By: Priyanka Limaye
Introduction
During the announcement of the Union Budget 2019-20, the Finance Minister of India introduced the prospect of an electronic fund-raising platform- Social Stock Exchange (SSE). She conceptualized SSE as a forum to list enterprises and voluntary organisations working for social welfare to raise capital as equity, debt or as mutual funds. The said forum is proposed to come under the ambit of the Securities and Exchange Board of India (SEBI). While this move isn’t unprecedented, it was bold to imagine it in an Indian setup. Despite the lack of clarity and the structure unclear, the aim was intelligible – to take the Indian capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion.
Following the announcement, during the budget presentation, an expert panel was set up by Securities and Exchange Board of India in September 2019. This working group was set up to evaluate the prospect of introducing such an Exchange and give recommendations on its working and implementation. The report was published on 1st June 2020.
The concept of a social stock exchange (SSE) sparked several crucial questions as to what the framework would look like, what does one mean by social enterprises , who are the real beneficiaries and numerous concerns about the feasibility and efficacy of such a strategy were raised.
Although the panel acknowledged that the report is the first important phase for a very long journey and more had to be done in the subsequent years, the critics welcomed the government for the concept and the recommendations that followed.
Report by the Working Group–
The panel is of the opinion that the launch of a systematic regulatory structure will enable investors and donors to contribute to India’s spending on the social sector. In response to the specific challenges raised by the Covid-19 pandemic, it would increase the potential of private enterprise by encouraging the injection of private sector resources in the fields of education, health and agriculture.
Proposed Framework, Structure and Mechanism
The report recommends the creation of a separate SSE segment within the existing stock exchanges. A set of predetermined listing criteria would filter out entities that consistently generate measurable social impacts and report such impacts. The For Profit Enterprises (FPE) and Non Profit Organisations (NPO) would be subject to a common minimum governance standard for reporting on social impacts and operating practices, including financial reporting. It is expected that the emphasis on transparency in the listing obligations will gradually lead to a viable ecosystem for raising capital in the service of the social sector.
The report recognized the distinction between FPEs and NPOs. The distinction between the two categories of social enterprises lies in the ability of FPEs to raise equity and to make profits. FPEs include companies registered under the Companies Act, sole proprietorships, partnership companies, HUFs and limited liability partnerships. Section 8 Companies in this regard have been included within the NPOs.
According to the report, the definition of a social enterprise would require a minimum reporting standard for beneficiaries for the immediate term of the SSE. The framework would demonstrate a clear intention on the part of both FPEs and NPOs to create ‘positive social impacts’ in the areas of the environment, society and governance. Moreover, there will be an additional requirement for FPEs to conform to the assessment mechanism which will be developed by SEBI. The framework would identify the social problem to be addressed and calculate the intensity of the social impact on the median individual of the target segment by taking into account income, social equity and diversity. In addition to its registrations and licenses, the social enterprise would also have to provide relevant information on the members of its governing body, its prior history of financing and its financial health.
The social impact assessment would be carried out through the beneficiary’s lenses. While the instruments directly listed on the SSE will fall within the scope of SEBI’s regulatory jurisdiction, the NPOs will continue to operate outside the scope of SEBI’s jurisdiction. The intervention of other regulatory bodies will therefore also be required in order to exercise supervision. Social impact from a beneficiary’s perspective is inherently difficult to measure because it cannot be readily expressed in monetary terms. The panel, afteranalysing different frameworks for measuring social impact , came to the conclusion that evolution of a standardised framework will take a few years as India, having a fledgling ecosystem, lacks the players who will implement such a measure.
The panel also recommends the creation of a database of information providers to keep track of the activities of NPOs, including the SSE compliance requirements. However, registration with intermediaries will not be compulsory for NPOs.
Funding Structure
NPOs face restrictions, by law, on their ability to issue equity , debt or units. Section 8 companies also have faced hurdles in fund-raising due to their inability to provide financial returns on investments. Trusts and societies are not body corporates under the Companies Act, and hence, in the present legal framework, any bonds or debentures issued by them cannot qualify as securities under the Securities Contracts (Regulation) Act 1956 (SCRA). The panel recommended the utilization of zero coupon zero principal bonds.
These bonds will be listed on the SSE and will carry a tenure equal to the duration of the project that is being funded, and at tenure, they will be written off the investee’s books. Under this framework, investors will be encouraged to route their financial resources only to NPOs with a proven record of social impact. Intermediaries will certify the NPO track record, although such registration with the intermediary may not be mandated. SEBI and the stock exchanges have been urged to introduce compliance procedural standards, including the provision of sanctions to regulate the financing of NPOs. Furthermore, investors in zero coupon zero principal bonds may also be awarded a tax benefit to incentivize their participation in this instrument.
