The Securities and Exchange Board of India (SEBI) recently received a report from its technical group on Social Stock Exchanges (SSEs). The technical group, chaired by Harsh Bhanwala, former chairman of NABARD, was established in September 2020. This followed a June 2020 report from the Working Group (WG) on the SSE, chaired by Ishaat Hussain.
Introduction to Social Stock Exchanges
The concept of the Social Stock Exchange, which would allow social enterprises, voluntary groups, and welfare organizations to list and raise capital, was proposed during the 2019-20 Union Budget. These non-loss, non-dividend paying entities are designed to address specific social issues. Such exchanges exist in other countries, including Singapore, UK, and Canada, and they facilitate the raising of capital for firms in sectors like health, environment, and transportation.
Understanding the Recommendations of the Technical Group
The group’s report includes several key recommendations for the governance of SSEs. It identifies certain types of organizations that should be excluded from raising funds through this platform, such as political and religious bodies, trade organizations, and corporate foundations.
Eligibility Criteria for SSEs
To be eligible for listing on the SSE, For Profit Enterprises (FPE) and Not for Profit Organizations (NPO) must demonstrate their primary goals involve social intent and impact. Listed entities will need to produce an annual social impact report detailing their strategic intent and planning, approach, and impact scorecard.
Raising Funds in Different Ways
The group’s report outlines various fundraising methods for NPOs and FPEs. NPOs could raise funds through equity, zero coupon zero principal bonds, development impact bonds, social impact funds with 100% grants-in grants out provision, and investor donations via mutual funds. FPEs could utilize equity, debt, development impact bonds, and social venture funds.
NPO and FPE Activities
Social enterprises can engage in a broad range of activities. These include eradicating hunger, poverty, malnutrition and inequality; promoting health care and sanitation; ensuring safe drinking water; promoting education, employability and livelihoods; advancing gender equality and empowerment of marginalized communities; fostering environmental sustainability and climate change action; developing livelihoods for the rural and urban poor; and supporting slum area development and affordable housing initiatives.
The Importance of SSEs in Post-Pandemic Economic Recovery
In light of the economic effects of the Covid-19 pandemic, it’s more important than ever to develop innovative ways of ensuring uninterrupted capital flow to the social sector. SSEs create institutional support that encourages more investors to consider environmental, social, and governance aspects when evaluating enterprises, rather than focusing solely on financial statements.
Creating an Enabling Regulatory Environment
Regulatory efforts must focus on establishing a conducive environment for the planned SSE, whilst minimizing the compliance burden on enterprises, social entrepreneurs, and investors. This is crucial to the effectiveness and success of the exchange.
