Building a new channel for fundraising

We have an opportunity to build a unique approach for robust and effective social stock exchanges that help social enterprises and nonprofits raise funds.
2019-10-01 00:00:00 India Development Review Building a new channel for fundraising
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During her Budget presentation, Finance Minister Nirmala Sitharaman proposed a social stock exchange (SSE) under the regulatory ambit of the Securities Exchange Board of India (SEBI) to support social enterprises and nonprofits in raising funds. SSEs can be helpful in bringing in significant additional capital to support entrepreneurs working to improve the lives of underserved populations, thereby accelerating inclusive growth.

Currently, there are no dedicated online information or investment platforms to serve for-profit social enterprises. As for nonprofits, it is estimated that there are about 3.1 million non-government organisations (NGOs); 25 percent are engaged in religious activity, 22 percent in community service, 20 percent in education, 18 percent in sports and culture, and 7 percent in health services, according to research conducted by McKinsey for Omidyar Network India.

Related article: Budget 2019: What it means for the social sector

Some privately-owned crowdfunding platforms for nonprofits do exist, but cover only a small fraction of NGOs. There are a couple of information and accreditation platforms — GuideStar India verifies, certifies, lists, and provides information on NGOs for potential donors. It has certified about 1750 NGOs. GiveIndia connects donors to causes they care about and lists about 500 NGOs on its platform, of which about 200 are ‘GiveAssured’, i.e. periodically accredited by GiveIndia.

Distilling key global learnings will be vital in ensuring that the Indian initiative is best positioned for success.

Globally, at least ten SSEs have been set up, including in Canada, the UK, Singapore, Kenya, South Africa, Brazil, Portugal, Mexico, Austria, and Jamaica. They differ by (i) types of organisations listed — for-profit vs nonprofit; (ii) services offered — directory-only, matching funders and organisations and providing for direct online fundraising; (iii) ability to trade securities — currently only 12 companies on UK’s SSE can trade; (iv) methodology for accreditation of organizations and investors; and (v) the ability of retail investors to participate. Distilling key global learnings will be vital in ensuring that the Indian initiative is best positioned for success.

What are some of the initial considerations in thinking about an Indian SSE?

The funding process has several components: Information availability, matching of funders and organisations, accreditation/certification, fundraising, and trading of securities. Currently, Indian stock exchanges enable trading of listed securities and reduction of information asymmetry between funders and recipients. They do not provide matching and certification services. Therefore, at the outset, clarity about which components of the fundraising process the SSE is trying to address is important. We then need to examine whether all these activities are permissible under the current regulatory framework of SEBI and the stock exchanges.

business growth elements graphic_fundraising_vecteezy

The funding process has several components: Information availability, matching of funders and organisations, accreditation/certification, fundraising, and trading of securities.| Picture courtesy: Vecteezy

A two-pronged approach would be required in conceptualising an SSE, since the issues relating to for-profit social enterprises and nonprofit organisations are very different.

In the case of for-profit social enterprises, an SSE can potentially help in raising their profile and visibility, attracting new equity and debt funders. However, the definition of a “social enterprise” needs careful thought. Our experience in working with 50 early-stage social entrepreneurs has shown that not all purpose-driven entrepreneurs want the “social entrepreneur” tag, to avoid the risk of such a classification resulting in lower valuations. An SSE can be particularly useful for social enterprises which are not “venture investment like” and offer more modest financial returns.

For nonprofits, an SSE can enable fundraising as well as information on operations and financials.

We also need to understand whether special measures are needed for for-profit social enterprises or if the regulatory provisions that already exist for smaller companies to raise equity and debt are adequate. An assessment of how effective the current provisions are and what efforts are required to enable social enterprises to fully leverage them would be useful. For nonprofits, an SSE can enable fundraising as well as information on operations and financials through standardised reporting. Ideally, certifications and accreditations should be provided by independent organisations outside the SSE.

Related article: How GST affects nonprofits

In a survey conducted by The Bridgespan Group, over 60 per cent nonprofits cited limited funding as a moderate or significant constraint to scale. A fundraising platform that has regulatory oversight can improve credibility and help ameliorate the difficulties nonprofits face in fundraising.

High quality and standardised reporting can boost confidence to provide more funding.

For donors, high quality and standardised reporting can boost confidence to provide more funding. If common minimum standards were established as eligibility criteria for listing (such as annual statements in standard formats) the greatest impact would be improvement of organisational practices, as nonprofits would be incentivised towards this. Moreover, a market for supporting nonprofits to improve practices will develop. This will increase funding flows, and eventually support nonprofits in scaling up.

A realistic and multi-year phased rollout of standards is desirable, or else most nonprofits may find it too onerous to list on a SSE. Nonprofit organisations are predominantly very small — seven out of 10 have one or no full-time staff — with very limited budgets. Other considerations for an SSE include the ownership, operating model and institutional structure. For example, can it be housed under the current stock exchanges, or is a separate institution required and desirable?

India is already a hub for social innovation. We now have an opportunity to be thoughtful about the above considerations and build a globally unique approach for robust and effective social stock exchanges.

This article was originally published by Business Standard and can be viewed here

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