The funding structures envisioned for NPOs, such as the Social Venture Fund, may also be used under the pay-for-success model. In these structures, conventional capital coming from institutional investors or banking institutions, would combine with social capital coming from philanthropic foundations or CSR spends or impact investors, to fund a specific NPO or a group of NPOs. Conventional capital would bear some risk as it would only earn a return if social impact is demonstrably created. That is the pay-for-success part. As a result, the NPO beneficiaries are incentivized to perform and gain credibility, or else risk considerations would prevent them from being able to use such structures to finance themselves.
It would require SEBI to provide a mechanism for social auditors to objectively assess the self-reported social impact of the FPEs.
In order to provide an impetus for the above-mentioned fund-raising mechanisms and to create a vibrant market for social investments, the Panel recommended that all revenue generated by stock exchanges through the SSE route be made tax-deductible. It has proposed exemptions for investors from paying Securities Transaction Tax for trades made on SSE, from paying Capital Gains Tax on long term capital gains accruing from the sale of securities in the SSE. Philanthropic donors could claim 100% tax exemption for their donations to all NPOs that benefit from the SSE. Corporates will be allowed to deduct CSR expenditure that goes to the SSE from their taxable income. In addition to this, the panel also recommended that the revenue generated by the stock exchange through SSE be tax deductible.
Critical Analysis
While the Report presents an idealistic scenario, where India has the ability to nurture the ecosystem required for such an exchange, it does not answer questions of all the intricacies involved in the functioning of the platform.
Given the societal and market idiosyncrasies and the presence of historically divided society in India, operationalizing an exchange directing capital to socially embedded causes has its own set of challenges.
Firstly, the report acknowledges the fact that a Social Stock Exchange would require a different environment for its growth considering the societal nature of its operation yet recommends that it be incorporated within the existing stock exchanges ie; Bombay Stock Exchange and/or National Stock Exchange. As a consequence of this, SEBI will act as a regulating body. A number of modifications will have to be made in regard to its aims and functions. This will lead to an immense burden on the already swamped SEBI which has a list of powers and functions that it is supposed to perform. This additional responsibility will include creating awareness among investors for stimulating the growth and development of SSE.
Secondly, the report fails to provide palpable definitions of terms like ‘social enterprise’. With a varied range of enterprises and organisations working to deliver social good, it is imperative to clearly define the outline of a social enterprise. The working group, in its recommendations, emphasized upon the fact that there is diversity of interpretations as far as the meaning and scope of ‘for-profit social enterprises’ is concerned. This would lead to a massive confusion and constant reconsideration. From ideating on their governance and organisational structure to identifying a list of services they can provide, all of it would have to be clearly defined upfront.
Thirdly, the SSE would have to clearly delineate to the financial instruments that would be traded to investors and impact issuers. In addition to this, trading of securities and tax related regulations must be clearly put in place. The Working Group’s recommendations provide for tax incentives to invest in a social enterprise. However, the 2020-2021 Union budget mandates that non-profit organizations will have to apply every five years for income tax registration to determine their charitable status and that they will also need to renew their 80(G) certificate providing donors with tax relief. After the expiry of the five-year period, both the institution and the investor would be subject to uncertainty as to the tax exemptions that the subsequent period of non-registration would entail. This would leave investors and institutions prone to uncertainty. It is required that the tax laws in India relating to the social sector are synchronised and integrated to attract both investors and investees with the required incentives.
Fourthly, coming up with a platform which hosts both for-profit and not for-profit organisations is bound to create confusion among the investors, especially retail investors who account for more than 38% of the equity market in India. This can result in SSE losing its appeal.
Lastly, the SSE needs to focus on capacity building of social enterprises and listed organisations. This includes making them investment ready to be aligned with the needs of the transparent financial systems, equipping them etc.
Global Modes of Social Stock Exchange
The SSE concept has been around globally in many countries in various forms, each country carrying its own unique SSE features. SSE is a fast-maturing concept and functions differently suiting the needs of the domestic development sector. The growth in this area has been limited across jurisdictions which adds to its incredulity. While India seeks to propel its growth story in the social sector space, there are few models that can be emulated, availing their expertise and relevance in the Indian context.
Canada- SVX
Canada’s Social Venture Connexion (SVX), opened in 2013 and is backed by the Government of Ontario. It is an online platform that uses crowdfunding and private placement to support capital raising by impact ventures and funds. For social businesses and organisations, SVX allows to list organisations and its securities, customize their fundraising requirements and attract investors. It offers investment opportunities in the social sector. The investors and the issuers can manage their investments, with the help of SVX personnel, on the platform. They have a 24-hour access to all documents in one place and make transactions through the platform.
