Finance Startup

How Does One Register on Social Stock Exchange in India?

The Social Stock Exchange in India is an initiative by the finance minister in the Financial Year 2019-2020 under the National Stock Exchange and Bombay Stock Exchange in 2022 to help Non-Profit Organizations, or Social enterprises raise funding from the public for their social mission. The SSE catalyzes assisting NPOs and social enterprises in focusing on their goals.

To register on Social Stock Exchange in India includes a series of steps to get registered by adhering to the guidelines set by the Securities Exchange Board of India. The first thing an organization must meet is the eligibility criteria outlined by SEBI and gathering the required documents to submit while registering for the SSE to access public funding. Its main focus is to ensure that these organizations have access to the market of Capital and connect the organization with investors.

After preparing the required documents, the organization must submit them to SEBI for approval and after, the SSE can proceed with listing on the SSE. The organization must have ongoing disclosure and reporting requirements on its regular updates on its financial performance and social impact.

Transform for Social Good: Emergence of SSE in India

The finance minister in the financial budget 2019-20 passed the idea of an electronic fundraising platform, i.e. Social Stock Exchange, under the regulatory body SEBI to raise funds for social welfare.

The objective of SSE is to channel the financial gap by providing an alternative instrument for fundraising, achieving social development and bringing the capital markets closer to meeting social welfare objectives.

A social stock exchange is a platform for raising funds from the public for social enterprises and organizations. As of September 2023, 18 companies were registered under the National Stock Exchange and 24 companies with the Bombay Stock Exchange.

The main aim of establishing the Social Stock Exchange is to create an efficient mechanism for funding social enterprises and ensure that the SSEs serve as a stock exchange and impact social or environmental development.

The funding in SSE usually comes from Corporate Social Responsibility, individual investors, government funding, etc., so the SSE plays an important role in utilizing the funds for social development activities.

Why Social Stock Exchange in India?

The SSE in India operates as a segment under the NSE and BSE to channel the funding issues for social enterprises including non-profit organizations and for-profit social enterprises to connect the organizations with the investor’s base. It is launched to promote impact investing; the SSE provides a regulated marketplace where investors can support organizations focused on addressing environmental and social challenges.

The SSE constitutes the Social Stock Exchange Governing Council to monitor its functioning. This encourages organizations to prioritize social responsibility by facilitating capital flows into sectors such as healthcare, education, and renewable energy etc.; the SSE plays a role in advancing substantial development goals and reporting and monitoring mechanisms to foster trust among investors and stakeholders.

What is the meaning of Social Enterprise?

A social enterprise is an organization that operates with the primary objective of addressing social and environmental challenges and monitoring financial performance. Unlike the traditional for-profit enterprise, social enterprise’s main focus is the social or environmental challenges of maximizing the profits for shareholders.

Social enterprise can take various forms, such as non-profits, cooperatives and for-profit entities with a social mission to create change by leveraging an entrepreneurial approach to tackle social challenges.

The SSE identifies two different forms of social enterprise: non-profit organizations and for-profit social enterprises. Those social enterprises that satisfy the eligibility criteria under the SEBI (Issue of Capital and Disclosure Requirements) Regulation 2018 can register as NPOs or FPEs.

Key Sources to Raise Funds in Social Stock Exchange

The NPO can raise funds from ZCZP, donations from mutual funds schemes, development impact bonds and in FPEs from equity shares on the main board, AIF, social impact funds, and issuance of debt security. However, the other key sources to raise funds in the social stock exchange are stated below:

1. Impact Investors

The impact investors are individuals or institutions seeking to generate both financial returns and positive social or environmental impact.

2. Institutional Investors

Institutional investors such as foundations and development finance institutions allocate capital to social enterprises listed on a social stock exchange.

3. Retail Investor

Retail investors, including individual investors, may also invest in social enterprises through the social stock exchange to support ventures that align with their values and contribute to positive social and environmental outcomes.

