By Dr R Balasubramaniam, Chairman, SEBI Social Stock Exchange Advisory Committee, India
UNDP estimates that India needs USD 1 trillion per year to meet the UN Sustainable Development Goals by 2030, and has a funding gap of USD 560 billion per year. As the Government alone may not be able to mobilise resources on this scale, it may look to enlist the support of the private sector and High Net Worth Individuals (HNI).
Social enterprises, development sector organizations, not-for-profits, NGOs and civil society organisations (CSOs) aim to bring about a positive change in society. However, their efforts to convert intent into impact are often constrained by a lack of capital, as well as by lack of sustained access to this capital. Could a social stock exchange (SSE) be the answer?
What are SSEs and why do we need them?
SSEs are trading platforms that allow social businesses and non-profits to raise capital by attracting ethical investors willing to invest in organisations that have a dual corporate and social mission.
At present, the social-development sector in India receives funding through multiple sources spanning corporate social responsibility (CSR), philanthropy, government funding and retail charity. An SSE would attempt to bring coherence across to diverse platforms with uniform frameworks of funding, utilisation, impact-creation, measurement, disclosures, and reporting.
With this in mind, and with an aim to enhance the ability of social enterprises and voluntary organisations to raise capital through debt, equity and/or mutual funds, India’s Finance Minister announced plans to set up an India-based SSE in 2019.
The progress to date
As of April 2023, the Indian SSE was set up in both the National Stock Exchange (NSE) and the BSE (formerly known as the Bombay Stock Exchange).
Work by a broad range of stakeholders to prepare the three key building blocks of this social trading platform is now underway, with the Government having the key role of the market maker and influencer:
- Demand side ecosystem – social organisations
- Supply side ecosystem – investors,
- and Infrastructure – the SSEand its intermediaries
However, for both investors and stock exchanges, finding the right investment and the right instrument is a complex task. To ensure that this is done correctly, the government-appointed SSE regulator (the Securities and Exchange Board of India (SEBI)) has set up an Advisory Committee to help create the ecosystem, to guide those involved and to oversee the functioning of the SSEs.
To date, a few financial instruments have been approved and notified:
- Mutual funds, where the returns on the parked capital (principal) would fund activities of social organisations, while the principal amount is potentially redeemable.
- Social impact funds, with two working models of 100% grant-in/grant-out model and a 25% grant-in/grant-out model also permitted.
- A new instrument called Zero Coupon Zero Principal (ZCZP) bonds has been conceived and approved. These have a zero coupon and no principal payment at maturity and may be issued to NPOs for social development projects/activities, in which the NPO has demonstrated expertise. ZCZP may not offer financial returns to the investor like conventional investment instruments, but they come with the promise of a social return on the investment to the funder.
Scaling up infrastructure and capacities
Creating a facilitatory ecosystem, especially in a situation where 90% of the organisations that can potentially participate are small with limited resources, is another real challenge.
Building this ecosystem and developing the capacities of participating stakeholders is a continuous process. Towards this goal, a ten-million-rupee Capacity Building Fund now exists with contributions from the National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI).
Validating social impact requires a rigorous social audit measurement framework and trained social impact assessors. Apart from creating a new cadre of jobs, it is necessary to ensure a harmonised process of social audit and augment transparency and accountability standards within the social sector. As such, the National Institutes of Securities Markets (NISM) is offering a training-cum-certification programme for social auditors.
Making SSEs succeed is hard and drawn-out work – but if India wants to ensure that investments in human capital stay a priority in this post-Covid era, it needs the various stakeholders – government, investors, businesses, financial intermediaries, regulators, philanthropic organisations, and NGOs – to partner, collaborate and co-invest.
SSEs are a unique and novel mechanism for socially conscious enterprises and non-profits to access an alternative funding mechanism that is reliable and subject to public scrutiny. In India particularly, an SSE could go a long way towards inculcating professionalism, objectivity and a culture of tracking, measuring, documenting, and reporting the social impact they are creating. The transparency and the opportunity to impact social change at scale is a clear win-win for all stakeholders in the ecosystem.
Dr R Balasubramaniam is a development activist and the Chairperson of the SSE Advisory Committee set up by SEBI. More about him is at drrbalu.com
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