The Big Social Experiment - Social Stock Exchanges

In Jul-19, Finance Minister Nirmala Sitharaman pushed forward a novel idea to set up the first-of-its-kind Social Stock Exchange in India.

What is a Social Stock Exchange (SSE)? SSE is a platform that allows investors to buy shares in a social enterprise that has been vetted by an official exchange. SSE will function on the lines of other major Indian stock exchanges like BSE and NSE, but its main objective will be different – raise funds for social welfare as opposed to capital gains. SSE supports social businesses and impact investing, revolutionising the traditional concept of stock markets. SSEs allow ethical investors to invest in businesses aligned with their values, creating a parallel social economy.

So, this covers the Not-for-Profit Organisations (NPOs). Does this also cover For-Profit Enterprises (FPEs)? Yes, FPEs can be listed on the SSE. However, the main difference will be that the FPEs will need to demonstrate that their business is actively creating a positive social impact. This will enable them to access a kind of capital that conventional FPEs do not have access to.

Why do we need SSEs? One main reason – Trust. “We work with lakhs of donors on the GiveIndiaPlatform. One of the biggest concerns we hear all the time is around trust: how can we trust that the money we are giving will be fully utilised and create the impact it claims?” said Atul Satija, CEO of GiveIndia. With the reporting standards and audit, and the overall system being run by SEBI and its intermediaries, SSEs establish the trust that retail donors seek in their philanthropic initiatives.

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Global Precedence of Social Stock Exchanges

Existing SSEs have worked as trading platforms that allow social businesses to raise capital by attracting ethical investors to invest in businesses that have a dual corporate and social mission. Close to seven social stock exchanges were set up across the world since the early 2000s, including in Brazil, Canada, Jamaica, Portugal, Singapore, and the UK. Of these, only three—Canada, Singapore and Jamaica—are currently functional.

What are the key reasons that SSEs folded up? Low awareness and training about how social stock exchanges work, which resulted in low enthusiasm among the investor community, and low economies of scale for listed non-profits and social enterprises.

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Recommendations from the Working Committee

SEBI constituted a working group on SSE in Sep-19. The working group report defines the objectives of the SSE and introduces the process of measuring and reporting social impact. It also outlines several recommendations –

• Minimum standard for social impact reporting: Create uniformity in reporting which actively supports decision-making for donors, and the NPOs must commit to reporting in accordance with the standards created.
• Social Venture Funds and Mutual Funds: Pre-existing funding structures such as Social Venture Funds (SVF) and Mutual Funds can be channelised through SSEs.
• Fiscal Benefits: Both the NPOs and the donors/investors have to be incentivised to invest their money, which can be done by introducing tax exemptions for at least the first 5 years.
• Foreign Contribution (Regulation) Act, 2010 (FCRA): Another way to unlock funds would be to enable foreign entities to invest in SVFs listed on the SSE, as the donors won’t have any discretion on the deployment of these funds to specific NPOs. These decisions will be taken by SEBI-regulated Indian fund managers and will, therefore, be easier for the government to monitor as they will have to conform to the Information Memorandum to be made public.

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Instruments introduced for SSEs

As required, SEBI has approved unconventional financial instruments for this unconventional exchange. In Jul-22, ZCZPs were declared as securities by the finance ministry. Others include –

• Zero Coupons Zero Principal (ZCZP): No interest to be paid over the tenure and no principal to be repaid at maturity. The tenure will be equal to the duration of the project that is being funded, and at tenure, they will be written off the investee’s books.
• Social impact funds (SIFs): Allow private investors to finance social services provided by NPOs. The investors are repaid if the providers achieve expected social outcomes. This can trade on the SSEs and lending partners bear some risk if the promised social impact is not created. Risk can be minimised by choosing the NPO carefully.
• Mutual funds: The returns on the parked capital (principal) would fund activities of social organisations, while the principal amount is potentially redeemable.

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Three Important Pillars for SSE

In Feb-23, NSE received final approval from SEBI, to launch the SSE as a separate segment. For SSEs to function seamlessly, the government identified a few areas of development to build an efficient and diligent infrastructure for the stakeholders –

• Demand-side ecosystem (social organisations)
• Supply-side ecosystem (investors)
• Infrastructure (the SSE and its intermediaries)

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Demand-side Ecosystem (social organisations)

SSE may seem more accessible to larger organisations with English-speaking professionals at the cost of smaller grassroots organisations. It may not cover very small, remote, very rural non-profits, in the same way as the main stock exchange does not cover every kind of company. However, the entry thresholds for non-profits have been kept as low as possible.