4. Government Subsidies

The social enterprises access government grants, subsidies or other forms of financial support to complement the funding from the social stock exchange.

5. Corporate Social Responsibility

CSR is an obligation to invest in social enterprises through their CSR funds to support social enterprises listed on a social stock exchange.

6. Impact Bonds

Social impact bonds are the financial instruments that leverage private investment to fund social programs. Social enterprises listed on an SSE to issue social impact bonds to raise capital.

How does Zero Coupon Zero Principal Instrument work in NPO?

The Zero Coupon Zero Principal instruments are financial instruments brought under the Securities Contract Act, 1956, that do not offer a periodic interest (Zero Coupon) and have no principal repayment at maturity (zero Principal).

Zero Coupon Zero Principal instruments help the NPO to raise funds from SSE through donations from investors at a discount to their face value. At maturity period the investor receives the full-face value of the instruments, providing a return on investment which allows the NPO to access funding without the burden of making any interest payments.

The Zero Coupon Zero principal has been permitted to be issued by the Non-Profit Organization registered on the Social Stock Exchange while adhering to the conditions about the dematerialization of the ZCZP instrument when there is a minimum issue of Rs 1 crore and minimum application of Rs 2 Lac.

Listed Entities Under the Social Stock Exchange in India

The listed entities under the social stock exchange to access the fundraising part are given below:

1. Non-Profit Organization (NPO)

NPOs are required to access the challenges related to social or environmental issues listed on the SSE. The NPOs must hold a valid certificate under sections 11A, 12AA, 80G and 12AB of the Income Tax Act to get an exemption status. These organizations may include those working in education, healthcare, poverty alleviation, environment and community development. Below are some of the NPOs listed under the NPOs for raising funds from the Social Stock Exchange:

• Charitable Trust under the India Trust Act, 1882
• Charitable Trust registered under the Public Trust
• Societies Registration Act of 1860 registered Charitable Trust
• Companies registered under Section 8 of the Companies Act of 2013.

2. Social Enterprises

Social enterprises operate with a mission to create a positive social or environmental impact by generating revenue and may seek listing on the Social Stock Exchange. These enterprises have various sectors, including renewable energy, trade, sustainable, and microfinance.

3. Impact Investment Fund

The funds focused on impact investing, which allocates capital to social enterprises and initiatives, can also be listed on the SSE. These funds raise capital from investors interested in generating financial returns while positively impacting society or the environment.

4. Cooperative

A cooperative with a social or community-oriented mission is included in the list of SSEs that can access capital and expand their operations, including sectors such as agriculture, housing, etc.

5. Microfinance Institution

The microfinance institution that provides financial services to underserved communities and individuals is considering focusing on the SSE to raise funds for scaling their operation and reaching more beneficiaries.

Regulatory Framework on Social Stock Exchange

The government issued a notification requiring that only NPOs listed on the Social Stock Exchange can raise funds through ZCZP bonds. The SEBI (LODR) Regulation inserted the ZCZP and encompassed regulations 91A to 91F to define the operational framework for SSEs.

SEBI also issued amendments to the SEBI(ICDR) Regulation to the Social Stock Exchange, which address the eligibility criteria for social enterprises seeking listing, mechanisms to raise funds, and disclosure and reporting requirements.

SEBI, in the circular dated 19^th September 2022, has also stated specific requirements for the NPO on SSE, such as:

• An NPO must have been in operation for a minimum of 3 years before proceeding to register on the social stock exchange in India.
• NPOs need to obtain a certificate under sections 12A, 12AA, 12AB, or 80G of the Income Tax Act to get tax exemptions, and the donor can claim a deduction for the contribution made.
• The NPO should have a minimum annual spending of Rs 50 Lac and a minimum fund of Rs 10 lac in the previous year.
• There are some additional criteria as per the specific NPOs to register on Social Stock Exchange.

