A Social Stock Exchange (SSE) functions as a regulated funding platform to allow social enterprises and voluntary organizations with a social purpose, to raise funds. The key objective of an SSE is to help improve access to capital for enterprises that seek to deliver a positive change in society. 

Globally, social investment platforms have been set up in a number of countries such as the UK, US, Brazil, South Africa and Canada. While akin in fundamental motives and objectives, these social investment platforms have taken unique formats in each country. For example, the SSE in the UK does not facilitate stock trading but serves as an information platform, providing information on enterprises listed on the London Stock Exchange which have passed its social impact test. On the other hand, the SASIX (South African Social Investment Exchange) in South Africa functions as a conventional stock exchange that allows investors to buy shares in social enterprises; investors can browse the SASIX and select social businesses based on project type, mission and location. 

Evolution of an SSE in India

In July 2019, during the announcement of the Union Budget FY19-20, India’s Finance Minister Nirmala Sitharaman proposed a social stock exchange to help enterprises and voluntary organizations working for social welfare raise capital through debt, equity or mutual funds. "It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion”, she said in parliament. The social stock exchange was proposed to be set up under the ambit of Securities Exchange Board of India (SEBI). The move was welcomed as a harbinger of greater inclusive growth and commitment to support social enterprises in India. 

Following this announcement, an expert panel was set up by SEBI in September 2019.  Under the chairmanship of Mr. Ishaat Hussain, Director at SBI Foundation and former Finance Director at Tata Sons, the committee’s objective was to suggest a feasible architecture and outline recommendations for setting up an SSE mechanism in India. The panel consisted of representatives of active stakeholders in the realm of social impact investing, Finance Ministry, stock exchanges and NGOs. The working group also conducted a series of consultations with various stakeholders including voluntary organizations, social enterprises and philanthropic organizations to compile their inputs. 

Working Group Report on the proposed SSE in India 

The panel released its comprehensive report on 1 June 2020. It sets out a structure for an SSE in India, recommending that it be housed under existing national exchanges such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). However, what is  interesting to note is that the report does not exclusively center around an architecture to facilitate capital exchange but adopts a more holistic approach to create an enabling ecosystem to spur the growth of the social impact sector in the country. 

At present, India has a number of avenues through which the social sector (non for profits and for-profit social enterprises) recieve funding. These are Corporate Social Responsibility (CSR), impact investing, Socially Responsible Investing (SRI), philanthropic/Government grants, amongst others. The SSE aims to achieve an integration of all these diverse avenues into a common national platform and establish a uniform framework in reporting and measuring financial and social returns. Thus, the SSE has an instrumental role to play in unlocking greater capital available for social impact funding by i) enhancing visibility of social enterprises, ii) institutionalizing innovating fund-raising instruments, and iii) building confidence amongst funders by formulating a common standard for reporting and evaluation. 

Proposed Avenues and Mechanisms for Fund-Raising 

The SSE aims to effectively deploy fundraising instruments and structures available under regulatory guidelines towards social enterprises. These instruments differ by the nature of social enterprise seeking funding i.e. the working group recognizes a distinction between for-profit enterprises (FPEs) and non-profit organizations (NPOs). 

For non-profit social enterprises (NPOs): 

• Zero coupon zero principal bonds: Allowing NPOs to directly list on the SSE through issuance of bonds in the form of zero coupon or zero principal bonds. This is a feasible option to unlock funds from donors, philanthropic foundations and CSR spenders. These bonds would carry a tenure equal to the duration of the project that is being funded, and at tenure, they would be written off the investee’s books.
• Social Venture Funds (SVF): An SVF is a category 1 Alternative Investment Fund (AIF) that is already allowed by SEBI to issue securities or units of social ventures to investors. 
• Mutual funds: An asset management company could offer closed-end mutual fund units to investors. The units could be redeemable in principal terms, but all of the returns could be channelled towards suitably chosen NPOs by the fund which acts as the intermediary. 
• Pay-for-success models: Pay-for-success models through lending partners or through grants are highlighted as effective mechanisms to ensure a more efficient and accountable deployment of capital. While these structures differ in detail, the key idea in all of them is the need for a specialized class of intermediaries to channel capital to NPOs and have an independent evaluator to assess impact. This model is also proposed for CSR funding. 