The sectors provided by SVX include clean technology, health and wellness, work and learning , food and social inclusion. The type of securities offered or made through SVX include common shares, preferred shares, bonds, convertible debentures and fund units.
They are currently registered as an Exempt Market Dealer in Ontario, Québec, Alberta, British Columbia, Saskatchewan, and Manitoba and the platform hosts impact ventures and funds based there which also includes not for profits, charities and for-profit businesses. The platform also reviews the impact the issuer creates and whether it meets SVX’s impact criteria. It uses Impact Reporting and Investment Standards (IRIS) metrics to evaluate impact.
On the investor front, only accredited investors are permitted access to SVX. These accredited investors include foundations and endowments, asset managers and wealth advisors. The platform weeds out investors who prioritize profit over any social gain by an investor agreement.
Singapore-IIX
Impact Investment Exchange opened in Singapore in 2013. This exchange is based on a crowdfunding model that allows social enterprises which are developed to raise capital by issuing securities to a larger group of investors on a public platform that facilitates trading in listed securities. IIX along with Stock Exchange of Mauritius (SEM) provides exposure to a global base of limited and accredited impact investors looking for transparent investment opportunities. The exchange focuses on energy, agriculture, education, healthcare and water.
IIX is regulated by the financial services commission and operated by SEM. It screens potential issues on the measurement of impact and its criteria and provides recommendations to SEM. In order to measure the impact, IIX uses the Social Return on Investment framework which measures how much social and environmental impact is created for every dollar invested. IIX also uses the IRIS metric. It also mandates issuers to appoint a representative to ensure the enterprises stay true to their commitments.
South Africa- SASIX
SASIX opened in 2006. The GreaterGood South Africa Trust’s initiative which was supported by Noah Financial Innovation’s Broking for Good Foundation, South African Social Investment Exchange (SASIX) was set up. Tied with the Johannesburg Stock Exchange, SASIX works like a conventional stock exchange allowing ethical investors to start investing from as little as Rand 50 (-INR 200) to, in turn, get a tax benefit. Investors can browse their website and select social businesses based on project type, sector and province. They can also keep track of the way the projects are being delivered and impact generated.
SASIX applies the same sort of assessment and due diligence considerations to projects as would be applied to financial investments. The platform seeks to increase the participation from the public, corporations and civil society in the social development of South Africa. The exchange ensures a level playing field by providing access to capital for small pioneering and remote organisations and investors who want to invest in one project or a portfolio of projects – by purchasing shares online or through the offices of the Greater Good South Africa Trust. In addition to this, GreaterGood South Africa provides analysis of the achieved outcomes and an assessment of the lessons learned at the end of the social investment cycle.
In case where the project is listed for more than twelve months without receiving enough funding, the project offering gets expired and the option of allocating the contribution to another SASIX project becomes available to the investor, in case the investor chooses to close his account in SASIX, the money in his account is allocated to the sector entity of his choice but is not returned as the investor has already received the tax benefits for the same. Fidentia Group is enabling the operations of SASIX by providing essential administrative, financial and trust fund management support services.
Started with an initial offering of 15 projects, SASIX has made a significant contribution to South African development with over R34.6 million (INR 13.84 crore) invested in 53 social development projects in over two years of its start with a focus on early childhood education, orphans and vulnerable children, food security, enterprise development, tho enlisted projects have shown measurable social impact.
United Kingdom- SSX
The Social Stock Exchange opened in June 2013. The social stock exchange in London serves as a directory listing down social organisations for investors to invest in. It does not facilitate trading of equity but acts as a research platform and helps connect potential impact investors with social organisations. It acts as an information provider, publishing standardised and comparable social impact data on listed organisations. For any organisation to be listed on the social stock exchange, it must be registered in the London Stock Exchange and has to successfully undergo a social impact test conducted by independent experts.
The social impact test is a stringent check on understanding whether the organisation has the potential to deliver viable returns and demonstrate how they will adhere to their own social and/or environmental mandates and missions. The social impact test measures the impact of organisations in terms of the social or environmental mission of the social business, target beneficiaries, details on business products, services and operations that deliver that social impact; stakeholder engagement and consultation plan ;evidence of social impact. means of collation, measurement and reporting of such impact.
Over time the UKs Social Stock Exchange has become a strong information repository with a base of 36-member companies and its members have raised GBP 400 million (INR 37,200 crore) for affordable housing, clean energy and healthcare facilities among other things.
