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Business News/ Opinion / Views/  Social stock exchanges offer us a chance to invest in our future
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Social stock exchanges offer us a chance to invest in our future

Our Sebi-proposed SSE can enable the funding of meaningful projects if launched in the right spirit

Investments that offer immediate financial returns are considered important to economic growth and have many backers (Photo: Mint)Premium
Investments that offer immediate financial returns are considered important to economic growth and have many backers (Photo: Mint)

The lure of financial markets can be tempting. Investments that offer immediate financial returns are considered important to economic growth and have many backers. However, the stable and healthy social and ecological foundations that permit this to happen and have longer term impacts often find little support, increasingly even from governments. A mechanism that allows for structured investments in the country’s long-term future would be great, wouldn’t it?

In this context, the Securities and Exchange Board of India (Sebi) constituted a 15-member working group on a social stock exchange (SSE) in September 2019. India has at least 3.1 million non-profit organizations (NPOs), more than double the number of schools and 250 times the number of government hospitals, according to an estimate in a June 2020 report by Sebi’s SSE working group. Broadly, the idea behind the exchange is to enable NPOs to raise money from the market by registering and listing on the SSE. To do so, NPOs would have to establish “primacy of social impact" as well as demonstrate the measurability of their efforts. At the same time, the SSE would be meaningful for donors and investors as it would enable the use of market instruments for investing in social endeavours, offer access to information and allow visibility on the impact of their contributions.

What could it enable and what do these proposals change? What are the proposals’ risks in their current form?

An SSE might encourage individuals and organizations to donate a lot more to NPOs than happens via the corporate social responsibility route today. For instance, the working group has proposed that first-time retail investors be allowed to avail a 100% tax exemption on a maximum investment of 1 lakh in an SSE mutual fund. It has also proposed doing away with the 10% cap on income eligible for deduction under 80G, for donations to NPOs that benefit from the SSE. In a best-case scenario, the SSE would boost both corporate and individual investments in social and ecological projects, two aspects that profit-driven financial markets are weak at addressing but act as a foundation for prosperity. Imagine thousands of Indians enabling hundreds of 1,000-acre forests with local community participation and livelihoods built around local agro-forestry produce and experiences.

Apart from NPOs, the SSE is also meant to aid for-profit social enterprises (FPEs) keen to raise funds. The working group has not defined an FPE; its logic is that enterprises should be able to “choose whether they want to be categorised as a social enterprise, and consequently commit to additional reporting on social impact". A report by the SSE technical group (distinct from the working group), however, notes that an FPE can list on the stock exchange “provided it is a company registered under the Companies Act 1956/2013 and complies with the requirements in terms of SEBI Regulations for issuance and listing of equity or debt securities".

It appears that any organization “in corporate form, partnership or sole-proprietorship firm" that creates a social impact as part of its business can be considered an FPE. This is a grey area and could be potentially misused, even possibly reduce the flow of funds to NPOs. It could end up as a tax-saving vehicle, given that the working group has proposed a five-year tax holiday for FPEs listed on the SSE.

The SSE seeks to give the NPO sector transparency by mandating increased financial, social and governance reporting. While this in itself is a good aim, mechanisms that are dependent on information risk leaving out smaller NPOs from the SSE’s ambit. It also risks alienating organizations whose effort and/or impact may not be amenable to adequate data-capture. For instance, NPOs involved in environmental justice, digital rights or other areas where the existing systems and processes are stacked against them. The working group’s proposals ask that NPOs furnish “more refined statements of intent, more rigorous assessments of the social impact, shift towards outcomes-oriented measurement, granular disclosures of governance mechanisms and financial operations". It notes that “difficulties of measuring outcomes have, in practice, been overcome to some extent by funding platforms such as GiveIndia and GuideStar". It also places emphasis on the role of social auditors for the “independent verification of such reporting". While the SSE technical group lays down protocols for social auditors, the worry is that middlemen agencies might emerge. Such agencies may gain unchecked influence over the SSE-NPO-donor ecosystem, given the proposals’ inadequacy of regulatory checks and balances. This could go against the spirit of the idea.

The tightrope between regulating NPOs to restrain misuse of the flexibility they are given and allowing for a wider set of fund-raisers that go beyond a narrow set of quickly measurable outcomes is a tough one, and needs a fair amount of work as the plan rolls out. As of now, the concept of a Social Stock Exchange only exists on paper. It’s a worthy idea, but still needs deliberation and consultations with all stakeholders. Its realization and eventual value to these stakeholders, especially to NPOs, will depend on some of these critical choices made at the onset.

Sameer Shisodia is chief executive officer of Rainmatter Foundation

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Published: 31 Aug 2021, 10:33 PM IST
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