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The Editorial Column is authored by Vanshika Samir and Qazi Ahmad Masood, Associate Editor and Assistant Editor respectively at RGNUL Financial and Mercantile Law Review.
1. INTRODUCTION
In the past few years, people have become more interested in investing in companies that are socially responsible and work to make the world a better place. To facilitate connections between investors and businesses with a focus on social good, the Social Stock Exchange (“SSE”) was created. For social companies, this subset of the stock market is a vital funding resource.
Nirmala Sitharaman, India’s finance minister, originally introduced the concept of SSE in the country’s Union Budget for 2019–20. The SSE provides stock market listings for non-profit organizations (“NPOs”). Non-profit organizations are charitable groups with a mission to further the public good. The SSE is an initiative that seeks to provide them with supplementary financing options. The National Stock Exchange of India (“NSE”) has recently been given the final permission to launch a social stock market.
The authors of this piece set out to define the social stock exchange and its advantages in India. The paper concludes with recommendations vital to the operation of the social stock exchange in India, following an analysis of the regulatory framework governing the sector.
2. BENEFITS OF SOCIAL STOCK EXCHANGES IN INDIA
The pandemic highlighted the need for more funding for non-profits and social enterprises. The SSE will help by directing additional money to groups who are doing this kind of work. Only companies with a social mission and impact will be allowed to trade on the SSE. The organization’s efforts on behalf of underserved communities and regions should serve as proof of its good faith. Relief from hunger, poverty, malnutrition, and injustice; advancement of women’s rights; protection of the environment; and support for children’s learning are just a few of the 15 categories which SEBI places under the practice of social work. The NGO needs to do everything on this list. The regulator has suggested that qualified non-profits raise capital through mutual funds, social impact funds, development impact bonds, and zero-coupon, zero-principal bonds. Section 80G of the Income Tax Code allows investors to write off donations to certain charities and humanitarian organizations.
3. FRAMEWORK REGULATING SOCIAL STOCK EXCHANGES IN INDIA
Finance Minister Nirmala Sitharaman proposed the creation of a Social Stock Exchange under the regulatory ambit of SEBI in her 2019-20 Union Budget speech. This would allow social enterprises and voluntary organizations working towards the realization of a social welfare objective to list on the exchange and raise capital through the sale of equity, debt, or units, similar to a mutual fund (“MF”). The regulator has established 16 broad activities in which social entrepreneurs must partake. Qualifying initiatives include those aimed at ending world hunger, poverty, malnutrition, and inequality; improving access to healthcare; bolstering education, employment, and livelihoods; empowering women and LGBTQIA+ groups; and fostering social entrepreneurial incubators. Except for affordable housing, corporate philanthropies, political or religious groups, professional or trade associations, and infrastructure and housing companies will not be considered social enterprises. Also, NPOs are required to present financial statements for the preceding three fiscal years, details on their work's historical societal effects and dangers, and strategies for mitigating such risks.
The market regulator then came up with a detailed framework for regulating the social stock exchange in India in July 2022. This gave social entrepreneurs another way to get money. In its circular, the regulator listed the minimum requirements that an NPO must meet to be registered with SSE. It also listed disclosure requirements for NPOs that raise money by issuing zero-coupon, zero-principal instruments, and annual disclosure requirements for NPOs that trade on such exchanges. SEBI rules say that the listed NPO must send SSE a statement of how the funds were used within 45 days of the end of the quarter. SEBI has also asked social enterprises that raise money through SSE to release the Annual Impact Report (“AIR”) within 90 days of the end of the fiscal year. The AIR should cover the qualitative and quantitative aspects of the entity’s social impact and, if relevant, its financial impact. This effect is caused by the project or solution for which money has been raised on SSE. NPOs and for-profit social enterprises with a primary goal of social intent and impact will be able to join the SSE. This will be shown by a focus on eligible social objectives for underserved or disadvantaged people or places.
In October 2022, the SEBI gave its approval for the BSE to add a separate social stock exchange (“SSE”). On December 19, 2022, the Securities Exchange Board of India gave the NSE permission to set up a Social Stock Exchange (SSE) as a separate part of the NSE. This was followed by the NSE getting the final go-ahead to set up the social stock exchange in February 2023. SEBI said that NPOs on SSE that have raised money through SSE or are registered with SSE would have to share information about their top five donors or investors every year. This includes information about their budget, size of operations (including the number of employees and volunteers), governance structure, financial statement, program-by-program use of funds for the year, auditors report, and auditor details.
4. CONCLUSION AND SUGGESTIONS
Even though the idea behind SSEs is important because contributions are needed for many social causes, it is still important to make sure it works well. To make sure the SSE works, there are a few things that need to be done. First, there needs to be more education and awareness about what social enterprises do and how they affect people. This will help investors understand how their investments affect society and bring in more investors who care about society. Second, there needs to be a standard way to measure the impact on society. This will help investors figure out how their investments are doing and make sure that everything is clear. Third, it is important to make sure that the SSE procedures are being followed and, if necessary, to make changes. It can be said that a lot will depend on how the Corporate Governance Issues of SSEs and SEs are handled, how well the disclosures and other requirements are written for the SEs, how instruments will be traded on SSEs, and a lot more. These Social Stock Exchanges can create a Social Fund that can be used by Social Enterprises to help solve problems, emergencies, and disasters like Covid-19. The Social Stock Market is without a doubt a good idea, and it is clear that it is needed. Social businesses and impact investors may both be able to take advantage of the new opportunities it could bring. What's left to see is how well the SSE works to reach the goal it was made for.