Step-by-Step Guide to Register on Social Stock Exchange in India

The step-by-step guide to register on Social Stock Exchange in India will help to make the registration process simple, below is the step-by-step guide:

1. Understanding of the Criteria of Eligibility

SEBI issued eligibility criteria to be listed in SSE. These requirements talk about the social impact the organization is aiming for and the financial sustainability of the initiatives by organizations.

2. Appointing Social Auditor

To maintain transparency the organization needs to perform a social audit which helps in verifying and evaluating the social impact generated by the organization and helps in guiding through the entire process to register on Social Stock Exchange.

3. Gathering Documents

The registration process requires various documents and information related to the organization’s social activities, practices, legal structure, etc., to be attached to the application for registration.

4. Submission of the Registration Application

Once all the required documents are gathered, the registration application with the required documents accurately is submitted.

5. Evaluation of the Application

After receiving the application to register on SSE, SSE will conduct a thorough evaluation to assess the eligibility criteria and social objectives and evaluate the organization’s financial sustainability, governance, and social impact.

6. SSE Listing

Once the registration application has been accepted, the SSE will grant permission to list on the stock exchange. It will open the door for the investors to invest in the listed organization.

Criteria of Eligibility to Register on Social Stock Exchange in India

The eligibility criteria to obtain the Social Stock Exchange license issued by the SEBI to list on the Social Stock Exchange are given below:

• The NGO must hold a certificate under sections 12A, 12AA,12AB, and 80G of the Income Tax Act.
• The NGO must be operational for at least three years to deliver social impact.
• At least 67% of the revenue or expenses from the past three years have been used to provide social activities.
• At the end of every quarter, the NPO must submit a statement to the SSE within 45 days
• stating how the funds were utilized.
• NPO must operate for at least three years before registering on the Social Stock Exchange.
• Social enterprises must disclose the annual impact report within 90 days.
• NPOs need to make annual disclosures of all five investors or donors.
• NPOs need to obtain a certificate under sections 12A, 12AA, 12AB, or 80G of the Income Tax Act to get tax exemptions, and the donor can claim a deduction for the contribution made.
• The NPO should spend a minimum of Rs 50 Lac Annually and have a minimum fund of Rs 10 lac in the previous year.
• The registration certificate for the entity registered as an NPO is valid for at least the next 12 months at the time of seeking to register on social stock exchange.

Necessary Document to Register on Social Stock Exchange in India

The key documents required to register on Social Stock Exchange in India are listed below:

• Documents disclose that the NPO is controlled by the government or private, such as trust deeds, memorandum of association, articles of association, etc.
• A copy of the registration certificate is obtained under sections 12A, 12AA, 12AB, or 80G of the Income Tax Act, and it needs to be valid for the next 12 months.
• The receipt or payments of an annual spending of at least 50 lacs.
• Receipts and payment of the funding made in the past financial year of at least Rs 10 Lac.
• Proof of ownership of the organizations.
• Copy of Pan Card, tax deduction and collection account number

Benefits of Listing for Social Stock Exchange in India

The benefits of listing for the social stock exchange in India for the organization and investors are stated below:

1. Easy Access to Impact Capital

The SSEs are designed to facilitate investment in organizations committed to social and environmental causes, and listing on the stock exchange helps these organizations raise funding easily.

2. Enhance Credibility

Being listed on a social stock exchange can enhance an organization’s credibility within the impact investment to the community and serve as an approval for organizations to commit to social and environmental development.

3. Legal Support

The regulatory body SEBI regulates social stock exchanges to promote social and environmental development in the community by supporting a favourable tax environment, regulatory framework, and measures to encourage investors to invest.

4. Engagement of Stakeholders

Listing on SSEs can facilitate stakeholder engagement, including customers, employees, and communities increasingly interested in supporting socially responsible businesses or activities.

