2.1 – Introduction

Now that you’ve understood what a social stock exchange is from the first chapter let’s dive into what kind of entities can get on the platform.

The concept of allowing social entities to raise funds through a stock exchange is a game-changer. Not only does it offer entities access to a wider pool of potential donors, it also gives investors an assurance that their money is being put to good use.

Getting access to public markets means taking up some grown-up responsibilities. With increased transparency and disclosure requirements, the entities will now be accountable to investors for the ultimate usage of funds.

As per Sebi, two types of entities – non-profit organizations (NPOs) and for-profit social enterprises (FPEs) – can list on the social stock exchange. For your reference, you may check the NPOs listed on NSE here.

Unlike some other countries, where they keep NPOs and FPEs separate, India offers both these entities a shared platform.

Now, you might be thinking, “Hold up, why are we letting those profit-making entities (FPEs) join the social stock exchange?” Well, that’s the same question Nithin Kamath from Zerodha asked Hemant Gupta, head of BSE Social Stock Exchange.

Gupta said that FPSEs are becoming an integral part of the social development in India and excluding them would make the social stock exchange incomplete. “Further, when non-profit and for-profit organizations come together, they can deliver far more impact than either one of them can do individually,” he replied.

2.2 – Social Enterprise

Both NPOs and FPEs put together are called ‘social enterprises (SEs).’

To get on to SSE, they have to show that social intent and impact are its primary goals. There is a checklist to prove that.

Firstly, the entity has to engage in at least one of the 16 welfare activities that the regulator suggests. We are talking about things like eradicating hunger, promoting education, and promoting livelihoods for rural and urban poor. You can check the list of 16 themes here in the table.

*As and when the list is updated, the eligible activities for social enterprises also changes

Two, the entity must target an underserved or less privileged population. Or it could be regions that have recorded lower performance in the development priorities of the government.

Now, the third one is the real test. The entity should prove that it has been earning its revenue from or spending money on those who really need it.

How, you ask? There are again a few metrics to check-

About two-thirds of the entity’s average revenue in the preceding 3 years must come from providing welfare activities to the target population. The welfare activity must be part of one of the 16 themes mentioned above.

Or, it has to show that two-thirds of their expenditure, as calculated above, was spent towards the welfare of the target population.

Or, there’s one more card in the deck. The entity can prove that the welfare activities were provided to a population that makes up about two-thirds of their targeted customer base/beneficiaries.

Pretty long list, huh? There are other conditions as well for an NPO and FPE separately.

NPO, for example, has to be in existence for three years. It should have been registered as a trust, society, or a Section 8 company under the Companies Act 2013 or as stated. It has some minimum fund-raising (₹50 lakh) and spending requirements as well. 

On the other hand, FPE has to meet all the eligibility criteria that any other commercial entity does. It can be listed either on the main board or SME platform (Small and Medium Enterprises) or Innovators Growth Platform for young fast-growing companies.

Sebi wants to make sure there are enough safeguards and no illegal or bogus company raises funds from the social stock exchange. After all, investor protection is one of the principles on which the regulator functions.

Back to eligibility criteria, a few entities, despite having a social intent, cannot become part of the SSE platform. Think political or religious organizations, professional or trade associations, and infrastructure and housing companies (except affordable housing). Even corporate groups that are mostly funded by their parent companies don’t make the cut.

Keep in mind that some of these conditions could be tweaked as the SSE keeps growing and shaping up.

2.3 – NPO vs FPE

Investors will be able to differentiate between an NPO and an FPE entity on the social stock exchange, as they would be labeled differently.

To step onto the Social Stock Exchange (SSE), NPOs need to go through a registration process, unlike FPEs, who can jump right in for listing.

FPE has the flexibility to list its securities on the main board, SME platform, or startup platform and raise funds. 

On the other hand, once NPOs are registered on the SSE, they can choose whether or not to raise funds.

Remember, for most NGOs, funding is required at a project level. Whenever they want to raise funds for specific projects, they can do so by filing paperwork each time.

You might ask, “Why bother with registration for NPOs then?”

The reason for registering is because NPOs can be familiarized with the rules of public fundraising. By registering, NPOs all agree to follow the same legal rules and it pushes them to be more open about how they get their funds. For-profit organizations would already have some idea of what listening means and what it entails. 

Registering serves as a good transition for NPOs, especially the smaller ones. Even if they don’t plan on listing anything right away, registering shows off their intent of social development to the public. Periodic disclosures and assessments also help improve governance in these organizations. Of course, this all comes with some extra compliance costs.

The registration for an NPO is valid only for 12 months and can be renewed based on meeting the eligibility criteria each year.

Once onboarded, NPOs and FPEs can raise funds using different instruments/modes such as – ZCZP bonds (Zero Coupon Zero Principal), donations through mutual funds, development impact bonds, and social impact funds – which we will discuss in the next chapter.

 Key takeaways: 

1. • Any organization that wants to get on to SSE has to prove ‘social intent.’ 
   • Non-profit organizations have first to register themselves on SSE. Once registered, they can decide whether to raise funds or not.
   • Registration on SSE will be valid only for 12 months. 
   • For-profit social enterprises can directly list on the mainboard or SME or Innovators Growth Platforms.
   • FPEs will be clearly distinguished from other commercial listed entities.