Mint Explainer: Why are social stock exchanges needed?

Sebi gave NSE in-principle nod to set-up social stock exchange as separate segment
Sebi gave NSE in-principle nod to set-up social stock exchange as separate segment

Summary

  • SSEs can be credible platforms for donations since the transparency norms put in place by Sebi ensure that firms disclose all relevant information including where would proceeds be used and how

India’s unique experiment of a Social Stock Exchange (SSE) is gathering steam, as many not-for-profit and social organizations show interest in listing on the platform. So far, over 20 social ventures have expressed their interest in listing on the new platform with more to follow.

What is a social stock exchange?

Stock exchanges are generally the platforms where shares of companies after raising capital from public investors are traded. Essentially a stock exchange listing facilitates capital raising opportunity for the company. Investors get to buy and sell shares on such exchanges. SSEs also mostly work the same way. Any not-for-profit organization (NPO) working for social goals essentially can raise capital from public investors by listing on SSE akin to what normal companies do for listing on stock exchanges. However, a key difference between SSE and a normal stock exchange is trading by investors. Since the money being invested in SSE listed entity is a donation, investors can neither make returns on such securities nor trade them like normal shares.

How does it work?

When a donor makes the donation to a firm listed on SSE, the firm issues the donor what is called a zero-coupon zero-principal (ZCZP) instrument. This is akin to bonds except that the instrument doesn’t carry any principal or interest with it. These instruments come with tax benefits that are identical to donations made to charity trusts currently.

Why is it required?

Currently, raising money for charity is a big challenge for many NGOs. A key source of funding comes from the corporate social responsibility (CSR) spending by big firms. Some NGOs also reach out to wider set of donors through special campaigns. SSE brings together NGOs and investors on a single platform. Through SSE, a social service firm will be able to reach out to wide range of donors.

SSEs can be credible platforms for donations since the transparency norms put in place by the Securities and Exchange Board of India (Sebi) ensure that firms disclose all relevant information including where would proceeds be used and how. Just like listed companies, SSE listed entities are required to make periodical disclosures regarding utilization of funds.

What kind of organizations can list on SSE?

Any not-for-profit organization focused on social objections intended for unattended and underprivileged populations or regions. According to Sebi rules, the entity should be engaged in 16 broad social activities such as eradicating hunger, poverty, promoting health care, supporting education and gender equality empowerment of women and LGBTQIA communities among others. The firm should be registered as a charitable trust and must be at least three years old.

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