Social Stock Exchange

What’s in today’s article?

• Why in news?
• What are Zero Coupon Zero Principal (ZCZP) Instruments?
• News Summary: Social Stock Exchange (SSE)
• What is a Social Stock Exchange?
• Who will be eligible to be registered or listed on the SSE?
• How do non-profit organisations (NPOs) as well as For-Profit Enterprises (FPEs) raise money?

Why in News?

• Recently, the National Stock Exchange of India received the final approval from the markets regulator Securities and Exchange Board of India (SEBI) to set up a Social Stock Exchange (SSE).

What are Zero Coupon Zero Principal (ZCZP) Instruments?

• ZCZP are financial instruments that do not pay periodic interest, but are issued at a discount to their face value and mature at par.
• With its zero-coupon, zero-principal structure, it resembles a debt security like a bond. 
• When an entity takes a loan by issuing regular debt security like a bond, it has to make interest payments and the principal when the bond matures.
• But with ZCZP instrument, when an entity issues these securities and raises money, it is not a loan but a donation. 
• So, the borrowing entity does not have to pay interest—therefore zero coupon—and it does not have to pay the principal (zero principal) either. 

News Summary: Social Stock Exchange (SSE)

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What is a Social Stock Exchange?

• Background:
  • Finance Minister Nirmala Sitharaman, presenting the Union Budget back in 2019, had proposed to initiate steps for creating a stock exchange under the market regulator’s ambit.
  • She had argued that it was time to take our capital markets closer to the masses and meet various social welfare objectives to inclusive growth and financial inclusion.
  • The proposal was cleared in September 2021.
• About:
  • The SSE would function as a separate segment within the existing stock exchange and help social enterprises raise funds from the public through its mechanism.
  • It would serve as a medium for enterprises to seek finance for their social initiatives, acquire visibility and provide increased transparency about fund mobilisation and utilisation. 
  • Retail investors can only invest in securities offered by for-profit social enterprises (SEs) under the Main Board. 
  • In all other cases, only institutional investors and non-institutional investors can invest in securities issued by SEs.

Who will be eligible to be registered or listed on the SSE?

• Any non-profit organisation (NPO) or for-profit social enterprise (FPSEs) that establishes the primacy of social intent would be recognised as a social enterprise (SE).
• Recognition of social enterprise would make the entity eligible to be registered or listed on the SSE.
• As per the SEBI’s regulation, the enterprises must be serving to:
  • eradicate either hunger, poverty, malnutrition and inequality; 
  • promoting education, employability, equality, empowerment of women and LGBTQIA+ communities; working towards environmental sustainability; 
  • protection of national heritage and art or bridging the digital divide, among other things.
• At least 67% of their activities must be directed towards attaining the stated objective. 
• This is to be established by enumerating that, in the immediately preceding three-year period:
  • either 67% of its average revenue came from the eligible activities; 
  • expenditure (in the same proportion) was incurred towards attaining the objective; or 
  • the target population constitute 67% of the overall beneficiary base.
• Corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies (except affordable housing) would not be identified as an SE.
• Additionally, non-profit organisations (NPOs) would be deemed ineligible should it be dependent on corporates for more than 50% of its funding.

How do non-profit organisations (NPOs) as well as For-Profit Enterprises (FPEs) raise money?

• NPOs
  • 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.
    • SEBI had earlier recognised that NPOs by their very nature have primacy of social impact and are non-revenue generating. 
    • Thus, there was a need to provide NPOs a direct access to securities market for raising funds. Hence, ZCZP instruments were launched.
  • Another structured finance product available for NPOs is the Development Impact Bonds.
    • Upon the completion of a project and having delivered on pre-agreed social metrices at pre-agreed costs/rates, a grant is made to the NPO. 
    • The donor who makes the grant upon achieving the social metrics would be referred to as ‘Outcome Funders’.
    • Since the payment above is on post facto basis, the NPOs would have to also raise money to finance their operations. This is done by a ‘Risk Funder’.
  • It is mandatory that the NPO is registered with the SSE for facilitating the issuance.
• FPEs
  • It can raise money through: 
    • issue of equity shares (on main board, SME platform or innovators growth platform of the stock exchange) or 
    • issuing equity shares to an Alternative Investment Fund including Social Impact Fund or issue of debt instruments.
  • For-Profit Enterprises (FPEs) need not register with social stock exchanges before it raises funds through SSE.
  • However, it must comply with all provisions of the ICDR Regulations when raising through the SSE.

Q1) What is SEBI?

SEBI stands for Securities and Exchange Board of India. It is the regulatory body that oversees the securities market in India. SEBI was established in 1988 and is headquartered in Mumbai. Its primary role is to regulate and develop the securities market in India, protect the interests of investors, and promote the growth of the securities market.

Q2) What is NSE?

NSE stands for National Stock Exchange of India. It is a leading stock exchange in India, headquartered in Mumbai. NSE was established in 1992 and has since become the largest stock exchange in India in terms of market capitalization and trade volume. 

NSE provides a platform for trading in a wide range of securities, including equities, derivatives, debt securities, and currency futures.

Source: Explained | Combining social welfare and capital markets through SSE | Money Control | The Wire