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The author is Dishaa Dand, a second year student at Gujarat National Law University.
Propelling India towards a future where finance becomes a powerful catalyst for equitable and inclusive development, the Union Finance Minister, presenting the Union Budget 2019-20, proposed to set-up a digital social stock exchange. The vision was to enable social enterprises to raise capital for realization of social welfare objectives. To transform this idea into a tangible reality, the Securities and Exchange Board of India (SEBI), entrusted with the regulation of such a platform, promptly constituted a working group to better conceptualize this idea. Consequently, the report of the working group was released in 2020. The framework for the Social Stock Exchange was notified by SEBI on 25 July, 2022. Finally, in 2023, SEBI granted approval to the National Stock Exchange of India to set-up the social stock exchange of India.
The establishment of the Social Stock Exchange signifies a paradigm shift in the ways capital markets could be harnessed to pave the way for development, to foster investment for meeting various social welfare objectives. This blog seeks to analyse the social stock exchange model, as developed by SEBI, and the promise it holds in revolutionizing India’s social sector.
What is a Social Stock Exchange
Rule 292A(i) of the SEBI Notification dated July 25, 2022, provides a definition of a social stock exchange as a separate segment of a stock exchange wherein Not for Profit Organizations may register and list securities for trading. Essentially, it would serve as a means for social enterprises to raise funds necessary for their sustenance and fulfilment of social objectives.
The genesis of the idea can be traced back to the realization that social enterprises face difficulties in being able to sustain themselves and lack long-term viability, primarily due to concerns like deficit finances. Several reports have shed light on the obstacles hindering the growth of social enterprises in India. A report by the British Council revealed that access to finance stood as the biggest hurdle impeding the growth of social enterprises in India. According to a report titled “The Promise of Impact Investing in India”, India faces a financing gap of over $565 Billion for achieving sustainable development goals. Moreover, the report by SEBI acknowledged an annual deficit of Rs. 4.2 crores in achieving the sustainable development goals. Based on research, a substantial investment from public as well as private sectors is necessary to address this gap so that the sustainable development goals can be achieved by 2030. Realizing the magnitude of the problem, it is suggested that action in the form of social impact investment by the private sector will be significant in bridging this gap. Accordingly, a platform dedicated for social enterprises would encourage investment towards ventures that are socially impactful. Particularly, a separate platform is essential since an SSE operates in a manner different from the traditional markets. Social enterprises may otherwise be restricted from joining due to the guidelines currently in place for listing of enterprises on the regular platforms.
Perspectives from around the world
The first ever stock exchange of this kind was set-up by Brazil under the Brazilian Stock Exchange (BOVESPA). Brazil’s Socio-Environmental Impact Exchange sought to identify projects in need of funding and connected them with investors. South Africa followed suit, offering investors a platform to purchase shares for financing social projects. Importantly, both of these SSEs did not provide any financial returns to investors. The Canadian Social Venture Connexion also intended to be an information exchange by connecting social businesses with interested investors and service providers. The UK Social Stock Exchange aims to serve as a directory for impact investors of all companies that pass a ‘social impact test’ i.e., all those companies that create a positive social impact. Countries including Singapore, Jamaica and USA also ventured into establishing their social stock exchanges. The Singaporean Impact Investment Exchange sought to operate along the lines of the UK’s SSE but expanded to let participants issue bonds.
This idea has, however, been met with limited success as only three out of the seven SSEs are still active. A lack of awareness and consequently, a lack of participation and engagement in the process is said to be one of the main reasons for the failure of SSEs worldwide. A long-term solution to ensure a viable social stock exchange has not been devised yet.
Indian Social Stock Exchange
With the inception of Principles of Responsible Investment (PRI), Environmental, Social and Governance (ESG) measures have streamlined into traditional systems. This push has been felt in India too, with the Ministry of Corporate Affairs releasing National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business and the capital markets regulator, SEBI, mandating listed entities to include Business Responsibility Reports as part of the Annual Reports. The Social Stock Exchange can also be seen as an extension of India’s attempts at adopting more ESG measures.
The Indian NPO market is significantly large, with over 3.4 million NPOs operating currently. The SSE would provide a platform for social enterprises in need of financing, and donors willing to finance social initiatives, to come together and bring about actual social change in the country. The reported social impact of such organizations and initiatives would provide the government with data on areas that need to focused upon. Moreover, it could serve to reduce some burden of the government.
The Indian SSE, though not functioning yet, is expected to include within its ambit, two broad structures, the non-profit organizations and for-profit enterprises that seek to be identified as a social enterprise. Certain eligibility criteria – similar to a social impact test – have been established for determining what would constitute a social enterprise [Rule 292E of the notification]. It emphasizes on the fact that such enterprises must work towards creating a positive social impact.
The framework provides that not for profit organizations could raise funds through issuing Zero Coupon Zero Principal Instruments or via donations through mutual fund schemes. Zero Coupon Zero Principal bonds are those which investors may invest in, without expecting interest or the principal in return. For profit enterprises may raise funds through the main board or by issuing debt securities. It can be deduced that they are not fully integrated into the SSE framework yet. Those that want to raise funds through SSE will be subject to strict testing to determine if they meet the eligibility criteria.
For efficient functioning of such a market, it is imperative to build the trust of investors. The disclosure requirements mandated by SEBI play a crucial role in fostering confidence within the market. Furthermore, enhancing transparency within non-profit organizations (NPOs) contributes significantly to the attainment of social objectives.
Challenges
A social stock exchange operates differently from the conventional financial markets due to significant differences in the expectations, risks, returns and impacts. Consequently, it becomes essential to create awareness amongst all relevant stakeholders. Sensitization of investors to various social projects is imperative.
It has been noted that the organizations that are listed on successful SSEs tend to be large and revenue generating in nature. For instance, 25 of the 36 organizations listed on the UK SSE reported a media revenue of USD 8.2 million. In the model planned for India, it is specifically focused on non for profit organizations, thus adding to the challenges of securing funding.
A primary concern that arises is the fact that these would provide zero to no returns to the investors. Ensuring adequate liquidity within the market then becomes a demanding endeavour, necessitating the use of incentives, both monetary and non-monetary, to attract investment.
Additionally, a significant concern arises regarding the collection of impact data as social and environmental outcomes often involve complex and multifaceted variables that are not easily quantifiable in nature.
Recommendations and Conclusion
The model of a social stock exchange, as conceived in India, holds significant transformative potential for enhancing the social sector. However, there exist challenges that raise concerns about the feasibility and success of its implementation, especially considering the track record of numerous countries that have struggled to establish a viable system.
Several suggestions can be proposed to overcome the hurdles associated with efficient implementation. First, steps could be taken to sensitize the stakeholders via online mediums, allowing for widespread dissemination of information. Second, the recommendations by the SEBI working group in terms of offering fast-track/expedited certification to those non profits that register with the SSE as well as tax exemptions to donors should be implemented as they incentivize participation. Third, integration of impact investing by large companies within the mandatory corporate social responsibility (CSR) framework could be explored. Finally, introducing a ranking system for investors or corporations based on their level of investment in the social stock exchange could serve as an incentive for companies to enhance their public perception as socially conscious entities.