Understanding the Social Stock Exchange (SSE)

Finance Minister Nirmala Sitharaman in her Budget Speech for 2019–20 had for the first time floated an idea for the creation of the Social Stock Exchange (SSE). The idea is to ease the process of raising funds for social impact organisations. To give “form and content to the Finance Minister’s vision”, SEBI had set up an expert working group in September 2019 and they have recently come out with their report. It is, therefore, an opportune moment to reflect on the underlying purpose of SSE and some of its most relevant provisions.

What is SSE?

Social Stock Exchange is a dedicated platform meant to provide capital market access to social impact organizations. The effectiveness and the impact that the organization can create is often limited by the amount of funding they receive. At present, the sources of such funding are mainly restricted to CSR, impact investing and philanthropy.

The main goal of an investor in a conventional financial market is to gain maximum return on their investment, whereas capital markets for social impact will allow investors willing to make a social impact, reach the right place for their money. So while most capital market exchanges require strict business criteria to be met to be listed at an exchange, an SSE is screened on the basis of the social impact it can create. Some of the other social sector exchanges across the world include Social Stock Exchange — United Kingdom, Social Venture Connexion — Canada, SASIX — South Africa and Impact Investment Exchange (IIX) — Singapore.

How will it help?

In general, non-profit organisations face legal restrictions to raise funds through debt or equity. SSEs allow them to raise funds through direct issuance of bonds in the form of zero-coupon or zero principal bonds. A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, drawing a profit at maturity, when the bond is redeemed for its full face value. The SSEs will also make use of alternate funds like the Social Venture Fund (SVF) to allow social ventures to issue securities to investors who may agree to receive restricted or muted returns.

On the other hand, for-profit social enterprises are also allowed to raise funds through equity. They will directly be allowed to list themselves on SSE, albeit with enhanced reporting standards and transparency. There would be some additional requirements like minimum net worth or profits to be met as well.

The exchange will also provide an avenue for investors who are looking for more opportunities to do social good. It not only helps build business credibility and brand value for the investing party but is often found to be much more self-fulfilling than a financial investment to be able to impact the most number of lives. However, time will tell how investors respond to the exchange when it is finally set up by the government.

India houses over 2 million social enterprises including for-profit and non-profits that have been facing serious constraints in being able to create an impact because of restrictive funding sources. In light of this, it is a welcome move to allow such organisations to have alternative and systematic ways of mobilizing funds. However, our efforts are still in the very initial phases and we will require much more planning and efforts while learning from the experiences of others to make this a success by contextualising it to the needs of our country.

Social Capital in times of COVID-19

In the current times, there is an even more urgent need for SSEs due to the serious economic damage inflicted by COVID-19, especially upon the poorest Indian households and large swathes of the informal sector. SSE can be an important additional resource in helping rebuild the lives of thousands of those who will lose livelihoods as a result of the pandemic and related shutdown. We also cannot be overly dependent on conventional funding that prioritizes financial returns and therefore will not be able to carry such a burden all by itself. Social capital may be most suited for these times. Especially, seeing the leading relief efforts undertaken by NGOs, such funding will increase the scope of the positive impact they will be able to create.

Securities and Exchange Board of India (SEBI) is seeking public feedback on the Working Group Report on Social Stock Exchange. You can read the summary of the report in both English and Hindi and give your feedback here.