These kinds of structures already exist in India in the form of Social/Development Impact Bonds. Social/Development Impact Bonds are based on multi-stakeholder models comprising of an investor, service provider, independent evaluator and an outcome payer. In the context of an SSE, the working group recommends that the investors be compensated by a new category of funders called “outcome funders”, who will pay out based on the social impact resulting from activities of the implementation agencies. Third-party evaluators will be employed to provide monitoring and evaluation to assess the impact of individual implementation agencies. 

For for-profit social enterprises (FPEs):  

• Equity listing: FPEs would list equity on the SSE subject to a set of listing requirements, including operating practices (financial reporting and governance) and social impact reporting. 
• Social Venture Funds (SVFs): AIFs and SVFs already exist for FPEs but do not require social impact reporting. The set-up of SSE would bring under the fold of the minimum reporting standard all FPEs that receive funding through the AIF/SVF channel. (Social impact reporting is highlighted in detail later in the article)

In addition, the funding structured highlighted above for NPOs could also be used for FPEs. 

COVID-19 Aid Fund

The working group acknowledges that the SSE has a unique role to play to revitalise sources of capital available to NPOs that are initiating COVID-19 relief efforts in the country. The report suggests that COVID-19 aid fund can be set up by SSE to activate solutions such as pay-for- success bonds and structured pooled loans with philanthropic foundations, CSR spenders and impact investors as outcome funders and domestic banks, Non-Banking Financial Corporations (NBFCs) and impact investors as lenders. 

Integrating CSR and SSE: How can CSR funds be deployed via the SSE? 

India is the first country in the world to make corporate social responsibility (CSR) mandatory. As per Section 135 of the Companies Act, companies with a net worth of INR 5 bn ($70 mn) or more, or an annual turnover of INR 10 bn ($140 million) or more, or net profit of INR 50 mn ($699,125) or more, to spend 2% of their average net profits of three years on CSR. 

The report highlights several innovative models to help deploy CSR capital via the SSE to stimulate engagement from private companies. In a nutshell, here are some of the key recommendations: 

1. Allow funding to NPOs on SSE to count towards CSR commitments of companies
2. Use CSR grants for pay-for-success models, wherein CSR funds are deployed effectively, and payment is made only when social impact is achieved
3. The trading of CSR spends between companies with excess CSR-spends and those with deficit CSR-spends.
4. Allow expenditure by corporates on building capacity for the SSE to count towards their CSR commitments

Creating an enabling ecosystem for the SSE

Additionally, the report highlights the following key recommendations, with respect to building an ecosystem that will enable the SSE to thrive and flourish in India: 

• Social impact reporting:  Common minimum standards for reporting on social impact have been suggested for both classifications (FPEs and NPOs), to reduce information asymmetry. The annexures of the working group report highlight the various aspects of social impact reporting, with a strong emphasis placed on “thoughtful, not onerous reporting”. It is envisioned that these frameworks will evolve in rigor and sophistication over the years. The working group also suggests operating a “capacity building fund” for enhancing reporting capabilities by NPOs. Over time, it is also envisaged that a new category of auditors—social auditors—will perform an independent verification of NPOs’ impact reporting. 
• Tax benefits: To increase the reception of these funding models amongst various classes of investors, the committee has also recommended several tax exemptions, benefits and other supportive regulatory clarifications.
• Setting up a Self-Regulatory Organization (SRO) and Information Repositories (IRs): These would work on enumeration of NPOs, their activities and areas of operation as well as provide credible and standardized information about NPOs. 
• Rigorous regulatory scrutiny: Listing of FPEs on the SSE must not be based only on self-reporting social impact. To ensure that only bonafide FPEs are able to associate with SSE, SEBI, in consultation with the existing specialist entities, should work out a mechanism for assessing credentials of the social impact dimensions self-declared by the FPEs. 
• Awareness campaigns: The working group recommends running a widespread and high intensity awareness campaign for social enterprises to list on the SSE and to ensure reception amongst both investor and investee groups 

Conclusion 

As per a survey conducted by Brookings India, 57% of the social enterprises identify access to debt and equity as a barrier to growth and sustainability. The advent of an SSE in India presents itself as a promising, groundbreaking and an illustrious step to bolster the impact investing ecosystem in the country and improve access to larger pools of capital for the social sector. This development also comes at an opportune time when the demand for financial returns coupled with desired social or environmental impact, is growing manifold. Thus, an SSE in India is uniquely poised to pave the way towards building a fruitful partnership between conventional and social capital, and ensuring greater inclusive growth in the country. 

For any comments, please write to me at anusha.bhagat@investindia.org.in.