In this context, SEBI, at its last board meeting, had the rather creative and constructive idea of creating an SSE that will work like any other stock exchange or bond exchange. The relevant securities of social enterprises (SEs) will be listed on a dedicated stock exchange and these may be traded by the public. It would be a new avenue of investment for socially conscious investors. The interesting part is that listed SEs will need to make appropriate initial and ongoing financial and social impact statements so that investors are aware of their activities. SEs that mobilize resources in the capital markets will need to register with the SSE and governance standards will be defined. There will be a mandatory social impact audit requirement for ES fundraising / registered on SSE.
SSE is likely to be a separate segment on existing exchanges. The SEs eligible to participate in the ESS will be entities with social intent and social impact as primary objectives. These businesses must be engaged in one of the eligible social activities. Qualifying companies may be able to raise funds by issuing shares that are like equity that do not pay dividends. Companies incorporated under section 8 of the Companies Act do not pay dividends. Other products could be zero coupon and zero principal bonds, social / development impact funds or mutual funds.
Although the eligibility criteria for SEs have not yet been notified, according to the SEBI technical committee report, it should be an SE that is involved in one of the 15 general eligible activities based on the SEBI. Annex VII of the Companies Act 2013. In addition, corporate foundations, religious organizations / activities / organizations, professional or trade associations, infrastructure and housing companies (except affordable housing) will not be allowed on SSE.
While we await detailed instructions on the listing and trading of these securities from SEBI, I assume that there will be a normal public offering via an offer circular and a listing and trading process for the securities. This will provide a liquidity platform for the investor. As an investor, I can just give / invest my return on my investment. Which means I’m buying 5 year zero coupon bonds which will be redeemed at the end of the 5th year. I can sell them in the market and someone else can keep them as a contribution.
From an investor’s perspective, in my opinion, there could be 3 possible opportunities. It could be like making a donation or a grant without expecting anything in return, whether it’s principal or interest. Second, it could be an investment without dividends or interest returns, but with an increase in capital and assured liquidity. In this situation, one could seek to recover the capital either at maturity or at the negotiated value. Or we could even choose to reinvest the contribution in another social cause. The third option could be to expect relatively lower returns given the social impact of the project. Of course, the structure of these instruments will have to be detailed according to the objectives of both – potential investors and SEs.
These are the first days for this concept. As we move forward and see it evolve, there will be a lot of things to work out. For example, most of these nonprofits operate as a trust or charitable trust – would they be required to turn into a business? If so, how would tax laws work? What happens to the trust securities – some of these trusts also have various other investments that could be very valuable? Is there a social rating process to differentiate different companies the same way an investor differentiates a AAA bond from AA? What will be the applicable laws in the event of borrowing, default, bankruptcy, etc. ?
This is a great concept that will bring the much needed creative financial support to this segment. As a corollary, it will bring transparency and public control in the sector. And of course, this will bring liquidity to the investment. While there are several gray areas and questions that need to be clarified, I think this is a fantastic thought and deserves a big boost for SEBI.