SEBI constituted a working group on Social Stock Exchange (SSE) in September, 2019. The purpose of forming the working group was to review and recommend for building up a mechanism (within the securities market domain) so that social enterprises can raise funds. The aim was also to suggest a regulatory framework covering areas such as eligibility norms for participation, disclosures, listing, trading, oversight etc. In this respect, the objective of forming a Social Stock Exchange is to enable organizations working towards social welfare to raise funds easily under the regulatory ambit of SEBI.

The Working Group decided to follow a consultative approach by carrying out consultations with various stakeholders and subject matter experts. After holding various meetings, the working group finalized the report.

The report defines the roles of SSE. It also introduces the process to measure and report social impact and also gave recommendations to implement common minimum standards for reporting on governance and financials. It also suggested the type of organizations that can be a part of the SSE and recommended funding structures for them. Finally, it gave recommendations on sustenance and growth of SSE and the setting up of Covid-19 aid fund. In this respect, the key highlights of the report can be understood as under:

• Presently, the organizations working in the Social Sector in India receive funding through Corporate Social Responsibility (CSR) allocations (under section 135 of the CA-2013) and philanthropy initiatives of the corporate entities. The purpose of setting up SSE is to create a common platform where funds can be easily raised by these organizations pursuing social work within the regulatory framework of SEBI.


• These social sector organizations can be categorized into “For Profit Enterprises” (FPE) and “Non-Profit Organizations” (NPO). FPE are basically company form of organizations having social impact as part of their business and can raise equity capital. Non-Profit Organizations include Section 8 companies under the Companies Act, 2013, trusts and societies that cannot raise capital through equity.


• There are benefits for Social Organizations by listing in SSE. FPEs can legally raise equity by listing it on SSE subject to minimum reporting standards. Similarly, Non Profit Organizations can benefit from issuing Zero Coupon Zero Principal Bonds.


• Further, these social sector organizations have to follow a minimum reporting standard as social impact is a part of their operations and strategy.


• Currently, the nonprofit organizations in India are facing several challenges in raising funds for their work and have to depend only on foreign donations, Corporate Social Responsibility (CSR) etc. In this respect, SSE has recommended issuing of Zero Coupon Zero Principal Bonds. These bonds are suitable for investors who wish to create social impact but do not wish to have their funds returned to them. They only want to see that their funds are channelized only to credible and legitimate non-profit organizations. SSE ensures that these nonprofit organizations follow a minimum reporting standard for assuring transparency to their investors.


• The nonprofit organizations can also raise funds through commercial capital as follows:
  • Mutual Funds An Asset Management Company (AMC) would offer mutual fund to investors. But, the investors would get only the redemption of Principal amount and the returns would go to the nonprofit entities.
  
  
  • Pay-for-Success In this structure, the conventional capital coming from the Institutional investors will be combined with social capital coming from philanthropic institutions. Conventional capital would bear some risk as it would only earn a return if social impact is demonstrably created. That is the pay-for-success part. So, the NPOs are incentivized to perform better to gain under the pay-for-success structure.


• The SSE can be further strengthened by promoting institutions such as Guidestar, NGO Darpan or Credibility Alliance which will provide genuine and credible information on non profit orginizations and help the investors to access them. SSE should also encourage the engagement of social auditors who will independently verify the impact reporting and also provide the necessary support for reporting requirements. Further various tax incentives should be given to encourage participation in the SSE.


• Lastly, in the present Covid 19 driven crisis, where thousands of people in the country have lost their jobs, there is a need for social capital to secure livelihood for these people. In this respect, it is recommended that a “Covid-19 Aid Fund” can be set up to finance nonprofit organizations that are providing relief to the affected people.

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