Social Stock Exchange in India -A Platform for Social Enterprise

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Social Stock Exchange in India – A Platform for Social Enterprise.
Dr V.R. Narasimhan and Ms. Aboli Pitre
1
Abstract
Social Enterprises are an important pillar of development for any society. Social Enterprises
extend a microscopic approach to close the gap between aspirational aspects of social
development and actual state of social development. There are limitations to the reach of
governmental agencies in addressing this gap which can be addressed by Social Enterprises
working in the area.
Social Stock Exchange (SSE) can act as agent of change in social sector of India. It has
potential to bring cultural shift to modernize the functioning of India’s social sector. It can
unlock new sources of funding for social organisations, promote NPOs, make new avenues
of impact investment available to investors and develop an ecosystem favorable for
development of social sector, provided they are evaluated only on social impact
considerations and not commercial perspective.
The structure of SSE as proposed requires some refinements as given in this article to make
them effective and serve the purpose for which they are being set up.
Key Words- India’s Social Stock Exchange, Social Enterprise, Social Sector
Introduction
Social Enterprises are an important pillar of development for any society. Social Enterprises extend
a microscopic approach to close the gap between aspirational aspects of social development and
actual state of social development. There are limitations to the reach of governmental agencies in
addressing this gap which can be addressed by Social Enterprises working in the area.
The society in India is very diverse, versatile and vibrant. It is evolving at fast pace. This also
means there is a wide spectrum of problems and issues that needs attention from Government as
well as Social Enterprises working to address the same. There are social issues, which are not
addressed by the Government because of constitutional and/or political obstacles; for example,
aiding education of economically backward students who do not fall within legal definitions but
genuinely need help, or restoration and resurrection of ancient temples, funding for reviving
‘Santana dharma’ on which our society thrived for thousands of years. Such issues can be
1
Dr V.R. Narasimhan is Dean, National Institute of Securities Market. Ms Aboli Pitre is a qualified company
secretary (A53767) and LLM from National Institute of Securities Market.
Views expressed in this are personal.

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effectively addressed by Social Enterprises with the help of donors who connect emotionally with
such issues. Unlike government, social enterprises do not have such constitutional or political
hurdles and they can contribute unhesitatingly.
The number of people in need of aid from Social Enterprises is increasing; simultaneously, there
is a healthy growth of philanthropists / donors looking for opportunities to share their prosperity
provided the project is honestly and efficiently managed. However, the Social Enterprises are not
able to reach to all of them due to which they do not attract funds though they deserve.
Social Stock Exchange at global level – some observations
.
This concept came into existence in 2003 when first Social Stock Exchange was introduced by
Brazil. Later South Africa (2006), Portugal (2009), Canada (2013), Singapore (2013) United
Kingdom (2013) and Jamaica (2019) also established SSEs. Out of total 7 SSEs which were
established, only 3 are still functioning. SSE in Brazil closed operations in December 2018. South
African SSE is no longer active and the SSE in United Kingdom changed its form over the period
of time. The SSE in Portugal failed to take off and stopped operations in 2015.
After studying the operations and impact caused by these different models, following observations
can be made
2
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 Most Social Stock Exchanges have both- Non-Profit (NPO) as well as For-Profit Enterprises
(FPE) eligible to raise funds from SSE platform. SSE of UK only allowed for-profit companies
with substantial market capitalization to be listed. It was possible because it had matured
impact investing ecosystem in place. Remaining all SSEs, especially the ones established by
developing nations, encouraged non-profit organisations to be part of SSE.
 All the SSEs have chosen to define the term of ‘Social Enterprise’ (SE) in order to establish
clear eligibility criteria to be able to raise funds through SSE platform. The eligibility criterion
is based either on previous track record (Brazil), financial viability of the business models and
measurable deliverables (South Africa), leadership, amount of investment, revenue, ratings on
Global Impact Investing Rating System (Canada), Market Capitalization (United Kingdom),
Legal Form (Singapore and Jamaica) etc. One common criterion observed in all these SSEs is
that the organisation’s primary objective has to be causing positive social impact.
 Organisations which are actually getting benefitted from SSEs tend to be large in size. Out of
36 for-profits which were listed on UK SSE, 25 for-profits reported to have median annual
revenue of $ 4.7 million. The median income of 8 out of 12 NPOs was around $ 0.7 million.
2
INTERNATIONAL CENTRE FOR NON-FOR-PROFIT-LAWS, CREATING A TRULY “SOCIAL” STOCK EXCHANGE (2021)
https://www.icnl.org/wp-content/uploads/India-SSE-report-short-version.pdf