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Supply-side Ecosystem (investors)

Currently, the minimum donation cap is at INR 2L on the SSE platform, it is likely that only individuals who have an income of over INR 1cr. are likely to use this platform initially. This restricts the retail investor segment to a small set of 1.3L people.

India’s SSE is a 100% donation-based model unlike any of its global counterparts, which are based more on an impact investment model. The difference is that the latter includes a component of returns, while the former is purely charity for a social cause. In India’s SSE, ‘returns’ will be measured in terms of social impact that will be determined through annual social audits.

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Building Infrastructure

For SSEs to function seamlessly, the government identified a few areas of development to build an efficient and diligent infrastructure for the stakeholders –

• State Sponsorship: The government would play a critical role as market maker & influencer.
• Multi-departmental Brainstorming: SEBI has designed the unconventional SSE model with inputs from a cross-section of multiple stakeholders from both demand-side and supply-side ecosystems, as well as the intermediaries involved.
• Capacity Building Fund: The INR 100-crore fund has been set up with contributions from the National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) aimed to train SEBI, the exchanges, the intermediaries and non-profits, and build capacity for SSE to scale.
• Social Audit: To ensure a harmonised process of social audit and augment transparency and accountability standards within the social sector, the National Institutes of Securities Markets (NISM) is offering a training-cum-certification programme for social auditors.

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SSEs – Where are we today?

Both NSE and BSE have set up their own SSEs. As of Aug-23, 31 NPOs have registered with the two SSEs. With the first initial listing on the way, there are another 5 scheduled for next month and 20 by the end of the financial year.

Unnati – the First Listing on the SSE Platform

Unnati Foundation seeks to raise INR 2cr., a move that will directly impact the lives of 10,000 young individuals in their final year in government colleges. The impact primarily falls into three key areas: job creation, self-employment, and higher education, with an estimated 60% of the youth set to benefit significantly. The NPO works with more than 400 volunteers. It will raise funds via ZCZB to attract investment from foundations and HNIs tilting towards social impact causes.

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Social Sector Funding – India’s Current Landscape

Social sector funding stood at 9.6% in FY22, and the government accounts for 95% of that funding.

India needs a minimum of $350-$400bn in annual funding (at least 13% of GDP) to fulfil just five of the most important UN Sustainable Development Goals (SDGs) by 2030 (zero hunger, good health, and well-being, quality education, gender equality, and clean water and sanitation). Even under optimistic scenarios, a funding gap of $60bn may exist every year.

Currently, the socio-development sector in India receives funding through multiple sources spanning corporate social responsibility (CSR), philanthropy, government funding and retail charity.

There are about 20,000 probable non-profits with the potential to list on the SSE and it is anticipated that the first few hundred will require low-touch capacity-building support. The rest, however, will require more comprehensive capacity and knowledge-building support, on the back of credible intermediaries who can be leveraged for the smooth transition of NGOs onto the SSE platform.

SSE will allow social funding channels to come together on a common platform, reduce this social-development funding gap, and introduce a uniform framework for reporting and measuring social impact which will become an important step forward for the development sector in this country. SSEs will also appeal to the next-gen philanthropists as more interesting and credible, particularly for projects that align with their passion areas.

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The Social Stock Exchange is an important social experiment. A long way to go, a wide gap to fill, and a large hole to fill, but all in due time. Today, this is a very important step in the right direction, as the social funding landscape learns to walk with the faith of retail philanthropists. Thank you for your time. Please post your feedback and comments.

For your reference, the following organisations deserve a shout-out for the work they are doing and the prominence that they have achieved. Please find below the list of organisations that are registered with the social exchanges in India – if you find a purpose you can relate to and you feel you want to contribute to the noble cause – feel free to donate.

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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –

1.????? https://seamlessglobal.co/a-social-stock-exchange-in-india-innovations-to-match-indias-sustainable-development-goals/

2.????? https://oecd-development-matters.org/2023/05/31/what-is-indias-social-stock-exchange-and-how-can-it-benefit-the-country/

3.????? https://www.thehindubusinessline.com/opinion/power-of-social-stock-exchanges/article67064940.ece

4.????? https://www.forbesindia.com/article/take-one-big-story-of-the-day/can-indias-social-stock-exchange-flourish-where-others-have-failed/86659/1#:~:text=Close%20to%20seven%20social%20stock,and%20Jamaica%E2%80%94are%20currently%20functional .

5.????? https://www.cnbctv18.com/business/companies/over-20-different-social-enterprises-registered-on-social-stock-exchange-16887251.htm

6.????? https://www.livemint.com/companies/news/ngo-unnati-to-raise-2-cr-via-listing-11698678597849.html

7.????? The Economic Times - Print Edition - 12-Nov-23 - Article titled "Social Experiment"

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