Social stock exchanges (SSEs) proposed in the Union budget will act as crowd-sourcing platforms for fund-raising by non-profit entities aimed at impact investment and transparency, a government official aware of the matter said. The word ‘exchange’ aims to ensure it is regulated by the Securities and Exchange Board of India (Sebi), the official said on condition of anonymity.
SSEs exist in several countries in various forms but there is no clarity about the Indian version yet on trading, tax benefit transferability and accountability of third parties availing of funds raised from this platform. There is also some confusion on whether the ‘exchange' will involve trading in securities issued by non-profit bodies.
“Usage of ‘exchange’ and being regulated by Sebi may cause mixed messaging about whether donations to non-profit bodies will be converted into securities and traded," said a regulatory official who did not want to be named.
Such securities do not offer financial returns apart from the social impact return and the transferability of tax relief availed of by donors is in doubt, he said. “The ministry and Sebi will examine whether there should be any trading on this platform or not. If at all there will be trading in these, it would happen through the Institutional Trading Platform. Additional checks would be built in to ensure that this is available to only savvy investors. NITI Aayog would be asked to help draft an accountability framework for third parties and entities listing on the platform," said the government official mentioned above.
“The concept of making a donation and later exiting is flawed as this will stall new donations. If a third-party purchases the donation receipt/security from the initial donor, the money does not go into the social project but merely underwrites the initial donor," according to an official with a global exchange. Taxation is another concern. At present, tax breaks are given for donations to social initiatives but these are not transferable. “The finance ministry may bring about amendments so that securities received by the investor upon donation will be attributed to “flow-through shares" so that the tax break will be given to the NGO, which in turn will pass it on to the investors," said the regulatory official. The idea to have a transparent fund raising based on impact investment is being hailed by activists.
Nobel laureate Kailash Satyarthi tweeted, “I welcome the proposal for setting up a Social Stock Exchange under Sebi. This will be a shot in the arm for social organisations to mobilise funds for the good of the society. It is an innovative and concrete step towards inclusive growth."
Social Venture Connexion of Canada opened in 2013 and is backed by the respective provincial government. The British SSE does not provide share trading facility directly but provides a database of companies that have passed a rigorous “social impact test" while at the same time acting as a research resource for would-be social investors. 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.
Impact investing in India began in earnest in 2001 with the establishment of Aavishkar, India’s first for-profit impact fund, alongside the entry of the non-profit Acumen Fund.
According to Brookings India, 67% of impact investors beat Sensex returns, with nearly 42% of surveyed investors stating they received returns above 20% in 2018. Another 25% of impact investors achieved returns in the 15-20% range, 8% of impact investors achieved returns between 10-15% and 25% of impact investors achieved below market returns of between 5-10%. Half of the impact investors in India had average investments above $20 million for the current financial year.