GS Paper III

News Excerpt:

SGBS Unnati Foundation became the first entity to list on the social stock exchanges (SSE).

About the news:

• SGBS Unnati Foundation is a not-for-profit organization (NPO).
• 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. 
• The Zero Coupon Zero Principal (ZCZP) instruments with a face value of ₹1 each will be credited into the demat accounts of the donors, which will not be traded but will sit in their accounts.
  • ZCZP bonds do not give any interest, and investors will not get any principal back on the maturity of the bond.
    • The bond will mature when the project for which they are raised terminate, or 12 months from the date of allotment.
• There are 38 more NPOs registered with the NSE SSE, and more listings could be in the offing in the next few months.

Social Stock Exchange (SSE):

• SSE is a separate segment within the existing stock exchange that can help social enterprise(s) to raise funds from the public through the stock exchange mechanism.
• Securities and Exchange Board of India (SEBI) has granted approval for introducing SSE as a separate segment on BSE and NSE.
• SSE acts as a medium between social enterprises and fund providers and that can help them to select those entities that are creating measurable social impact and reporting such impact.
• It identifies the two forms of social enterprises that are engaging in the activity of creating positive social impact and that meets the primacy of their social intent.
• Not-for-profit organisation (NPO)
• For profit social enterprise (FPSE)
• Only Indian entities can register in the Social Stock Exchange. Foreign investors like FII’s, FPI’s or NRI investors, are not allowed to invest in NPOs fund raising.
• Creation of SSE was proposed by the Union Finance Minister while presenting the Union Budget 2019-20 with the aim of listing social enterprises and voluntary organisations.

Significance of listing on SSEs:

• Improved market access: SSE will facilitate a common and a structured meeting ground between Social Enterprises and investors/donors with inbuilt regulation for providing sanctity and accountability of finances.
• Synergy between investors and investee in social aims: In view of flexibility of investments and capital that would be available on an SSE, the canvas of choice would be much wider allowing investors and investees with similar missions and visions to connect seamlessly.
• Performance based philanthropy: Performance of the enterprises listed on an SSE would be monitored thus it will instill a culture of performance (Social return) driven philanthropy.
• Minimal registration cost: SSE saves cost for both issuer and investor/donor by charging minimal fees for registration and listing.
• Additional avenue for Social Enterprises: Central and State governments till date have the biggest onus of achieving sustainable development goals. SSE will provide an alternate avenue for raising funds thereby encouraging new and existing social enterprises.

Challenges regarding SSEs:

• The lack of a paradigm for measuring social effect that is generally applicable makes it challenging to assess the social impact of non-profit organizations.
• Since many Indian non-profits are unregistered and lack the funding to keep up with their financial records, it may not be possible for them to comply with the proposed transparency and listing requirements.
• Funds obtained via SSE may be invested by for-profit businesses (FPEs) in a manner that supports the growth of their primary company.
• Impact assessors—a new class of intermediaries tasked with assessing the effectiveness of social entrepreneurs' work—may emerge as a result of the Social Stock Exchange (SSE).
• It could be necessary for the SEBI to create regulations to control their area of operation and registrations.
• For social stock markets, calculating the return on investment for investors can be difficult since, in the case of social enterprise investments, the return on investment is contingent upon the achievement of the social welfare goal.
• But there are no set standards for judging a social welfare goal's effectiveness.

Recent developments:

• The SEBI board recently approved halving the minimum issue size of ZCZPs by NPOs on SSEs to Rs 50 lakh from Rs 1 crore.
• The minimum application size will be reduced to ₹10,000 from ₹2 lakh.
• Implications:
  • It will enable wider participation of entities in the SSEs, thereby enhancing the goal of positive social change.
  • More NPOs will be made eligible for registration and fund-raising through the issuance and listing of ZCZPs on SSEs.

Way forward:

• For all social enterprises to be able to take use of the social stock exchange, the government must relax the requirements for compliance and reporting.
• The regulatory framework in India has to take international investors' interests into account because foreign money are a major part of the country's social sector.
• It is recommended that the government establish a legally defined concept of a "social enterprise."