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This shows that only larger organisations with sophisticated infrastructure were able to get
benefit from SSE.
 All the SSEs around the globe were either instituted as Corporate Governance Initiatives or
were in partnership with the existing stock exchanges of respective countries. The successful
SSEs are those where the management of SSE is independent of parent stock exchange.
Jamaican Social Stock Exchange, even though was CSR initiative of Jamaica Stock Exchange,
it has an independent board of directors. The Social Stock Exchange of Canada operates as an
independent Non-Profit Organisation and has self-governing Board of 6 members. Even if
Singapore’s Social Stock Exchange is managed by Stock Exchange of Mauritius, the securities
issued through it are subject to exclusive control of SSE.
 One of the reasons for failure of 4 out of 7 SSEs was lack of proper business model. All the
SSEs received philanthropic funding in the initial days of their operations. Jamaica and Brazil’s
SSEs received funds from main stock exchange’s CSR funds. UK’s SSE charged membership
fees from organisations whereas, Canadian SSE charges listing and consultation fees.
Jamaica’s SSE is still in initial phase of its operation, but aims to develop self-sustaining
business model to fund its operations. For long term success of the SSEs it is important to
develop a business model.
Social Stock Exchange in India
In the budget speech of 2019, Honorable Finance Minister Nirmala Seetharaman proposed the idea
of establishing Social Stock Exchange in India under the regulation of Securities and Exchange
Board of India.
Social Stock Exchange (SSE) can be explained as regulated platform that brings together social
organisations and donors to facilitate the funding and growth of social enterprises. SSE establish
a system and mechanism to regulate the functioning of Social Enterprises. The most important
role that SSEs play is to act as a facilitator of social finance and providing common platform for
Social Enterprises, donors and investors.
From a layman’s perspective, Non-Government Organisations (NGOs) (usually not for profit, but
social service oriented entities) are perceived as social enterprises. Such social enterprises
undertake a wide range of socially relevant projects – some short term, some long terms and some
in response to events viz., natural disasters or events that demand social help and intervention. The
inflow of funds for these enterprises is not only scarce but also irregular, making long term
commitment difficult. Often the grants and donations received do not cover the operating expenses
incurred by these enterprises which limit the scope of their work.

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Lack of transparency and accountability of Social enterprises is the worst deterrent in attracting
financial support. Most of them operate under the legal form of Trust, Society or Section 8
Company and as such legislations governing these structures require maintenance of proper books
of accounts and mandate auditing the same, some social enterprises have been used to siphon off
the funds and donations. It is reported that from the year 2011, Government of India has cancelled
foreign funding licenses of more than 20,600 NGOs mainly because of misuse of foreign donations
and failure to file annual returns.
3
Also, there is no statutory provision in legislative framework that requires these enterprises to
report the social impact during the period of reporting to the donors or funders. The donor has no
mechanism to ensure or even know that the donation is being utilized for the promised cause.
There are legal provisions which require disclosure of utilization of money raised, however it is
not mandatory for these Social Enterprises to provide report on qualitative as well as quantitative
aspects of actual change that they brought by their efforts in the targeted population.
Unless these issues are compressively addressed, social enterprises may not thrive to serve much
required social and communal causes. Social Stock Exchanges (SSEs) have emerged in recent
times as institutions that offer to address most of these challenges and also bridge the gap between
social sector funding needs and private funding.
Structure of Social Stock Exchange as proposed in India
Based on the statement made in the budget, SEBI constituted Working Group on Social Stock
Exchange (WG) in September, 2019. In June 2020 it published its recommendations and
established vision of India’s Social Stock Exchange. In September 2020 a Technical Group (TG)
was constituted to further develop the framework for working of Social Stock Exchange. In May
2021 it published the report. The discussions and recommendations of these two groups result in
design and structure of SSE in India.
 Definition of Social Enterprise
WG has suggested adopting ‘self-declaration’ approach, instead of defining a ‘Social
Enterprise’. The enterprise itself has to choose if it wants to be categorised as ‘Social
Enterprise’ or not. Working Group did not restrict the legal form of the enterprise as it
envisioned the future where more enterprises would incorporate social impact objective in their
business approach.
3
Bharati Jain, Foreign funding licenses of 20 K NGOs cancelled since 2011, THE TIMES OF INDIA (Feb 10, 2021, 5.00
AM),https://timesofindia.indiatimes.com/india/foreign-funding-licences-of-20k-ngos-cancelled-since-2011-
govt/articleshow/80778113.cms

