{"id":1838,"date":"2020-06-09T11:30:43","date_gmt":"2020-06-09T11:30:43","guid":{"rendered":"https:\/\/idronline.org\/2020\/12\/23\/understanding-indias-proposed-social-stock-exchange\/"},"modified":"2026-01-14T23:27:49","modified_gmt":"2026-01-14T17:57:49","slug":"understanding-indias-proposed-social-stock-exchange","status":"publish","type":"post","link":"https:\/\/idronline.org\/kn-in\/understanding-indias-proposed-social-stock-exchange\/","title":{"rendered":"Understanding India\u2019s proposed social stock exchange"},"content":{"rendered":"

The idea of a social stock exchange (SSE) in India was first floated by the finance minister<\/a> in her budget<\/a> speech for the year 2019-20. The objective, as stated then, was to take capital markets to the masses; specifically, organisations working towards social welfare, in order to make it easier for them to raise funds. The SSE would come under the regulatory ambit of the Securities and Exchange Board of India (SEBI<\/a>).<\/p>

SEBI formed a working group—comprising of representatives from the government, philanthropic foundations, nonprofits, impact investors, and the private sector—to give form and content to the vision of an SSE. The working group consulted with various stakeholders, including other nonprofits, social businesses, philanthropists, and so on, to inform their understanding. After several months of work, the working group has released its report<\/a> on the SSE.<\/p>

The report clearly defines the need, objectives, and nature of the SSE, and also introduces the process to measure and report social impact. It delineates the types of organisations that can be a part of the SSE, and charts out funding structures for each. Finally, it makes certain policy recommendations to sustain and grow the SSE, and discusses its applicability during the COVID-19 crisis.<\/p>

\"What<\/a><\/div>

Related article: Concerns around India’s social stock exchange<\/strong><\/p>

Here are some highlights.<\/p>

What is an SSE?<\/h3>

Social sector organisations (both for-profit and nonprofit) play a significant role in delivering essential services to vulnerable and marginalised communities. However, the effectiveness of the sector is contingent on adequate funding. At present, the social sector in India receives funding through multiple sources, such as corporate social responsibility (CSR), impact investing, philanthropy, and everyday giving. Enabling these diverse channels to come together on a common platform and introducing uniform frameworks in reporting, measurement, and standards could be an important step in developing the sector. This is where the SSE comes in.<\/p>

The SSE lists funding channels for the social sector, and offers a set of procedures that act as a filter, letting in only those organisations that are creating measurable social impact and reporting such impact. The standardisation of procedures in the sector could be a key outcome of the SSE.<\/p>

Who can participate in the SSE?<\/h3>

As the SSE seeks to channel more capital to social sector organisations, it is important to define these organisations. They can broadly be categorised into for-profit enterprises (FPEs or social businesses), which are legally similar to corporates, but create social impact as part of their business; and nonprofits organisations (NPOs, or simply nonprofits), which include Section 8<\/a> companies, trusts, and societies. The key difference between them is that social businesses can raise equity capital, while nonprofits cannot.<\/p>

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To participate in the SSE, an organisation can legally be incorporated in any way, as long as social impact is a part of its operations and strategy. To determine this, they would have to commit to a minimum reporting standard.<\/p>

Minimum reporting standard<\/div>

The measurement of social impact under the SSE must go beyond simply monitoring the behaviour of corporates. However, it would take a few more years to evolve a standardised framework for all organisations raising funds through the SSE. To serve in the interim, the group has outlined a minimum reporting standard that must be mandated. It would include a range of information—from defining the social problem being addressed and setting targets; to the reach, depth, and inclusivity of the social impact; to general information such as registrations.<\/p>

Over time, the reporting requirements can become more rigourous, by enabling more comprehensive assessments of the social impact, more granular disclosures of governance and finances, and so on.<\/p>

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The SSE will unlock large pools of funding and enable commercial capital to partner with social capital. | Picture courtesy: Unsplash<\/p><\/div>\n<\/p>

How can nonprofits benefit from the SSE?<\/h3>

Currently, nonprofits in India face several challenges when it comes to securing funds for their work. Institutional funding, such as foreign donations or CSR grants, are typically directed towards large nonprofits. Further, non-tax-deductible donations are generally permitted to be spent only on programmes and not organisational development, and tax-deductible donations are few and small in size.<\/p>

The SSE will enable the routing of grants to nonprofits in a variety of ways, and help aggregate donations from multiple individual donors.<\/p>

A zero coupon zero principal bond<\/div>

By law, nonprofits face restrictions on their ability to raise money through traditional financing instruments such as debt and equity. Despite that, there is an opportunity to unlock funds by listing zero coupon zero principal bonds on the SSE.<\/p>

These bonds 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. They are particularly well-suited to investors who are looking to create social impact but do not wish to have their funds returned to them. Investors will be keen to channel funds only to credible and legitimate nonprofits, which the SSE will ensure by requiring minimum reporting standards by nonprofits.<\/p>

Related article: Five myths about impact bonds<\/strong><\/a><\/p>

Funding structures for commercial capital<\/div>

The SSE will enable the routing of risk capital (or venture or commercial capital) to nonprofits via specialised funding structures. The SSE would leverage the Social Venture Fund (SVF)<\/a>, which is an alternative investment fund allowed by SEBI to issue securities of social ventures to investors who may agree to receive restricted or muted returns.<\/p>

Examples of funding structures through which nonprofits can raise commercial capital are as follows:<\/p>