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Photo: Reuters
Photo: Reuters

Opinion | A guide to the proposed social stock exchange for NGOs

Do-gooders that meet reporting standards may find a variety of new ways to raise funds for their work

Recently, a committee constituted by the Securities and Exchange Board of India (Sebi) submitted its recommendations on the creation of a social stock exchange (SSE). It will soon become clear which of these are accepted by Sebi and the relevant ministries of the government.

The committee hoped to do more than create a matchmaking platform for donors and non-profit and non-governmental organizations (NGOs). It took a holistic approach towards the overall development of the social sector, and so its recommendations cover a broad range of areas.

At the outset, it is important to highlight that the recommendations do not affect the current ways that NGOs work, nor their existing avenues of fund-raising. They relate to additional instruments and means for raising funds. These can also help improve the visibility of NGOs, and build greater recognition and trust in the sector among funders and the wider community.

Secondly, several recommendations will benefit all NGOs, whether or not they raise money through the SSE platform. Specifically, the suggestions that go beyond new funding avenues for NGOs, and aim at the creation of a supportive environment for them, including: one, encouraging institutions like information repositories on NGOs (like GuideStar, BSE Samman, etc.) and social auditors for impact measurement; and, two, introducing standard reporting norms and impact measurement for NGOs that seek to raise money through the SSE. The committee has also recommended tax benefits and regulatory clarifications.

While the report lays out several funding instruments and structures for NGOs, its three key avenues for fund-raising are mutual funds, social venture funds, and zero-coupon-zero-principal bonds. To benefit from these, NGOs can:

One, approach a mutual fund house to promote a fund whose interest/returns its investors can donate to NGOs. An example of this is the HDFC MF Cancer Fund. Its investors get their money back from HDFC MF, but any interest or gains that are made are donated to select NGOs.

Two, keep track of how social venture funds (SVFs) are developing. Sebi’s alternative investment fund guidelines permit SVFs to function as “grants-in, grants-out" vehicles for charitable purposes. The committee wants these popularized and encouraged for the NGO sector. Under this, a fund manager will pool grants from several donors and on-grant them to NGOs working in the SVF’s area of interest. As this idea gains momentum, NGOs working in areas specified by such a fund’s objectives should be able to reach out to it and ask to be considered for inclusion in its list of organisations eligible for grants.

Three, consider directly “listing" on the SSE with a zero-coupon-zero principal (ZCZP) bond. A ZCZP bond works the same way as a donation. “Investors" will fund the NGO based on its overall objectives or plan for a specific project and the social impact it will create. NGOs do not need to return the money or pay any interest on it. Because it is a bond, it becomes an instrument that can be listed on the exchange, providing the NGO both high visibility and credibility.

NGOs that use the SSE to raise funds will need to report the social impact they create, using a specified framework. This has been kept very simple, and most well established NGOs will find it easy to comply. A key purpose of any exchange is to reduce information asymmetry between funders and recipients. A consistent easy-to-understand format for information on and analysis of impact will help donors make decisions, boost transparency, and build public confidence in the sector. NGOs should also consider getting external organisations to help them measure social impact. While this won’t be mandatory at first, it will help them prepare; impact measurement will gradually become more sophisticated over the years, as third-party impact measuring agencies or “social auditors" emerge.

Fund-raising on an SSE enables NGOs to get more publicity for their work, enabling them to attract a wider pool of donors. It can also help them enhance their reputation as leaders in the sector. Early movers will contribute to setting standards on reporting and impact measurement, and help build confidence in India’s non-profit sector.

Even if NGOs do not seek to use the new SSE platform in the near term, they can stay abreast of the way the social impact measurement and reporting framework develops and try adopting it. The framework recommended by the committee is easy to implement and flexible enough to accommodate a wide range of NGO activities.

The committee has also recommended that the proposed SSE set up a capacity building unit, along with a fund with an initial allocation of 100 crore. This fund would prioritize support to smaller NGOs and help them create the capacity they would need to report their social impact and even partly fund the cost of this exercise. The unit will also raise awareness and promote the fund-raising instruments available on the SSE.

Several tax benefits and other supportive regulatory clarifications have also been recommended by the committee. If implemented, all these proposals could help the country lay an inclusive foundation for social finance and boost the funding of this sector over the years to come.

Roopa Kudva is managing director, Omidyar Network India

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