minister Nirmala Sitharaman, in her Union Budget speech of 2019-20, had proposed the creation of an SSE, under the regulatory ambit of Sebi for listing social enterprises and voluntary organizations working for the realisation of social welfare objectives, so that they can raise capital as equity, debt or as units like a mutual fund (MF).
What is a Social Stock Exchange?
A Social Stock Exchange is a platform that will help social enterprises to raise funds from the public. It is similar to a stock exchange which helps companies raise funds from the public.
Social stock exchanges may give investors much clarity on a firm's social impact and its intention to work toward social welfare.
How will a Social Stock Exchange help social enterprises?
Social enterprises need financial resources for carrying out social welfare works and creating social impact.
As NSE says, the SSE will provide a new avenue for social enterprises to finance social initiatives, offer them visibility and bring in increased transparency in fund mobilisation and utilisation by social enterprises.
How can social enterprises raise funds on Social Stock Exchange?
A social enterprise will have to first register itself on the Social Stock Exchange after which it can begin raising funds by issuing financial instruments such as Zero Coupon Zero Principal.
"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 an instrument issued by NGOs on an SSE to raise funds. So far, social organisations have been relying on donations to raise funds. Now, with the help of an SSE, they can easily raise funds via a stock exchange mechanism.
One needs to remember that after fundraising via ZCZP, the borrower does not have to pay the interest or pay the principal either. So, they are akin to donations.
Why should we donate through ZCZP?
If ZCZP is like a donation, why should we choose it and not donate directly?
This is because ZCZP offers transparency regarding donations. There has not been much clarity on how social enterprises utilise donations and there have been concerns over the misuse of funds and reports of fraud also.
Now, if a social enterprise raises funds through ZCZP, it will have to do regular audits of its social activities and report them to social exchange for the perusal of all stakeholders.