Can social stock exchange ignite social entrepreneurship boom?

?As one of the promising takeaways of current FY union budget presented on July 5, the finance minister of India, Nirmala Sitharaman proposed creation of an electronic fund-raising platform - a social stock exchange (SSE), under the markets regulator Securities and Exchange Board of India (SEBI), for listing social enterprises and voluntary organisations with social welfare goals so that they can raise capital as equity, debt or as units like a mutual fund.

“It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion,” said Sitharaman.

This is a significant move for all stakeholders in the social ecosystem (including government, financial institutions, community organisations, development agencies, social enterprises and social entrepreneurs). 

Envisioning the country to be $5 trillion economy in 5 years, PM Modi said - "Everyone is a stakeholder in this country.”

Om, the eCommerce startup owner (Startups&Knowledge eCommerce) gushed about the details with his friend Mukesh who is a struggling social entrepreneur trying hard to make a difference in the mass education space. Mukesh was excited upon hearing this news. 

As the entrepreneurs deliberated, they found a series of queries pop up regarding the execution when the momentum gets going for fruition of this exciting proposal. 

Can this innovative and novel move kindle access to capital by social enterprises and voluntary organisations?

Will the exchange involve trading in securities issued by non-profit bodies?

Will donations to non-profit bodies be converted into securities and traded as well? 

Will the exchange include for-profit social enterprises, micro finance companies and non-profits?

Will the exchange function as an institutional trading platform?

Huge Demand 

Impact investing in the country started in earnest with launch of Aavishkar, India’s pioneer for-profit impact fund in 2001, along with entry of non-profit Acumen Fund.

Today, access to funds is a major bottleneck for social enterprises and non-governmental organisations (NGOs). It is a challenge for social enterprises to raise funds because it requires long term investments to solve a particular social problem and provide financial returns as well. Absence of a consolidated social capital pool is really the issue that the social stock exchange envisions to tackle.

SSE can act as a crowd-sourcing platform, for fund-raising with transparency by entities based on impact investment. 

Undoubtedly, it is an innovative measure to open up capital markets to social sector, and involve public participation in social causes through the equity route.

Transitioning from an individual focus for impact investments towards capital markets that serve society as well, where a social entity can be identified as distinct asset class to attract right kind of investors who are aligned with its mission.

Well, industry analysts have rightly welcomed this initiative by government.

Global SSE Snapshot 

In the past number of years, there have been many positive developments across the globe, with SSEs established worldwide adopting different models. Launched in 2013, the Social Stock Exchange in London (UK) functions as a database repository connecting social enterprises with potential investors. Social Venture Exchange (SVX) in Canada is an online platform where retail and institutional investors can invest in companies with a social or environmental impact. In South Africa, the SSE SASIX works like a regular stock exchange where impact investors can buy shares in social businesses based on location and mission. SSE platforms also exist in Brazil, Kenya and Asia(Singapore’s Impact Investment Exchange). 

Rise of Social Investors 

The Social Stock Exchange aims to provide a single reference point for investors and help them support social enterprises. It is set to change the way in which access to capital for social businesses is granted. Today, it is heartening to observe increasing trends where value driven, savvy investors look for financial success alongside social and environmental impact. Related article @ Investors and the social angle

This can be a good opportunity for FII and FPI players to enter this space. 

Furthermore, the platform can lead to democratisation of social sector, as ordinary citizens get to know about publicly listed social businesses, and participate in potential investments.

Can SSE attract interest from greater number of investors ?

Scaling Social Ventures 

Low valuation and relatively lower financial returns have made investments in social enterprise not quite a lucrative option for investors. The SSE platform as a new social investment market that would value social businesses appropriately, could bring a shift in mindset. 

Can we see a surge in interesting ventures delivering high social and environmental impact? 

From a really diverse range of sectors - social and affordable housing, clean-tech, waste, water, recycling, education, health, sustainable energy and transport, and culture.

Challenges Ahead 

When the proposed social exchange takes shape, accreditation at all levels—investors, social businesses, and the intermediaries that act as vital brokers and valuation experts in the field, remains the biggest challenge, which can be addressed through education & awareness, devising accountability framework, policy & regulations, increasing number of  social enterprise startups, formulating processes for entities in the platform, and investment in research & development.

Companies with proven track record would no doubt be granted access by SEBI to public capital through this platform. While ethical credentials of companies need thorough evaluation, the real challenge lies in measuring the actual social impact made by products or services of the enterprise. The cost of due diligence in this area is expensive and difficult. 

Can SSE solve this important issue for investors? 

The success of this platform will depend largely on this critical parameter. 

Issues like tax benefit transferability, incentives (tax relief etc) for fund managers and investors in this space will need to be addressed.

Appropriate methodologies for valuation of social enterprises will need to be devised.  

Needless to say, ring-fencing the exchange from fraud is vital. Currently, this ecosystem is quite fragmented and there is a huge trust deficit.

If developed with transparency and good governance, this exchange can attract new and existing investors to take holistic decisions leading to great social impact. 

A positive ecosystem for SSE is the need of the hour. 

It is encouraging to see the government take tangible initiatives to boost impact investments, as focus shifts towards ethical, sustainable and socially responsible investing for collective social well-being and preservation of environment. These issues are gaining centre stage as the country marches forward in the path to socio economic development towards achieving the goals of sustainable growth.

If well executed, this can prove to be a path-breaking endeavour with a potential to create a vibrant social enterprise ecosystem in the country. 

Ultimately, what better way to invest and get profit through one which also works for the social good! Real value in creating a more holistic investment market!

Can SSE shape future of impact investments in India? 

Can SSE add real value to country ? 

Can this disruptive platform trigger boom of social enterprise start-ups in India? 

Can Mukesh’s mass education startup benefit from the proposed social stock exchange?

Startup Noodles, Spice ‘em Up!