Role of NABARD, NSE, SME and SIDBI in Social Stock Exchange

Each of these organizations plays an important role in the system of the social stock exchange in India:

1. National Bank for Agriculture and Rural Development (NABARD)

NABARD plays an important role in rural development and agriculture financing in India. In the context of SSE, NABARD can facilitate funding and provide support to social enterprises that focus on rural development, agriculture, and other social sectors.

2. National Stock Exchange (NSE)

The National Stock Exchange is one of the leading stock exchanges in India. It provides platforms for listing and trading securities issued by social enterprises on the SSE and contributes to the development of SSE infrastructure.

3. Small and Medium Enterprises (SMEs)

The SMEs help in social entrepreneurship, impact investing in addressing social and environmental challenges, and help SMEs access capital markets and raise funds for growth and expansion.

4. Small Industries Development Bank of India (SIDBI)

SIDBI has an important role in promoting and financing small and medium enterprises in India to provide financial support, assistance, and capacity-building programs that meet the needs of social enterprises.

Challenges to Register on Social Stock Exchange in India

The organizations registered on social stock exchanges in India face several challenges due to their unique requirements. Some of the key challenges include:

1. Lack of Regulations

One of the primary challenges is the absence of continuous changes in the regulatory framework. Presently, SSEs operate within the existing regulatory framework of securities exchanges, which doesn’t always include the accurate, unique requirements of social enterprises or organizations.

2. Non-accuracy in Measurement & Reporting

The SSEs require organizations to provide their social and environmental impact and financial performance. However, defining accurate performance data and reporting will be a challenge for organizations and companies.

3. Lack of Investors Awareness

There is a lack of awareness among investors about the SSEs, so there is a requirement to educate the investors about the impact of investing and the opportunities presented by the Social Stock Exchanges.

Social enterprises are Not Eligible to Register on Social Stock Exchange in India.

There are a few social enterprises that are not eligible to register on Social Stock Exchange in India:

• SEBI does not allow promoters, Trustees, or Directors in for-profit social enterprise scenarios to access the securities market.
• Promoters, Trustees, or Directors of one social enterprise who are also promoters or directors of the other social enterprises are not eligible to access the securities market, as defined by SEBI.
• If the promoter or director is the willful defaulter, then they are not eligible to register on SSEs.
• If the director, promoters or trustees are debarred by the Ministry of Home Affairs or any other central or state government ministry, then they are not allowed to register on Social Stock Exchange.

Checklist to Register on Social Stock Exchange in India

Below is the checklist for the NPO seeking to register on social stock exchange in India for the understanding of the organization to register on social stock exchange.

• Certificate of Registration of the organization.
• Proof of ownership of the organizations.
• Copy of Pan Card, tax deduction and collection account number
• The organization needs to submit an audit report of the last three years financial statements
• The organization needs to register under 80G of the Income Tax Act.
• Registration for the certificate under sections 12A, 12AA, and 12AB of the Income Tax Act.
• Confirmation from the SSE is needed to fulfill the eligibility criteria of the social enterprises.
• Following the additional disclosures as stated in Annexure 4. 
• Confirmation from the CA as per Annexure 2.

Timeframe to Register on Social Stock Exchange in India

After the successful submission of the application to register on Social Stock Exchange, the document draft is made available on the SSE’s website and the NPO for 21 days for any public comment, or if there is any comment required to be provided by the SSE, then they can give it within 30 days to the NPOs.

Fees to be Incurred to Register on Social Stock Exchange in India

The non-refundable registration fees include processing fees, TDS, net fees, etc., as specified by the SSE. SSE is cost-effective because it saves costs for both investors and issuers by charging minimum fees for listing and registering on the Social Stock Exchange.

Conclusion

The registration process for a social stock exchange in India involves a series of steps outlined by the regulatory body, SEBI, such as emphasis on the eligibility criteria, gathering of the documents, and evaluation process. So, following the guidelines and understanding the details about the SSE will help the organization to comply to effortlessly register on social stock exchange while aligning with the values and goals of the investors, stakeholders, and organizational performance.

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