Social Stock Exchange (SSE) is one of the newest concepts introduced in India by SEBI recently. It opens up a whole new horizon for Social Entreprises (SEs), gives more scope of creative investment to socially aware investors and also increases the scope for professionals apart from being a step in the right direction for social development.
Listing in a stock exchange provides transparency and this helps investors to make informed decisions about where to invest through public scrutiny. When it comes to disclosure of necessary information, good governance, due diligence and transparency, there is a huge difference between a listed and an unlisted entity. For unlisted entities not enough information is available in public domain.
Social enterprises (SE) comprise a very large part of the ecosystem in the country. But these non-profit organisations are unlisted entities resulting in their inability to tap the capital market. There are investors interested in contributing towards social causes in such entities, but due to information about these entities being in the oblivion, such noble intentions often do not see the light of the day.
To fill this gap, the Securities and Exchange Board of India (SEBI) has recently come up with the idea of creating a Social Stock Exchanges. The #SSEs will operate like other stock exchanges and SEs will be allowed to list their securities in this exchange. These securities can then be traded by the public and investors interested in investing in social entities will have the information and clarity about them. From the point of view of financial inclusion this initiative is in the right spirit. Social entities literally struggle to get funding for their activities. It may be noted that the idea of encouraging impact investment and getting social returns was introduced in the country by the 2019-20 Finance Budget. During the two years of pandemic that followed the massive work of the social enterprises were brought to the fore and concern about their need for funding got importance thus resulting in this new initiative launched by #SEBI. For investors with social awareness, it is going to be a new investment opportunity.
SEBI’s Report on Social Stock Exchanges
In 2021, SEBI’s Technical Committee came up with the Technical Group Report on Social Stock Exchange. Annexure I to that Report contained the Taxonomic classification of areas and sub-areas for social objectives. It contained 15 broad categories of social welfare activities. Some of these are eradication of hunger, poverty, malnutrition and inequality, promotion of healthcare, gender equality, education, employability, ensuring sustainability, protection of natural heritage, promoting rural livelihoods and so on. Listed SEs may choose from equity, zero-coupon bonds, mutual funds, social impact funds and development impact bonds to raise capital through the SSE.
The social entities will be required to make necessary initial disclosures in order to get listed. Once listed, they will be required to submit financial statements, reports and social impact disclosures on a regular basis in order to provide the much needed clarity to their investors. SEBI will monitor the due diligence, reporting and disclosures of the listed SEs. There will be strict governance norms for them to comply. Although the listed SEs will enjoy tax benefits, they would be subjected to increased compliances, mandatory social audits and continuous disclosures encompassing financial, governance and social impact aspects.
The detailed SEBI guidelines on listing and trading of such securities are awaited. But it is expected that they will be pretty much similar to normal securities in the normal stock exchanges. Only that since these are not-for-profit enterprises, the securities listed and issued by them will probably bear no dividend or interest. So an investor who has invested in some zero-dividend securities can get them redeemed at face value or traded value whenever he/she wants to and the same may be purchased by another trader. And the cycle goes on. It may also be possible for an investor to make a one-time donation without expecting anything in return. The SSEs will guarantee social investors the liquidity they desire. Only the detailed SEBI guidelines will be able to clarify these nitty-gritties.
SEs eligible to get listed
The question arises as to which SEs will be listed in these SSEs. The answer is simple. Entities with various social causes as their primary objective who are in need of funds will list themselves in SSEs. It may be noted that both non-profit organisations and for profit organisations with social objectives can get listed. In order to be listed, 67% of an SE’s activities should be eligible social welfare activities. Foundations owned by companies, political or religious organisations, professional or trade associations etc. will not be permitted to list their securities on SSE.
SEs and their current funding
As of now SEs mainly receive their funding from the CSR budget of eligible companies u/s 135 of the Companies Act, 2013. They also receive other philanthropic donations, both from institutions and individuals.
The introduction of SSEs will mean that SEs will now be subjected to stricter regulation and closer monitoring and required to make regular disclosures w.r.t. to their activities and transactions entered into. This move will be a blow to corporates who form trusts in order to evade taxes. Diversion of funds to trusts in the name of mandatory CSR will now be under strict watch of #SEBI for listed SEs. However, for unlisted SEs, there’s no change except that some serious investors will now prefer only listed SEs for routing their social investment.
Scope for professionals
#Professionals will have a big role to play in the coming days in work related to the Social Stock Exchange, Social Entities, listing and the related #compliances. Social Audit is being introduced for SEs, both as a precondition for listing and as a part of regular reporting with the SSE.
What is Social Audit?
As per the report of SEBI’s Technical Committee as stated above, Social Audit refers to the part relating to financial audit, and the part relating to non-financial audit of the Report pertaining to Social Enterprises governed by SEBI. A more detailed definition is available from UN’s Food and Agricultural Organisation (FAO). According to it ‘Social Audit is a way of measuring, understanding, reporting and ultimately improving an organization’s social and ethical performance. A social audit helps to narrow gaps between vision/goal and reality, between efficiency and effectiveness’. It values the voice of the stakeholders and creates an impact upon governance. It focuses on the ever neglected issue of social impact. It aims at creating awareness among beneficiaries and providers of local social services. It promotes collective decision making, shared responsibility and creation of social capital.
Who is a Social Auditor?
A #SocialAuditor (SA) is a person, firm or institution for the purpose of #SocialAudit of a Social Entreprise governed by SEBI. As for the financial part of the Social Audit it implies a person who is a member of the Institute of Chartered Accountants of India (ICAI), holding a Certificate of Practice. With respect to the non-financial part of the Social Audit it includes a person who is a post-graduate from a university recognized by the UGC with 3 years’ experience in development sector or a graduate from a university recognized by UGC with 6 years’ experience in development sector, or a #CharteredAccountant, a #CompanySecretary, or #CostAccountant, or any other accredited person/agency meeting the eligibility criteria as specified.
Global scenario
#SocialStockExchanges have been set up in the past in countries like the UK, Canada, Singapore, South Africa, Brazil, Portugal, Jamaica etc. As on date only the SSEs in the UK, Canada, Singapore and Jamaica are still operating. The Technical working group at SEBI has, while preparing the Report, addressed the various regulatory loopholes and drawbacks that led to the downfall of the SSEs in other countries. Hence, we must keep our fingers crossed for success of SSEs in India. However, there is no denying the fact that the measurement of social impact in numbers while analyzing the Social Return on Investment (SRoI) for investors, auditors and regulators continues to be a big challenge.
Grey areas
Most NGOs today are either trusts, societies or section 8 companies. Whether Trusts and Societies will also be allowed to list themselves on the SSE or they will need to convert themselves into a section 8 company is not clear. Since the concept is in a nascent stage, it is difficult to assume anything with much precision now.
There are several grey areas that need elaboration, but that does not take away the credit from SEBI for coming up with this fantastic new concept that will bring in the much needed creative financing support to this segment that will directly impact the society in a positive manner.
Conclusion
In my opinion, this new initiative will also achieve another objective - exposing NGOs with financial irregularities. Since the process of listing will be tedious and elaborate with huge documentation and disclosures it is expected that only those NGOs that have clean books and record will finally get listed in the SSE. This will also help investors to put their money in the right place.