Redefining Impact Investing: Navigating the NSE's Social Stock Exchange (SSE)

There are over 2 million recognised social enterprises in India. Asian Development Bank recognised India as one of the three Asian countries with a thriving social enterprise sector. The social sector funding stood at 9.6% of India’s GDP in FY 2022. Despite all this, India’s non-profit organisations struggle to access funds.

Over the years, social sector funding in India has evolved to include several sources, however, impact assessment of these fundings has always been a conundrum. Traditionally, non-profit organisations in India have accessed funds from government grants, foreign donors, and Indian philanthropists.

India now has a Social Stock Exchange (SSE) that aims to facilitate funding for social enterprises, and organisations working for social welfare. 

The SSE is regulated by the Securities and Exchange Board of India (SEBI) and has been incorporated as a segment of both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), the two prominent stock exchanges in India. 

The aim is to enable non-profit and for-profit social enterprises to raise funds by way of equity, debt, or mutual fund units. Going ahead, trading on these exchanges is also being thought of.

In this article, we will see what a Social Stock Exchange is, why it has been introduced, how and why retail investors should participate, and how social enterprises are viewing the emergence of  SSE in India. Let’s start by understanding the basics first.

What is the SSE and Why has it been Introduced by the NSE?

In 2019, Finance Minister Smt. Nirmala Sitharaman proposed the creation of a Social Stock Exchange in her budget speech before the Lok Sabha, envisaging an electronic fundraising platform for social enterprises and voluntary organisations working for social welfare. 

She proposed a fundraising platform like the conventional stock exchanges where social enterprises can raise funds by way of equity and debt instruments from the general populace. Such a platform was proposed to be regulated by the SEBI.

After a long consultation process, with the SEBI constituting a working group and a technical group on SSE, NSE finally received SEBI’s approval in February 2022 to set up its Social Stock Exchange segment. 

BSE also got its SSE segment in December 2022. In the meantime, SEBI recognised zero coupons zero principal (ZCZP) bonds as an instrument to raise funds on SSE.

So, a social stock exchange or SSE is an extension of the traditional stock market phenomenon that provides a platform for investors to contribute to social enterprises and social welfare projects without the expectation of pecuniary returns, but as a way of impact investing.

In India, 95% of the social sector funding is carried out by the public sector. Due to a 35% increase in public spending, India's social sector spending as a proportion of GDP increased from 8.6% in FY 2021 to 9.6% in FY 2022. 

Despite this development, India continues to fall well short of the estimated annual spending needed by the NITI Aayog (13% of GDP) to meet the Sustainable Development Goals (SDGs) by 2030. Private philanthropy continues to grow at a moderate pace, Between FY 2017 and FY 2022, private funding to the social sector has grown at a pace of 8%.

The social stock exchange is a way to enhance private funding of the social sector by way of facilitating the trade of financial instruments. Bain & Company’s India Philanthropy Report, 2023 suggests that private philanthropy has to step up and play a catalytic role in bridging the social sector funding gap in India.

The idea behind a social stock exchange is to use financial markets to move capital for social welfare causes. It can bring potential investors and social enterprises on the same platform and bridge the trust gap between the social sector and individuals or businesses to wish to contribute to social causes.

It is not possible to facilitate the listing of all or even the majority of social enterprises in a country with over two million social enterprises. 

However, the entry threshold and eligibility criteria have been kept as low as possible to encourage the participation of the social enterprises who are still trying to understand and comprehend the regulatory and compliance regime of getting listed on the SSE.

You can read about NSE and BSE’s eligibility criteria for getting listed on SSE here and here respectively. Broadly, the applicant has to fall under any of the 17 eligible activities listed for demonstrating primacy of social impact. 

These activities include the eradication of hunger, poverty, malnutrition, and inequality, promoting healthcare, promoting education, and promoting gender equality, among many others. 

Additionally, 67% of their revenues or expenditure or consumer base has to be in the social sector, that is, impacting the members of the target population. The target segment has been laid out as underserved or less privileged population segments or regions. 

Notably, entities such as corporate foundations, political or religious organisations, infrastructure, and housing companies, except affordable housing have been kept outside the scope of eligible applicants. 

Further, there has been a distinction made between for-profit and non-profit organisations in terms of procedural aspects such as listing documents, etc.

As of September 2023, there are 24 registered entities with the SSE segment of the NSE and 19 registered entities with the SSE of BSE.  Four years after the Finance Minister’s proposal, India’s SSE is expected to soon have its first few listings of social enterprises. 

How and Why Should Retail Investors Participate?

The SSE presents a well-structured and regulated platform for individuals and entities with a philanthropic interest. Those who wish to contribute to some higher noble causes of social welfare can very well do so through the SSE.

As of today, listed non-profits, as and when the first listings happen will raise funds through zero coupon zero principal (ZCZP) bonds which are meant for investors looking to create a social impact without seeking financial returns. The minimum application size is INR 2 lakh, which is a fairly high ticket size to see overwhelming retail participation. 

A fair expectation would be to see excitement and enthusiasm from high-net-worth individuals (HNIs) and next-gen philanthropists engaging on the platform. 

Additionally, these ZCZP bonds can be issued only for specific projects. Listed entities can use ZCZP bonds, mutual funds, and social impact funds for the time being, while innovative instruments are being thought of and necessary regulatory changes are being made.

Companies investing through the SSE cannot account for such investments as part of their corporate social responsibility (CSR) commitments. 

This is to avoid a clash of the two mechanisms that essentially have the same end goal. There is ambiguity on the tax benefits for donors and investors on the SSE.

The SSE will provide investors with all information required such as project deliverables and outcomes, and impact assessment reports. 

The SSE will provide a standard mechanism of reporting impact assessment and will ensure transparency, thus encouraging investors. Going ahead, every demat account holder in India could become a potential investor, as and when the SSE evolves and consolidates.

Views from Social Enterprises on the SSE

The Indian SSE is still in its nascent phase with new entities getting registered once in a while. The growth can best be described as steady. The regulator, SEBI along with the exchanges, NSE and BSE are now working on spreading awareness and training stakeholders about how the SSE works.

The Indian Social Stock Exchange (SSE) is now focusing on capacity-building, sensitisation, and training of all stakeholders. Social enterprises are largely enthusiastic, however, still in an unclear environment with regard to the development of the SSE. 

There are compliance and regulatory requirements that they need to take care of, alongside ensuring fulfillment of eligibility criteria. In the initial stages, the focus of the SSE should remain on providing comprehensive guidance to the social enterprises that are looking to register and get listed on the SSE.

Conclusion

Social enterprises are often the first line of responders in times of crisis. Both for-profit and non-profit social enterprises contribute to welfare causes having a social impact. 

In a developing country like India, with over 2 million social enterprises, it is essential to streamline and encourage investments in the social sector, and the SSE is expected to do exactly that. 

With the emergence of SSE, it is likely that domestic private investment will increase in the Indian social sector driven by trust and transparency in a highly regulated platform.