Demystifying India’s Proposed Social Stock Exchange

Following the recommendation made by the Finance Minister in her 2019 Union Budget Speech, a working group constituted by the Securities and Exchange Board of India (SEBI) recently released its report on the Social Stock Exchange (SSE). 

The report gives form and structure to the Finance minister’s vision of ‘bringing the capital markets to the masses’ and establishes the contours of what is proposed to become India’s first SSE.  

This working group culled out the broader framework of what is to be the SSE, by working closely with voluntary organizations, philanthropic organizations, regulatory bodies, social enterprises, and online fundraising platforms in a consultative manner to best address the sector’s needs.

So, what is SSE?

The SSE is at the intersection of capital markets and the nonprofit sector.  It is a platform (housed either under the NSE or BSE) for listing social purpose organizations (SPOs), which include for-profits and nonprofits, to enable them to access a flow of funds and pools of capital in order to achieve scale and fulfill the social welfare objectives of India. This ecosystem envisions supplementing the philanthropic capital with patient capital i.e. where investors are in no hurry to gain returns.  The nonprofits would be listed through the issuance of zero-coupon principal bonds, social venture funds, mutual funds, and various other securities that might come about. The listing of these SPOs would be contingent upon a minimum reporting standard which mandates sharing impact, governance audits, and financial statements with SEBI. Hence, only SPOs that create measurable social impact and report these figures of impact would be funneled into the public listing arena. 

 

What’s in it for nonprofits?

Nonprofits rely heavily upon the whims of philanthropic organizations, corporates, individual donors, and impact investors for their funding; with the larger nonprofits getting the lion’s share of the funding, the smaller organizations struggle with their functioning. Further, very little funding is permitted towards organizational development, if it’s via a non-tax deductible donation, as this is mainly to be utilized for programs. By listing on the NSE and BSE, the SSE can leverage the existing infrastructure and client relationships of the exchanges to onboard donors, investors, and more SPOs. 

Furthermore, the benefit is twofold as not only do SPOs now benefit from additional fundraising instruments and structures but the overall development sector gains from enhanced capacity-building efforts. 

Let’s first take a  look at a fundraising instrument that would help Nonprofits-

The introduction of zero-coupon principal bonds (which is like a donation certificate), would attract those investors who are looking to create social impact but do not need their funds to be returned to them. These bonds will carry a tenure equal to the duration of the project that is being funded, and at tenure, they will be written off the investee’s books. Investors will be keen to channel funds only to credible and legitimate nonprofits, which the SSE will ensure by requiring minimum reporting standards by nonprofits. Additionally, Mutual Funds like the HDFC CANCER FUND would be available.

 

Let’s now look at how the development sector stands to gain- 

In order to benefit from the SSE, the SPOs need to commit to minimum reporting standards which would ultimately separate the wheat from the chaff, bring about more accountability within the sector and create a universal framework for all nonprofits to work within. It’s akin to creating a common language between all givers and receivers, to address the issue of the trust deficit in the social sector. However, that is not to say that the reporting would be onerous; it would mainly be around areas of inclusivity, reach and depth of the work undertaken. It would mainly be through qualitative reporting via audio/visuals/descriptions of the impact. There would also be increased visibility for these SPOs than ever before, and would hope as the listing would create.

At ConnectFor, we already have a robust mechanism in place to measure the qualitative and quantitative impact made by our 400+ Nonprofits, which could possibly be used as an information repository by the SSE and potential funders.

A reality check from NGOs-

Chetna, the founder of Mann Deshi believes that while the SSE is an extremely exciting idea, it would require many changes within the functioning of SPOs when it comes to regulatory compliances. These regulatory wrinkles would need to be ironed out and most SPOs don’t have the capacity to take this on. There would also be a fear now, that all the funding that initially came from great donor relations would now be directed elsewhere and there would be an encroachment on previously available funds to a particular SPO. Also, the SSE runs the risk of turning into an elite club of listed SPOs. 

Further, the notion of the development sector facing a trust deficit is entirely misplaced and misguided as nonprofits have to jump through several hoops such as the Charity Commissioner, ITR 7, FCRA  and can even be summoned to clarify why a paltry donation of Rs.100 has been loaned out to a student.

Usually, it takes years before impact can be measured, and sometimes impact can go either way- negative or positive. Hence the report needs to clarify whether inputs and outputs would be considered as reporting metrics. 

One of the weaknesses of the report is that it does not define a for-profit organization and that could lead to several businesses entering the arena with a symbolic halo on top. 

In conclusion

At a time when there is a general pessimism about the financial security of several SPOs due to Covid-19, the SSE could not have come at a more opportune time. However,  there are several aspects that still need to be deliberated upon and only time will tell whether all that glitters is gold.

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