Home >Opinion >Quick Edit >Will welfare bonds work?

On Monday, a committee set up by India’s regulator of capital markets, the Securities and Exchange Board of India (Sebi) issued a proposal that would enable non-government organisations (NGOs) and social welfare entities to raise funds by issuing bonds that would be listed for public trading. Finance Minister Nirmala Sitharaman had in last year’s Union budget announced a plan to set up a so-called social stock exchange (SSE) under Sebi to help social enterprises access capital just as private companies do. The trading platform envisioned by the government could let investors subscribe to—and trade—the debt of organizations that are vetted by it. This is expected to lend transparency to a sector that has often seen NGOs under the scanner for shady sources of finance.

At one level, how well the idea works in aiding welfare projects would depend on how fair the process of financial intermediation is. The panel has proposed minimum reporting standards for organisations that raise funds via the exchange. The purpose of the money sought would have to be explained, of course, and profit is not meant to be the goal. There will be audits of their accounts, too. Such measures should help firm up investor confidence.

At another level, the idea’s success from a social perspective will depend on the kind of entities it attracts. Bond issuance means the scheme expects a listed body to generate revenues and repay its borrowings. Not all welfare organizations operate like companies, however, and so several NGOs that rely only on donations may not want to participate, unless they are ready to indebt themselves. Then there is also the paradox of generosity. Do-gooders that falter in repaying their loans could see the traded value of their paper fall, raising yields and thus the market rate at which they can borrow. This would reward those that generate money to repay investors and punish those that are too generous to their beneficiaries.

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