An overview of the Social Stock Exchange, the rationale behind it, instruments listed on it, successes and challenges, and examples of other countries who have set up their own SSEs. 

Written by Pallavi Balakrishnan (Summer Analyst)

A Social Stock Exchange (“SSE”) is a platform that brings together non-profit organisations and for-profit social enterprises, with prospective donors or investors. It aims to replicate the capital raising methods seen on the regular stock exchange in listed for-profit businesses, allowing for profit entities to raise huge funding from the public in order to run their businesses. A stock exchange acts as a trustworthy intermediary, requiring organisations to provide transparency, disclosures and documentation so that donors and investors can feel assured in putting their capital towards a reputable organisation. While this system is well understood and accepted in the for-profit capital market, it is a new and evolving concept in the not for profit sector. However, as the not-for-profit sector increasingly requires finances to address the pressing challenges of our age, it looks towards the for profit sector for these finances, incentivising countries to set up systems like the SSE to appeal to them.

In 2003, Brazil was the first country to set up a Social Stock Exchange. Other countries such as the United Kingdom, South Africa, Canada, Singapore, Portugal, and Jamaica have also tried to set up SSEs, with limited success. In India the SSE is regulated by the Securities and Exchange Board of India, and runs as a part of the National Stock Exchange and Bombay Stock Exchange. It was launched after a Budget Speech by the Finance Minister in 2019. In 2022 SEBI put out a framework for SSE, which was issued as a circular after public comments in 2023.

Some conditions for non-profit organisations to be registered on the SSE are:

• They must be at least 3 years old;
• They must have a valid certificate under Section 12A, 12AA or 12AB of the Income Tax Act, 1961;
• They must have a valid registration under Section 80G of the Income Tax Act, 1961 for tax exemptions;
• They must have a minimum spending of at least Rs. 50 lakhs annually;
• They must have had a minimum of Rs. 10 lakhs funds in the past year.

For profit social enterprises are required to be focused on development activities, and must have allocated at least 67% of their revenues, expenditure or customer base in the immediate three years prior to listing, on their target sector. They must also comply with the Issue of Capital and Disclosure Requirements Regulations or Alternative Investment Fund Regulations to be eligible to raise funding through the SSE. The challenge however, is that for-profit social enterprises and their investors may find it more advantageous to list on the regular stock exchanges, and raise funds or obtain returns through for-profit capital markets. 

Non-profit organisations can issue specific instruments called Zero Coupon Zero Principal Bonds with a total issue size above Rs 50 lakh, and individuals can buy these bonds for Rs 10,000 or more. The difference between ZCZP Bonds and regular shares listed on a Stock Exchange is that they do not provide returns to the donor, and they do not entitle the donor to a share in the company. They provide the donor a reliable means to grant funds to a cause they believe in and accrue the tax benefit for it. Enterprises are also required to undergo audits and provide details of how they use the funds they raise, providing donors with transparency and accountability. In December, 2023 SGSB Unnati became the first organisation to list ZCZP instruments worth Rs. 2 crore on the Social Stock Exchange. 

The SSE has also attempted to create new instruments for enterprises to use, such as Social Impact Bonds or Pay-for-Success Bonds. These SIBs require a combined effort between government, private sector investors and non-profit organisations or social enterprises. This innovative financing method requires the social enterprise to achieve certain goals, and upon achievement of those goals the private investor receives a payout from the government. If the outcomes are not met, the private investor bears the financial burden. However, there continue to be struggles around availability of willing investors, funds on the side of the government, and accurate definitions and measurement of impact on the non-profit or social enterprise side. NABARD is one example of an entity that has issued SIBs in India for environmental and socially conscious projects. The state of Rajasthan has also issued SIBs called Utkrisht Impact Bonds, to finance maternal and newborn healthcare facilities.

As of May, 2024 there were 43 social entities listed on the Bombay Stock Exchange’s SSE and 59 entities listed on the National Stock Exchange’s SSE. While the SSE provides a new and innovative way for socially minded organisations to raise funds from the private sector, challenges remain in awareness and uptake. The small number of entities listed on the two SSEs shows the lack of awareness or the inability to achieve the requirements set by the regulator. In addition, in a country where 62% of non-profit organisations have expenditures of under Rs.1 crore (Million Missions Report, 2023), concerns remain over the conditions surrounding minimum sizes of listings. Nonprofits and social enterprises in India tend to arise to fulfil local needs and the required minimum sizes may be too large for most social enterprises or non-profit organisations to be able to achieve them. There is a need for SEBI to conduct consultations amongst stakeholders from within the industry and revise the requirements so as to benefit the maximum number of enterprises and expand the scope and reach of the non-profit sector.