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 Criteria for listing
Indian SSE shall allow both, Non-Profit as well as For-Profit Organisations to be listed on the
Exchange. The approach and instruments proposed for each of them would be different, but
minimum reporting standard proposed for both is common. To be eligible to get registered or
listed on SSE, the SE has to prove that its primary goal is to have social intent and impact.
To ensure the same, Technical Group has proposed three criteria viz., Eligible Social
Objective, targeted population or region being underprivileged ones, predominance of eligible
social activity in the overall activities of the social enterprise which establish primacy of social
impact objective of the entity. Once the social enterprise has established the primacy of social
impact, it becomes qualify for on-boarding the Social Stock Exchange.
It is also proposed that certain organisations viz., corporate foundations, political or religious
activities, professional or trade associations and infrastructure companies as ineligible to be
listed on SSEs.
 Registration of NPOs
Unlike FPEs, NPOs have choice of only getting registered with SSE. Once registered, an NPO
can choose whether to list or not on the Exchange. To get itself registered with SSE, NPO has
to fulfill the criterion mentioned above. Registered NPO would be able to leverage the
reputation that it earns by satisfying the mandatory criteria.
 Listing Requirements
Different regulatory requirements are to be fulfilled by NPOs and FPEs. For NPO, it will be
required to provide audited financial statements of previous 3 years along with social impact
statements. Apart from this, Technical Group has recommended certain ‘differentiators’ which
must be included in offer document provided by NPO while listing the securities.
Whereas for FPEs, the regulations applicable for listing on conventional stock exchange would
be made applicable. In addition to that, ‘differentiators’ as mentioned above are also required
to be mentioned in offer documents. They have option of listing their debt securities on main
board of conventional stock exchange, whereas equity may be listed on main board/ SME
Exchange or Investor Growth Platform.

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 Securities proposed to be listed on SSE
Different kinds of instruments are suggested by TG for NPOs and FPEs. NPOs can issue
Equity (if section 8 company), Zero Coupon Zero Principal Bonds, Social Venture Funds with
100% grants-in grants-out model, Mutual Funds and Development Impact Bonds. FPEs can
issue Equity Instruments, Debt Instruments, Social Impact Funds as well as Development
Impact Funds.
TG has proposed changes in Social Venture Funds model to incentivize investors. The
minimum corpus size is proposed to be reduced from Rs. 20 Crores to 5 Crores and minimum
subscription amount to be reduced from 1 Crore to 2 lakh. The nomenclature to be changed
from Social Venture Fund to Social Impact Fund and companies are to be allowed to utilize
CSR Funds into it.
 Capacity Building Fund
The success of Social Stock Exchange depends on the participation of Social Enterprises. The
proposed structure of SSE is aimed at bringing big cultural change in the working of Social
Enterprises across the nation. To adapt to this new cultural shift, the enterprises could need
assistance and training. Therefore, the need for launching Capacity Building was felt by the
policymakers.
The proposed Capacity Building Fund will consist of contributions made by Stock Exchanges,
developmental agencies like SIDBI, other financial institutions, as well as donors who wants
to contribute towards the fund. The corporate donors can claim the donation made towards the
fund as CSR expenditure. It would be housed at NABARD as administrative fund and will
have corpus of Rs. 100 Crores. As the fund welcomes donations, it will need the registration
under section 80 G of Income Tax Act.
Fund will be governed by an Advisory Board comprising of representatives from
developmental organisations, stock exchanges, philanthropic organisations and NPOs. CBF
would focus on training and education of the NPOs about process of registration, listing,
disclosure, instruments and other relevant factors involved in proposed SSE
 Social Auditors
Every organisation registered and/or listed with SSE must be get Social Audit performed. It is
envisioned that Social Auditor shall have 2 components- Financial Audit and Non-Financial
Audit, which includes audit of social impact.