Each country has a different perspective towards financing social enterprises. The UK SSE currently acts as an information provider to the general public, publishing standardized and comparable social impact data on its site. The Canadian SSE is probably the closest to a full-fledged stock exchange but is open only to institutional investors. Laudably, it is backed by the Government of Ontario, has objective valuation criteria to publish reports, and provides easy legal registration for social businesses. The Singapore SSE is similar to the Canadian one in terms of measurement criteria but is yet to qualify any companies for investment. Meanwhile, the South African SSE is more akin to an online matchmaking platform than an investment platform.
Future
The biggest problem among all of the social stock exchanges is the accreditation at all levels- investor, issuers, intermediaries etc. Necessary steps and concrete policies need to be formulated at the onset of the formation of a SSE. Social finance has a lot of stakeholders and it affects important decisions regarding allocation of creativity, capital, and entrepreneurship. It affects growth of new markets, business structures, and commodities within existing societies.
To institutionalise a viable SSE structure in India it is imperative to build a comprehensive ecosystem which enables both investors as well as investees holistically. This includes services such as legal advice, project selection and tax regulations. A dedicated support channel must be established to help social enterprises and organisations through the listing process, run continuous capacity building programmes and help them comply with the impact investment requirements among other areas. A well-defined SSE ecosystem would consist of lucid policies, investees familiar with impact investing, process of securities trading and potential investors who are well-informed and are willing to channelise their funds via an SSE.
To steer growth and functioning of an SSE in India, the roles of various stakeholders become essential. In building the capacity at the sector level to leverage the benefits of an SSE, the Government of India and its affiliated regulatory body would be of great value. As policy makers, they would enable transactions by providing tax related guidelines for both national and foreign investors. Their role would be to establish the regulatory and legal framework laying down the norms of listing for both investors and investees together with curating a common framework of social impact assessment and benchmarking it to global standards to integrate with international participants. In efforts to propel growth, the SSE government must establish an incentive structure for investors and also develop a network of service providers, advisors who can assist on large investments, building provisions for social financing and preparing sustainable business and financial models. It is equally important to establish a strong due diligence mechanism for potential investors and investees wanting to get listed.
While the regulator and the certifying body form a part of the governance structure, investors and investees would be important from an impact funding and impact issuance standpoint, respectively. Investees would constantly follow market trends and best practices on impact investments and leverage the SSE to raise capital through issuance of tradable securities. In ensuring a seamless listing process, investees would contribute towards complete disclosure during the due diligence process and strive to attain maximum impact ratings during and post listing of their social projects.
Conclusion-
As a concept, an SSE would shoulder enormous responsibility of streamlining capital inflow without compromising on benefits reaching those at the bottom of the pyramid. In its formative years, an SSE would need support and interest from institutional investors. Moreover, the government could create financial capacities by leveraging funding support from public financial institutions, social mutual funds to enable priority investments into this exchange. For enlisting entities on an SSE, the scope of participation should be broad in keeping with the ethos of openness of exchange, In reference to marking net worth threshold of entry, an SSE and its regulator must take cognisance of the financial landscape of social enterprises in the country and ensure that only the credible and sustainable entities reap the benefits.
In the last decade, over USD 100 billion cumulative impact investments have been mobilised in the social sector in India leading to a positive impact on over 450 million rural and semi-urban lives, generating employment and serving them through access to education, housing and better healthcare opportunities. The emergence of an SSE as a well-regulated platform holds a large opportunity to catalyse the impact of social investment thereby unlocking the unrealised potential of the industry and contributing to economic growth of the country. It is estimated that, in the next two years, if an SSE is able to facilitate around INR 500 crore of impact investments, more than 7 lakh lives could be directly impacted in the areas of affordable housing, clean energy, food and agriculture, financial inclusion and access to better healthcare. The impact investing space in India holds great promise to bring in additional finance to close the gap to be able to meet the United Nation’s ambitious Sustainable Development Goals (SDG) targets by 2030. With India striving to clock the USD 5 trillion GDP mark by 2025, it is imperative that social growth is widespread and inclusive at the same time.
(Priyanka is currently a law undergraduate at Indian Law Society’s Law College, Pune (ILS). The author may be contacted via mail at priyanka.limaye4@gmail.com)
Cite as: Priyanka Limaye, ‘Social Stock Exchange – The New Age Philanthropy’ (The RMLNLU Law Review Blog, 10 May 2021) <https://rmlnlulawreview.com/social-stock-exchange-the-new-age-philanthropy/> date of access
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