Opinion: India Should Go Ahead With Its Social Stock Exchange

In her FY2019 budget speech, India's Finance Minister, Nirmala Sitharaman, introduced the idea of creating a Social Stock Exchange (SSE) in India. An SSE acts as a regular capital market stock exchange, except the platform allows investors to buy and sell shares in social enterprises. It is a way to give social entrepreneurs, who can come from all different demographics, access to funds through the capital markets. The SSE would fall under the regulation of the Securities and Exchange Board of India (SEBI).

As a developing market, India still faces many social issues from hunger, poverty, lack of education, gender and income inequality, etc. Creating an SSE would align the interests of the investors and the social entrepreneurs. Social entrepreneurs want to create for-profit businesses which have a positive impact on certain social issues, and investors want to see a more diversified portfolio, and in turn, strong returns. The SSE would act as the perfect medium to help both parties achieve their goals.

Why Does India Need Social Entrepreneurship?

Since its independence in 1942, India has come a long way in tackling many social issues. In 1942, 92% of the population were less educated, the average life expectancy was 23 years old and poverty was more than 90%. However, today, literacy rates are up significantly to 72%, average life expectancy is at 69 years old and poverty has been reduced. Nonetheless, there is still a huge gap that needs to be addressed regarding major social and environmental issues in India.

Currently, according to the World Bank, up to 10% of India's population lives below the poverty line. This means this portion of the population survives on less than $2 a day. On the other end of the spectrum, it is estimated that nearly 40% of all agricultural output is wasted in India due to inefficient and improper practices. All the while, 10% of the population struggle to access basic needs such as food and shelter, placing India 102nd out of 117 in the Global Hunger Index.

In addition to the population living below the poverty line, India has a very orthodox caste system. The lower castes in this "system", such as Dalits, are considered second grade citizens and have no access to proper sanitation, education or funding. There is a huge economic gap between the upper castes and lower castes. In recent years, urban area upper caste members had an income which was more than 70% greater than those of lower castes. This orthodox system, along with other factors, has created a huge income gap. Gender inequality is also a major reason why India needs social entrepreneurship. Around 48% of the population in India are females, yet they still face many challenges in professional and social environments. Of the total employees in agriculture, almost 60% of them are women and of the total labor force, only around 25% are women. Despite the impressive economic growth India has seen, gender inequality is a major concern in India because half the population is not given the same privileges the other half does.

Lastly, as a result of the rapid economic growth in India, a lot of which has come from industry and manufacturing, it has caused a detrimental impact on the environment. Without proper waste management, India is seeing water sources polluted and trash, primarily plastic, wind up in huge waste lands. India produces 26,000 tones of plastic waste each day, which makes them the largest plastic polluter in the world. In addition, of the population in the rural areas, more than 90% of energy use (for cooking and work) comes from firewood, which leads to huge amounts of deforestation. Furthermore, of the most polluted cities in the world, 21 were in India.

These are just the tip of the iceberg to the social and environmental issues India face, and COVID-19 has only made it worse. Social entrepreneurship can be one solution to changing and improving many of these issues.

How Social Entrepreneurship Can Help

Social entrepreneurship can help solve these social and environmental issues by creating businesses. Social enterprises look to creating businesses which are human and nature focused, something many traditional businesses have over looked. They are about focusing on the 'triple bottom-line'; People, Planet, Profits. Social entrepreneurship gives people the chance of fulfilling two goals they may have: entrepreneurship and impact.

It has been suggested that a purpose driven business has a better chance of success than one with only profits in mind. The purpose will align the interests of all parties involved, particularly the employees of a social enterprise. If the employees are motivated about the social cause being tackled as much as the entrepreneur themselves, the chances of them obtaining the goal as a team is much higher. Social enterprises are arguably more effective than NGOs because there is a benefit for every part involved. Once all parties see personal benefits in sight, the entire ecosystem would work together to achieve the social cause of the enterprise.

India currently has more than 2 million social enterprises, many of which have been funded by loans from foundations such as Schwab Foundation for Social Entrepreneurship or micro-financing institutions, such as Annapurna Mircofinance.

Of the 2 million social enterprises, many have been successful in their missions. A great example is Arunachalam Muruganantham, who is perhaps India's most famous social entrepreneur. Muruganantham's mission was to provide low-cost sanitary menstrual pads to women in India, a problem which he saw firsthand with this wife. Muruganantham grew up in poverty, but was listed on the Time Magazine's list of 100 Most Influential People in the World. Like Muruganantham, there are at least 6 million artisans in the rural areas of India, majority of whom are women, who also have the potential to come up with innovative solutions to social and environmental challenges faced by the majority of the Indian population. Another great example of social enterprise, which started before social enterprise became properly conceptualized, is Araving Eye Hospital, started by Dr. Govindappa Venkataswamy and Thulasiraj D Ravilla. The eye hospital, established in 1976, has since treated more than 3 million patients almost free of charge.

