Last Updated on May 25, 2022 by Neera Bhardwaj
Finance Minister Nirmala Sitharaman highlighted the need to form a social stock exchange in her Budget speech in Feb 2019. “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”, Sitharaman said. She opened the floodgates of debate on something that has been in practice in several countries for years and she believed this could drive social change in India.
SEBI then formed a working group on the social stock exchange on 19th Sept 2019, headed by Ishaat Hussain. The panel submitted its report on the social stock exchange a year later on 21st Sept 2020 and outlined the setup of a social stock exchange in India. In this article, let us look at what a social stock exchange is and its features.
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What is a social stock exchange?
A social stock exchange is a platform that allows the listing of non-profit organizations and non-government organizations. This allows these organizations to raise funding for social causes and purposes apart from getting donations. A social stock exchanges help raise capital for non-profit organizations that aim at bringing a positive change in society. You can buy shares in social enterprises that work in spheres they believe in and that have been vetted by the exchange governed by SEBI.
Such an alternative funding structure can help non-government organizations get funds by direct listing on the stock exchange. Although new to India, several countries like UK, Italy, Brazil, and Canada have social stock exchanges in place to help such organizations.
India has 31 lakh+ non-profit organizations that can benefit from the concept of social stock exchange by raising capital from public investors.
Purpose of a social stock exchange
A 2018 survey on the state of social enterprises in India by the British Council revealed that 57% of social enterprises in India are reeling under debt and lack access to equity. This acts as a major barrier to the growth of the social enterprise and the social welfare it aims to achieve. A social stock exchange will help bridge these barriers and help such enterprises raise funds to continue doing social good.
In addition to this, India has several human development goals to achieve that have been set by the UN. Since the government alone cannot achieve victory, non-profit organizations can be monetarily empowered to do so at the grassroots level.
One hurdle is the lack of literature on investing in social purpose organisations. A move like setting up a social stock exchange can bring in more research and literature in the domain to help those at the helm of social welfare in the community.
It will also help reduce the dependency of non-profit organizations on donations and funding and help build a strong framework that solely focuses on impactful development and sustainable development in society.
How does a social stock exchange work?
The expert panel set up by SEBI released a detailed report on 1st Jun 2020, where it laid out the structure for setting up and functioning of a social stock exchange in India.
Currently, non-profit and non-government organizations in the country receive funding via donations, CSR (Corporate Social Responsibility), SRI (Socially Responsible Investing), government aid, and other philanthropic gestures. A social stock exchange may be able to integrate all these funding options into a single, unified platform. The platform will not only help raise capital but will also help to track social and financial returns clocked by the social enterprises.
The social stock exchange is expected to be a separate segment in the current stock exchange. Only those social enterprises will be selected to be listed on the stock exchange that has reported a strong positive social impact and is both credible and capable of doing so in the future.
Non-profit and non-government organizations will have to adhere to all norms set by the Information Repositories. Social auditors will also make sure to note the impact of social good done by the organization after the organizations have self-reported their work.
The proposal is that investors buying the stocks of such organizations on the stock market will be entitled to tax benefits under Section 80G of the IT Act. Meanwhile, companies buying shares of such companies may consider it as a CSR act.
How can non-profit organizations raise money via the social stock exchange
The following options are available for non-profit social ventures to raise capital at the social stock exchange:
Mutual Funds: A fund house could offer mutual funds to investors. All the returns after the sale of the mutual fund units could be sourced to the non-profit organization. The fund would have already chosen the non-profit organization as the beneficiary and only acts as an intermediary.
Zero coupons zero principal bonds: Non-profit organizations could be allowed to get listed on the stock exchange directly via issuing bonds in the form of zero principal bonds. The bond would be funding a social project of the organization and hence, the tenure of the bond would be equal to the project’s duration. This option can help get funds from CSR spenders and philanthropists easily.
Pay-for-success models: Lending partners could grant the organization funding for social ventures and assess the impact of the social project. The method also acts as a check-and-balance to make sure accountable use of capital.
Social venture funds: Such funds are already being used to issue units of social ventures to investors.
For organizations that are ‘for-profit’ social enterprises too, the aforementioned methods can be used to raise capital. In addition, equity listings can also be used to raise money. After agreeing to mandatory requirements, for-profit enterprises would be listed on the social stock exchange to raise funds.
Social stock exchange ecosystem in India
In addition to the 2019 Budget, the 2021 Economic Survey also highlighted the concept of social stock exchange in India under SEBI’s ambit. As per the report, a framework would have to be developed for bringing non-profit and for-profit social organizations on board the social stock exchange. Until 24th Dec 2020, eight mutual funds have been launched in India in the realm of Environment and Social Governance (ESG).
It is also important to note that Green Bonds have already been listed on the stock exchange as of 2017 which allows investors to invest in ‘green’ firms.
The report has recommended that organizations carry out intensive, thoughtful social impact reporting. Over time, social auditors would also perform unbiased and independent impact reporting.
It has also been recommended that investors be given lucrative tax exemptions and benefits to boost the reception of these funding models for non-profit organizations.
The panel has also suggested setting up a self-regulatory organisation that would provide credible and standardized information about the organization.
Investing in 'green' firms is allowed as of 2017, the year green bonds got listed on the stock exchange. Click To TweetBottom line
Social welfare and non-profit organizations in the country are severely cash-strapped and scouring for funds at frequent intervals. A groundbreaking move like setting up a social stock exchange can play an important role for such organizations and help them raise money for social good.
