SOCIAL STOCK EXCHANGE

EVOLUTION:

• Union finance minister first floated the idea of social stock exchange for India in union budget speech for 2019-2020.
• Following the budget announcement, SEBI has set up a working group in September 2019 to examine and make recommendations on the structures and mechanics of a social stock exchange.

HOW IT WORKS?

• Social Stock Exchanges (SSE) are dedicated platforms that allow investors to purchase stakes in social enterprises, volunteer groups and welfare organizations.
• The SSE will function as a common platform where social enterprises can raise funds from the public.
• They comes under the regulatory ambit of SEBI.
• Contrary to most capital market exchanges that allow firms to be listed when they meet certain business criteria, a social stock exchange generally screens enterprises on the basis of their ‘social impact’ before listing them.
• It falls under the broad purview of ‘impact investment’ (It is a form of funding that aims to drive measurable social benefits while also generating monetary returns)
• Arguably, social stock exchanges have the potential to offer innovative solutions that utilize equity investments to create social impacts.
• The SSE can be housed within the existing stock exchange such as the Bombay Stock Exchange (BSE) and/or National Stock Exchange (NSE).
  • This will help the SSE leverage the existing infrastructure and client relationships of the exchanges to on-board investors, donors, and social enterprises (for-profit and non-profit).
• However, the purpose of the Social Stock Exchange will be different - not profit, but social welfare.

THE NEED FOR SOCIAL STOCK EXCHANGES

• India needs massive investments in the coming years to be able to meet the human development goals identified by global bodies like the UN.
• This can’t be done through government expenditure alone. Private enterprises working in the social sector also need to step up their activities.
• Currently, social enterprises are very active in India. However, they face challenges in raising funds.
• One of the biggest hurdles they face is, apparently, the lack of trust from common investors
• According to a McKinsey study,‘impact investors’ in India poured a total of $5.2 billion between 2010 and 2016, most of which was concentrated in sectors like financial inclusion and clean energy.
• As per a survey conducted by Brookings India, 57 per cent of the social enterprises identify access to debt and equity as a barrier to growth and sustainability.

SOCIAL ENTERPRISES IN INDIA – AN OVERVIEW

• The enterprises that create social impact can be broadly categorized into two:
  • For-Profit Enterprises (FPEs) - which include companies registered under the Companies Act, sole proprietorships, partnership firms, HUFs and limited liability partnerships
  • Non-Profit Social Enterprises (NPOs) - which include Section 8 companies, trusts and societies.
• The key difference between these two categories is that they source different kinds of capital. Specifically, FPEs can raise equity while NPOs cannot

INSTRUMENTS AVAILALBLE FOR ISSUE:

• For Non-Profit Social Enterprises (NPOs): Zero coupon zero principal bonds, Social Venture Funds (SVFs), Mutual Funds etc.
• For ‘For-Profit Social Enterprises (FPEs)’: Equity and Social Venture Funds (SVFs)
• For Section 8 Companies: Equity and Debt

BENEFITS

• For social enterprises:
  • SSE platform will acknowledge the problems of investment fundraising for social enterprises
  • There is a great opportunity to unlock funds from donors, philanthropic foundations and CSR spenders, in the form of zero-coupon zero principal bonds.
  • Helps small social enterprises to gain trust among impact investors
• For investors:
  • SSE will bring greater transparency for social enterprises, assisting investors to better evaluate the social enterprises they would like to invest in
  • Investors in zero coupon zero principal bonds may also be awarded a tax benefit
• For social sector: SSE is a significant step towards the encouragement of an ecosystem to support the growth of social finance because it:
  • Open up avenues for direct listing and streamlining funding mechanisms for NPOs
  • Innovation of new funding instruments and funding structures
• For government: Government gets some relief on its welfare spending, as private sector enterprises could pool in capital for investing in social sector.
• For Indian society as a whole:
  • Improve our performances in human development indicators
  • Helps to improve India’s image on global front

CONCERNS:

• No legal criteria:  It will be difficult to distinguish between a social enterprise and a normal enterprise given that there exists no legal criteria to differentiate between the two.
• Absence of any universally applicable framework for social impact measurement
• Scope of participation: Numerous non-profit organisations in India may be unable to comply with the proposed disclosure and listing standards as they not registered and lack the resources to maintain their financial records
• Regulation of social impact assessment intermediaries: SSE may give rise to a new set of intermediaries such as impact assessors responsible to measure the impact of work that social enterprises do. The SEBI may have to come up with regulations to govern their registrations and scope of work.
• Return of investment: Social stock exchanges often find it challenging to determine the return on investments for investors. In case of social enterprise investment, the return on investment will be based on realization of the social welfare objective. There is no established criteria to determine the success of a social welfare objective.
• Chances of misuse of fund:  For-Profit Enterprises (FPEs) may invest the funds received through SSE, in a way that helps them to promote their main business.

WAY FORWARD:

• Clarity on definition of social enterprises: Government will need to create a legal definition of a ‘social enterprise’.
• A common minimum standard of reporting social impact: Measurement of social impact and the activity of social reporting must be institutionalized
• Building institutions: SSE should also play a key role in ecosystem building, by encouraging institutions such as ‘social auditors’, which will perform independent verification of social impact reporting
• Capacity building fund: SSE should set up a capacity-building fund to support to the smaller Non-Profit Social Enterprises (NPOs) to meet regulatory requirements
• Simplifying procedure: Enable fast-tracking of getting certifications for Non-Profit Social Enterprises (NPOs)
• Tax benefits: Allow philanthropic donors to claim 100% tax exemption for their donations under 80G of Income Tax
• Corporate Social Responsibility (CSR): Allow funding to Non-Profit Social Enterprises (NPOs) on SSE to count towards CSR commitments of companies.
• Relax compliance and reporting standards: The government should relax compliance and reporting standards to make the social stock exchange inclusive enough for all social entities to reap benefits.
• Since foreign funds play a substantial role in the social sector in India, the regulatory framework should also account for the interests of overseas investors

INTERNATIONAL EXPERIENCE:

• Kenya: The Kenya Social Investment Exchange, launched in 2011, connects vetted social enterprises with impact investors, both foreign and domestic. A listed social enterprise has to demonstrate social impact as well as financial sustainability beyond the funding period.
• UK: The Social Stock Exchange in London functions more as a directory connecting social enterprises and potential investors. Launched in 2013, it only accepts companies that pass its independent assessment on social impact.

CONCLUSION:

• The SSE is uniquely poised to become an important component of India’s policy response to Covid19.
• By expanding the pools of source capital and innovating new structures, SSE will substantially multiply the funding opportunities for the social sector.

PRACTICE QESTION:

Q. What are Social Stock Exchanges? How it contributes to the development of health and education sector in India?