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 Information repositories
Working Group as well as Technical Group has emphasized on role of information repositories
in the functioning of Social Stock Exchange.
Information Repositories would work on developing a database for social enterprises, their
activities, areas of operations along with other important information in standardized format.
The function of Information repositories is merely as aggregator of information on NGOs and
they provide searchable database of details of social enterprises in comparable form.
 Disclosure and Reporting
All the registered and/ or listed Social Entities would be required to make various continuous
and event based mandatory disclosures and reporting.
Apart from disclosures on general, governance and financial aspects, all the social enterprises,
i.e. NPOs and FPEs are required to file ‘Annual Impact Report’ with SSE. This report shall
include details of qualitative and quantitative aspects of social impact generated by entity. In
case of listing of project, the impact generated by such project shall be reported.
 Social Stock Exchange to be housed under existing stock exchange
Like most of the stock exchanges established across the world, Social Stock Exchange of India
will be hosted as platform under one of the existing stock exchanges.
 Tax Incentives for Donors and Investors
Working group committee has made suggestions to provide better tax incentives to investors.
It has proven to be an effective tool to attract participation in financial instruments. The
recommendations include-
1. Allowing 100% tax deduction for donations made to NPOs registered with SSE
2. Removing the cap of 10% on income eligible for deduction under section 80G of Income
Tax Act
3. Allowing all investments in securities of NPO 100% tax deductible
4. Allowing first time retail investors to avail 100% tax exemption of their investment in SSE,
subject to maximum limit of 100,000 INR.
5. Allowing investors investing in Social Enterprises exemption from STT and Long Term
Capital Gains

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Critical Observations on Proposed Social Stock Exchange structure:
1. Hosting Social Stock Exchange in Existing Stock Exchange
a. The rationale behind hosting Social Stock Exchange in existing stock exchanges is to
use the already well established infrastructure of existing stock exchange for SSE.
Partnership or incubation support from existing stock exchange lends credibility and
helps to accelerate the process of institution of platform. It gains confidence of
investors and donors. While establishing SSE in partnership with existing stock
exchange has its benefits, it is equally important to ensure that management of SSE is
separated from that of the stock exchange. If both are managed by same management,
it can prove detrimental to the functioning of SSE. The purpose of SSE is very different
from that of conventional stock market; therefore, same set of governing principles
cannot be applied to both.
b. SSE in India should serve as information repository and a platform to connect social
enterprises with potential donors; as SSE obtains social audit or Promise vs
Performance reports from social enterprises, donors will have confidence and faith in
the project. Projects that appeal to the donors will attract funds and others will wither
out over a period of time. SSE should not be considered as platforms for providing
liquidity nor should it be a rigorously regulated/controlled. However, the proposed
structure appears to be tending towards a seriously regulated SSE which may not help
growth of SSE.
c. SSE should be governed by independent governing body or board of directors. It can
have representation of different sectors like social enterprises, regulatory bodies,
financial markets, intermediaries and investors. The voices of all the stakeholders
should be heard, ensuring adequate representation of minority and adequate gender
representation.
d. SSE should be a financially independent entity to ensure its sustainable functioning.
Clear codes and guidelines which are sensitized towards original objective of SSE
make sure that it does not drift from the mission and prioritizes positive social impact
above all.
e. SSE requires financial sustenance until it is able to generate its own funds. A part of
the proposed Capacity building fund should be allocated as sustenance fund for SSE.

