Today we will be discussing the Social Stock Exchange. We will be discussing the recent recommendations given by SEBI, which is the Securities and Exchange Board of India, with regard to listing off non-profit organizations in the Social Stock Exchange. We will in detail discuss the recommendations given by SEBI in this regard. We will be analyzing these recommendations. We will see what are the benefits of what can be the significance of the recommendations, how it will be helpful for the non-profit companies and various other stakeholders.
We will also be discussing the status of non-profit organizations in India and how they will be benefited from this. We will also discuss the concept of a social stock exchange. We will see some international examples of the working group of social stock exchanges in some developed countries. So these are the topics that we’ll be handling today, very important, especially because in the budget 2019 – 2020, the government made an announcement regarding Social Stock Exchange.
Recently, an expert panel was constituted by the Securities and Exchange Board of India. And SEBI is also the regulator of the stock exchanges and mutual funds in the country. So an expert panel, which was constituted by the SEBI, recently recommended allowing non-profit organizations to directly list on social stock exchanges. So this expert panel has given the recommendation to allow the non-profit organizations to be directly linked to the stock exchanges.
First one is regarding the issuance of bonds
Now what is a bond, a bond is a debt instrument. A debt instrument is used to raise capital or finance. Now, there are two broad bases in which a company can raise its capital one is through debt instruments and the other one is through issuing equity instruments.
So either equity or debt, bonds are a kind of debt instrument. And that recommendation sees that non-profit organizations should be allowed to directly list through the issuance of bonds in the form of zero-coupon or zero principal bonds.
Now, what does it mean by zero-coupon bonds? Now, before that, we need to know what this meant by coupon is nothing but with regard to the debt market, we see a coupon for interest. So a coupon is nothing but that interest coupon late means the interest rate.
Now, what do you mean by zero-coupon bonds?
Zero-coupon bonds are those bonds that bear zero interest. Now, if a particular bond bears zero interest, what does the profit for the investor, or what is the income in return for the investor?
So zero-coupon bonds mean those bonds which are issued at a discount. So those bonds which are issued at discount and redeem that par. So this is called a zero-coupon bond. Let’s take an example to understand it better. Suppose the value of a bond is rupees hundred. This is just an example. Now, this bond, this issue that 90 rupees and redeem that hundred rupees.
So what does it mean?
Suppose you are an investor. You can buy the bond at rupees 90. And at the time of redemption, you will be paid a hundred rupees. Now, there’s a difference of 10 rupees. This is up to the return of the investor gate. But here there is no provision for interest or coupon rate. So the investor may not be getting any fixed return in the form of an interest or coupon, but instead, these bonds are issued in discount and redeem that bond. So this is the euro coupon bonds.
Now, the expert panel set up by the SEBI has recommended that the non-profit organizations should be allowed to directly list through the issuance of bonds in the form of zero-coupon or zero principle bonds.
Now, what is the advantage of Social Stock Exchange?
This will help the nonprofit organizations to access funds from the donors, from philanthropic foundations, CSR spenders, the companies the corporate will spend on their corporate social responsibility (CSR) spenders because these people will be encouraged to buy zero-coupon bonds.
So this will encourage all these stakeholders, like the donors who want to make philanthropic donations and those companies who are looking to spend their CSR amount. So these people will be incentivized to buy these zero corporate bonds.
Now, the second recommendation is regarding social venture funds, and the committee has recommended a range of funding avenues like the social venture funds under the (AIF’s), which is the Alternative Investment Fund.
And what does a social venture fund? social venture funds are funds for which invest in list social enterprises and voluntary organizations to expand the opportunity for people living in poverty? So social venture funds mean those investment activities are those investments that take place at the early stage of the social enterprise and voluntary organizations.
So at the early stage of a social enterprise, these investments take place. And this will help in expanding the opportunity to serve or to provide service to the people living in poverty. So it has a social factor.
Now the third one is regarding enhanced reporting standards. The profit social enterprises will be allowed to list on platforms with enhanced reporting requirements. These are recommendations by SEBI. The government has to finally approve. This is because SEBI is only the regulatory body and it is the government that has to approve it. It is finally the cabinet that will approve all these recommendations.
So the third recommendation is that the profit social enterprises should be allowed to list on the platform with enhanced reporting requirements.
So a listing of the non-profit companies on the SCC, which is a social stock exchange, should come with enhanced reporting requirements. And the Social Stock Exchange, it can be housed within the existing (BSE) Bombay Stock Exchange and the (NSC) National Stock Exchange.
Now let’s see what other significance is of the recommendations.
So how these recommendations are helpful to non-profit companies. First, this will help the Social Stock Exchange to leverage existing infrastructure and client relationships with onboard investors, donors, and social enterprises so they can make use of the existing infrastructure.
The second one, the recommendations also provide for certain tax incentives. So seven, tax incentives are allowed under the recommendation and this will increase the participation in the culture of giving among various stakeholders. So if tax incentives are given, this will encourage people to contribute to social goals.
And thirdly, this will increase the banks and other investors to participate with non-profit organizations and thereby making social and economic growth more inclusive. So banks and other investors can participate with the non-profit organizations. And this will make growth, economic growth, and social growth more inclusive. Inclusive means bringing in more stakeholders.
Social Stock Exchange
Now, let’s come to the concept of the social stock exchange. The idea of the social stock exchange as a platform for listing a social enterprise, voluntary, and welfare organizations. It came up in the union budget 2019-2020.
So social stock exchange is nothing but a platform that the social enterprises, those enterprises that work for a social cause, voluntary organizations, and welfare organizations can list. And also they can raise funds. We know the purpose of a stock exchange, the stock exchange provides the platform for a listing of the companies and sells their shares or raises that capital through this platform.
Similarly, social stock exchanges melt exclusively for those enterprises which work for a social course. So, those social enterprises; voluntary and welfare organizations, and even non-profit companies can list on stock exchanges and they can raise the capital to meet their requirements. And this idea was mooted in the Union Budget 2019-2020.
Now. the social stock exchange it works under the market regulator SEBI. Social stock exchanges are regulated by SEBI and that’s why SEBI expert panel gave this recommendation now. And the aim of the initiatives like the social stock exchange is to help social and voluntary organizations which work for social causes to raise capital as equity or debt or a unit of mutual funds.
It provides a new and cheaper source of financing for social welfare objectives while showcasing India’s independence from foreign aid. We know that there are many regulations with regard to foreign contributions. Especially foreign contributions that are received by the NGO’s.
The idea of social stock exchange already exists in countries such as Singapur, UK, Canada among others. These countries allow firms operating in sectors such as health, environment, and transportation to raise risk capital for social.
Now we come to the Indian context, let’s see the conclusion India has more than 2 million social enterprises including our NGOs. We have a large number of social enterprises and voluntary organizations in the country.
There is a need to learn from the other countries who have already implemented this idea of social stock exchange e.g In London, where SSE acts more as directly connecting social enterprises with impact investors.