There are many skilled social entrepreneurs in India who also have a drive to make a social impact, such as Suhani Jalota at the Myna Mahila Foundation. Despite there being many VCs specializing in social enterprises in India, there is still a lack of large institutions, such as Grameen Bank of Bangladesh, to provide significant capital backing. A Social Stock Exchange could be a solution.

The Social Stock Exchange

As mentioned, a Social Stock Exchange (SSE) is a capital markets exchange dedicated for the trading and investment of social enterprises. The SSE would give opportunity for social entrepreneurs to list their companies so they raise financing and expertise from the capital markets, through enthusiastic individual investors, institutional investors (such as ESG funds) and corporations. Investors would have the opportunity to invest in social impact companies which will help not only to their returns but also to their indirect social impact.

The SSE provides numerous benefits. Firstly, by giving access to capital markets to social enterprises, the SSE provides a bigger range of social entrepreneurs to get funding. With more funding available from a stock exchange, more entrepreneurs can emerge from even the most rural regions and create an impact on their lives and their society's. In addition, some Micro-financing institutions in India demand a high interest rate, up to 25%, which may not be feasible for social entrepreneurs, specially ones coming from more humble backgrounds. The SSE, though risky for investors, does not place a very high financing cost on the enterprises. In this case, debt may be more expensive than equity. The SSE also gives access to a constant source of financing, and financing from international investors. As any other securities exchange, such as the Bombay Stock Exchange, enterprises can issue more shares to the public and raise money at any time.

Furthermore, the SSE, would give more transparency and accountability for social investing. As the SEBI would be regulating the SSE, there would be more symmetrical information available for all parties involved. Investors would be able to conduct the due diligence process very clearly as social enterprises would be required to report their information to the SEBI. By essentially privatizing social impact, there is a lower burden on the Govt. to sponsor social initiatives. Since each party (investors and entrepreneurs) all have a vested interest with the creation of the SSE, each will do its best achieve the maximum social impact and financial gain.

The Govt. of India, through Section 135 of the Companies Act, requires that companies with a turnover of more than $150 million, net worth of more than $70 million and net profit of more than $700,000 have to spend at least 2% of their average net profit on CSR. The start of the SSE would be an ideal place for companies to invest their funds allocated for CSR. It serves as an easy platform to make a social impact, earn returns and satisfy the government's requirements. A company's willingness to invest in social causes is evident from the rapid rise of ESG investing. Many ESG focused funds have emerged, bringing in some institutional investors looking to make their social impact, and have invested in socially conscionable enterprises.

The success of SSEs has been seen in other countries as well. Singapore, Canada, South Africa and the United Kingdom are the only countries with an SSE at the moment. Singapore's Impact Investment Exchange, for example, has helped successfully raise $40 million per year for social impact investments. Canada's Social Venture Connexion has raised >$100 million in capital to fund social enterprises. The UK, almost $600 million and South Africa at around $2 million. These countries are more developed markets, thus there is less of a need for social enterprises focused on those markets, compared to a developing nation like India. Though the amounts of funds raised by Singapore, Canada, South Africa and the United Kingdom may seem small, relative to regular stock exchanges, social enterprises in those regions do not have the same scalability options as they do in India. India's massive market, and array of social problems, has the ability to raise more funds than the all of the others combined.

Conclusion

A Social Stock Exchange has the potential to make social impact sustainable. Pierre Omidyar, founder of eBay, has a school of thought that by giving social enterprises access to capital markets, or enticing private banks to make return-earning micro-loans, we can make social impact self-sustainable. By aligning the interests of investors and entrepreneurs on social impact and financial returns, an SSE can make social impact an ongoing wheel.

India is growing very fast, but they have also overlooked many problems which many developing nations face. There remains significant poverty, income inequality, gender inequality and a negative environmental impact. Social enterprises have a chance at solving some of these issues in India. However, many potential social entrepreneurs remain unfunded or unrecognized due to the limited capital available. By essentially privatizing social impact, social enterprises can gain access to appropriate amounts of capital and resources.

India can join Singapore, Canada, South Africa and the United Kingdom in leading the way for creating such initiatives which encourage and enable social and environmental impact. I believe India's Finance Minister is on the right tracks and should urge the Govt. to make this happen, especially since COVID-19 has only worsened problems.

Hope you enjoy the read. Please let me know if you have any thoughts, questions or feedback. Thank you!

Written By,

Abhishek Khetan

[email protected]

BU 2020 Graduate