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2. Bridging Inequality in Access to Capital-
The proposed structure permits both ‘for profit’ social enterprise and ‘not for profit’ social
enterprise to be listed on SSE. When ‘for profit’ enterprise is juxtaposed with ‘not for
profit’ enterprise, it will be difficult for ‘not for profit’ enterprises to attract funding since
they can describe their social impact but not quantify it. To bridge the gap-
In India, FPEs already have conventional stock exchange where they can raise capital.
However, they cannot effectively compete with other companies on main board due to the
low financial returns that they would offer. At the same time, if NPOs and FPEs are listed
on same platform, NPOs are put in disadvantageous position. Therefore, the ideal solution
is to have independent SSE platforms for NPOs and FPEs.
3. Defining Eligibility Criteria-
i) The committees have made narrow interpretation of the term ‘Social Impact’, while
determining the criteria of ‘Social Enterprises’. Every business organisation causes
‘social impact’ in one way or another. The nature of certain services and products
provided by businesses is such that even though profit making is their primary
objective, they may still have significant positive social impact viz., generic drug
manufacturing companies, vaccine manufacturers, educational institutions, hospitals;
etc. They should not be qualified to list on SSE.
ii) Any social organisation thrives on the principle that the organisation and its donors
believe in some common cause and are willing to contribute towards the same. Social
Enterprises make the infrastructure and volunteers available for the same while the
donors provide the financial support. As long as both of them believe in some social
cause, approval of regulating authority should not be required as long as its motive is
not to make profit. There should not be a filter put by authority as it is recommended
by Technical Group. The listing criteria suggested now acts like a filter. Projects that
do not appeal to donors will wither away.
iii) TG recommended inclusion of approved CSR activities as eligible. As these activities
are already covered under CSR and getting funded by corporates, the need to include
the same activities in SSE is avoidable.
iv) Religious Organisations are proposed to be ineligible to access SSE. However, many
religious organisations undertake non-religious activities. Preventing religious
organisations in totality would prevent them from accessing SSE for their non-religious

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activities as well. Only religious activities may be prevented but not religious
organisations in toto.
v) There are many small traders such as artists, weavers, craftsman etc., who form trade
association for better visibility and collective development. They need all the support
from donors. If the definition of trade association envelope such needy trade as well
and are prohibited, they will be prevented from taking the benefit of SSE. The
definition of trade associations should be calibrated not to make such trade bodies
ineligible for listing on SSE.
4. Listing Criteria
i) In order to be eligible to list of SSE, the criteria of minimum annual spending and
minimum amount raised is proposed. The objective of introducing of Social Stock
Exchange is to facilitate raising funds by social enterprises for social causes. The
criteria of minimum annual spent and amount raised, is contrary to this objective.
The NPO which is doing good work but is in need of funds becomes ineligible due
to these conditions. Therefore, the requirement of minimum amount raised and
spent is not required.
ii) It is proposed to have common format of offer document for all the NPOs
irrespective of the size, area of work, target segment, legal structure, etc. Instead of
providing standardized format for all, it should be principle based. Only the factors
which must be covered should be provided.
iii) In listing requirements for FPEs, it is recommended that listing criteria shall be
same as listing requirements of any other companies. FPEs will need to comply
with strict LODR guidelines unlike NPOs. The SSE is proposed to be housed in
existing stock exchange. This makes including FPEs in SSE pointless. It
complicates the compliance. Also, different listing requirements for FPEs and
NPOs make it difficult for investor to compare FPE with NPO working on similar
cause. It fails to bring uniformity in disclosures.
5. Instruments listed on SSE not to be considered as ‘Securities’ under SCRA, 1956
The securities in SSE need not be considered at par with securities issued by companies on
conventional stock exchanges. Here, the funder or investor does not expect financial
returns on investment. The incentive is the social impact caused by the entity. Therefore,
regulating the listing of FPEs on SSE by same set of regulations which are applicable for

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listing on conventional stock exchange is not ideal. The donor does not expect his donations
to be transferable. If donor sells donation, the good work gets undone. Hence liquidity
need not be an essential function for SSE.
6. Social Auditor
It is proposed that the concept of ‘Social Auditor’ should include ‘Financial’ as well as
‘Non-Financial’ Audit.
As per current legal structure, NPOs as well as FPEs are already required to get the
financial audit done. ICAI has separate set of principles for the same. If Social Audit
includes both then the need for separate financial audit should be eliminated.
Two different individuals or institutions should perform financial and non-financial audit.
The skills, expertise and experience required to perform financial audit is completely
different than non-financial audit. It requires different mindset. The financial audit can be
performed by members of ICAI; however they should not automatically be made enable to
perform non-financial audit unless they have experience of working in social sector.
Conclusion
SSE can act as agent of change in social sector of India. It has potential to bring cultural shift to
modernize the functioning of India’s social sector. It can unlock new sources of funding for social
organisations, promote NPOs, make new avenues of impact investment available to investors and
develop an ecosystem favorable for development of social sector, provided they are evaluated only
on social impact considerations and not commercial perspective.
End of document.