Combining social welfare and capital market through SSE

Combining social welfare and capital market through SSE

Subject : Economy

Section: Capital Market

Concept :

About Social Stock Exchange:

• The SSE would function as a separate segment within the existing stock exchange and help social enterprises raise funds from the public through its mechanism.
• It would serve as a medium for enterprises to seek finance for their social initiatives, acquire visibility and provide increased transparency about fund mobilisation and utilisation.
• Retail investors can only invest in securities offered by for-profit social enterprises (SEs) under the Main Board.
• In all other cases, only institutional investors and non-institutional investors can invest in securities issued by SEs.

Who will be eligible to be registered or listed on the SSE?

• Any non-profit organisation (NPO) or for-profit social enterprise (FPSEs) that establishes the primacy of social intent would be recognised as a social enterprise (SE).
• Recognition of social enterprise would make the entity eligible to be registered or listed on the SSE.
• As per the SEBI’s regulation, the enterprises must be serving to:
• eradicate either hunger, poverty, malnutrition and inequality;
• promoting education, employability, equality, empowerment of women and LGBTQIA+ communities; working towards environmental sustainability;
• protection of national heritage and art or bridging the digital divide, among other things.
• At least 67% of their activities must be directed towards attaining the stated objective.
• This is to be established by enumerating that, in the immediately preceding three-year period:
• either 67% of its average revenue came from the eligible activities;
• expenditure (in the same proportion) was incurred towards attaining the objective; or
• the target population constitute 67% of the overall beneficiary base.
• Corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies (except affordable housing) would not be identified as an SE.
• Additionally, non-profit organisations (NPOs) would be deemed ineligible should it be dependent on corporates for more than 50% of its funding.

How do non-profit organisations (NPOs) as well as For-Profit Enterprises (FPEs) raise money?

• NPOs can raise money either through issuance of Zero Coupon Zero Principal (ZCZP) Instruments from private placement or public issue, or donations from mutual funds.
• SEBI had earlier recognised that NPOs by their very nature have primacy of social impact and are non-revenue generating.
• Thus, there was a need to provide NPOs a direct access to securities market for raising funds. Hence, ZCZP instruments were launched.
• Another structured finance product available for NPOs is the Development Impact Bonds.
• Upon the completion of a project and having delivered on pre-agreed social metrices at pre-agreed costs/rates, a grant is made to the NPO.
• The donor who makes the grant upon achieving the social metrics would be referred to as ‘Outcome Funders’.
• Since the payment above is on post facto basis, the NPOs would have to also raise money to finance their operations. This is done by a ‘Risk Funder’.
• It is mandatory that the NPO is registered with the SSE for facilitating the issuance.
• For-Profit Enterprises
• It can raise money through:
• issue of equity shares (on main board, SME platform or innovators growth platform of the stock exchange) or
• issuing equity shares to an Alternative Investment Fund including Social Impact Fund or issue of debt instruments.
• For-Profit Enterprises (FPEs) need not register with social stock exchanges before it raises funds through SSE.
• However, it must comply with all provisions of the ICDR Regulations (Issue of Capital and Disclosure Requirements) when raising through the SSE.

Zero Coupon Zero Principal (ZCZP) Instruments

• ZCZP are financial instruments that do not pay periodic interest, but are issued at a discount to their face value and mature at par.
• With its zero-coupon, zero-principal structure, it resembles a debt security like a bond.
• When an entity takes a loan by issuing regular debt security like a bond, it has to make interest payments and the principal when the bond matures.
• But with ZCZP instrument, when an entity issues these securities and raises money, it is not a loan but a donation.
• So, the borrowing entity does not have to pay interest—therefore zero coupon—and it does not have to pay the principal (zero principal) either.