Dr. Ujwala Bendale
Dean and I/c Principal of Bharati Vidyapeeth (Deemed to be) University, New Law College, Pune, India
Adv. Satya Singh
Student of L.L.M from Bharati Vidyapeeth (Deemed to be) University, New Law College, Pune, India
Mr. Gaurav Mishra
Assistant Professor in Bharati Vidyapeeth (Deemed to be) University, New Law College, Pune, India
INTRODUCTION
Fundraising and financial assistance are two of the most crucial yet challenging factors for the growth of the social enterprise landscape in India. This is primarily because investors view social fundraising as a form of charity and not from a business perspective. Moreover, a significant number of social enterprises in India are not registered and do not have legal recognition and the investors are unsure about the long-term financial viability of such enterprises and whether such enterprises are capable of generating high profits and high returns for the investor. Hence, the social enterprise sector in India continues to suffer due to the absence of an effective financial investment framework.1
To boost the social enterprise sector in India and achieve social welfare objectives, the Finance Minister, in the budget speech 2019-20, proposed the establishment of an electronic fund raising platform called the social stock exchange (SSE), under the ambit of Securities and Exchange Board of India (SEBI). The purpose of establishing SSE is to allow social enterprises and other voluntary organizations to raise capital as equity or debt, similar to the traditional stick exchanges.2 Therefore, SEBI subsequently appointed a Working Group (WG) to provide recommendations and set up a framework for social stock exchange in India. This article discusses in-depth about the social stock exchange framework in India, its benefits and the recommendations of the WG.
What is a Social Stock Exchange?
Social stock exchange (SSE) is a specialised stock exchange specifically for social startups or social enterprises where retail investors can invest in companies working on a social cause. It is described as an electronic platform that allows social enterprises to raise investments through alternate fund-raising methods.3 Similar to traditional stock exchanges, social enterprises, including both non-profit and for-profit organisations can get themselves registered on the social stock exchange. However, the key eligibility criteria to register on the stock exchange is that social enterprises have to successfully demonstrate their social vision. Moreover, such enterprises shall have a financially viable business model that reinvests most of its earnings back into the business to achieve the social vision.4
Recommendations of the SEBI SSE Working Group
The SEBI Working Group broadly suggested recognising two types of social enterprises that can get registered on social stock exchange – for-profit social enterprises and non-profit social enterprises. Moreover, the SSE should be set up under the ambit of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The purpose is to provide SSE the benefits of existing infrastructure and client relationships, allowing them to smoothly onboard social enterprises, investors and donors.5
Moreover, the WG described the two key roles of SSE. The first role is to set up fundraising instruments and structure for social enterprises. As per the structure, fundraising instruments for FPOs will be equity and Social Venture Funds (SVFs). For NPOs, fundraising instruments will be zero coupon zero principal bonds, SVFs, and Mutual Funds (MFs). They will also be allowed to issue various pay-for-success structures and other securities. However, Section 8 companies6 will be able to raise funds through two modes – equity and debt.
The second role of the SSE is to act as a catalyst or medium for the holistic development of the social sector landscape in India. A capacity building unit will be created to implement reporting standards for social enterprises. The following are some of the key recommendations by the WG:
1. Activating and Mainstreaming Social Capital and Available Funding Infrastructure for NPOs:
The WG recommends listing zero coupon zero principal bonds on the SSE to seek funds from donors, philanthropists and organisations spending corporate social responsibility (CSR) funds. It further recommended the listing of existing instruments, namely, SVFs and MFs, on the SSE.
2. Implementing Common Minimum Standards
The WG further recommended implementation of common minimum standards for social enterprises related to social impact reporting and governance and financial disclosure. This will help maintain uniformity.
3. No Social Enterprises Legal Definition
Since there are multiple enterprise models working in the social sector in India, the WG recommended that there should be no particular legal definition for for-profit social enterprises. Instead, the enterprises should self-declare whether they want to fall under the category of social enterprises. In case the enterprises decide to declare themselves as social enterprises, they will have to consent to additional social impact reporting.
4. Minimum Standard for Financial and Impact Reporting
According to this recommendation, both NPOs and FPOs will have to follow a minimum reporting standard for intent, impact scorecard, and financial details. While the NPOs have the liberty to self-report, the FPOs shall follow an assessment mechanism formulated by SEBI.
5. Regulatory Changes
One of the most prominent challenges in the Indian social sector is the cumbersome registration process for non-profit organisations. The WG recommended that 12A, 12AA and 80G certifications should be fast-tracked for NPOs. Moreover, the limit for charitable institutions to raise funds through commercial or semi-commercial activities should be increased from 20% to 50%. This step is likely to promote a supportive and sustainable environment for the non-profit sector.
Analysis of Social Stock Exchange in India
Indian or foreign investors hardly invest in social enterprises to fund their pre-seed or early- stage investing.7 The implementation of a social stock exchange will allow investments from retail investors, thus improving financial growth of the sector. This is called impact investment which helps investors invest in social causes that they believe in and generate returns. The implementation of social stock exchange in India will bring together various stakeholders, including social entrepreneurs, investors, government and regulatory authorities and foster a collaborative environment for the development of the social sector in India. Moreover, leveraging the existing infrastructure of traditional stock exchanges will not only boost credibility for SSE but also strengthen partnerships, leading to increased investments and growth of SSEs. However, the most important factor that will make the implementation of social stock exchange a success is the measurement of social impact. Impact reporting will encourage more investors to register on social stock exchanges.
CONCLUSION
The SEBI framework of SSE and the recommendations of the technical group and the working group explain that SSE will also allow both for-profit and non-profit social enterprises to raise funds through impact investment, corporate social responsibility spendings and government funding.8 Moreover, certified agencies will be set up for the purpose of conducting social impact tests for listings. The step to set up the social stock exchange will be highly beneficial for the Indian social sector landscape and help India achieve its sustainable development goals. However, the effective functioning of the social stock exchange will involve several challenges such as measuring the impact of social enterprises and defining and implementing standard guidelines for financial reporting. Linking the infrastructure of the existing stock exchanges to the social stock exchanges can boost SSE’s credibility and build investors’ trust. However, even though a partnership is recommended between traditional stock exchanges, the social stock exchange should have independent decision-making authority and independent leadership.
