The idea of a social stock exchange (SSE) in India was first floated by the finance minister in her budget 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).
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 on the SSE.
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.
Here are some highlights.
What is an SSE?
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.
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.
Who can participate in the SSE?
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 companies, trusts, and societies. The key difference between them is that social businesses can raise equity capital, while nonprofits cannot.
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.
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.
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.
How can nonprofits benefit from the SSE?
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.
The SSE will enable the routing of grants to nonprofits in a variety of ways, and help aggregate donations from multiple individual donors.
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.
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.
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), 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.
Examples of funding structures through which nonprofits can raise commercial capital are as follows:
- Mutual funds: A conventional asset management company would offer mutual fund units to investors. The principal amount of the investment would be redeemable, but all of the returns would go to chosen nonprofits.
- Pay-for-success: Commercial capital could bear the risk of a social programme by investing in it. If certain pre-decided social outcomes are achieved, the investor would be paid back the principal amount, plus interest, by a philanthropic donor, CSR funder, impact investor, or the government.
How can social businesses benefit from the SSE?
Since for-profit organisations are legally able to raise funds through the equity route, they would list equity on the SSE, subject to the minimum reporting standards. Additionally, certain eligibility conditions that SEBI has for non-social businesses would also be applicable, such as minimum net worth or average operating profit.
SEBI should work out a mechanism to assess the credibility of the impact self-declared by a social business.
The funding structures discussed for nonprofits would be applicable for social businesses as well. SVFs already exist for social businesses, but currently do not require social impact reporting. This will get mandated by the SSE.
The report points out that while the minimum reporting standard can be an effective tool to determine whether an organisation is actually creating positive social impact, the association of social businesses with the SSE must not be based only on self-reporting. It recommends that SEBI should work out a mechanism to assess the credibility of the impact self-declared by a social business and verify its preference for social returns over financial returns. This is crucial to identify and allow only those social businesses that are genuinely creating social impact to be associated with the SSE.
How can the SSE ecosystem be strengthened?
To sustain and grow the flow of funds through the SSE, a multi-dimensional policy intervention is required. Here are some recommendations by the working group:
The SSE should play a key role in building the social sector ecosystem, by promoting institutions such as information repositories (for example, GuideStar, NGO DARPAN, or Credibility Alliance), which will provide credible and standardised information on nonprofits and help players on the SSE access a diverse range of nonprofits. The SSE should also encourage the setting up of a self-regulatory organisation (SRO) that will bring together existing information repositories to meet the above ends.
Over time, the SSE should encourage the engagement of social auditors, which will perform independent verification of impact reporting.
To support nonprofits in enhancing reporting capabilities, the SSE should set up a capacity building fund of about INR 100 crore to bear some of the costs of increased reporting requirements. The fund should prioritise support to smaller organisations.
Funding to nonprofits through the SSE should count towards CSR commitments of companies, including expenditure on building capacities of nonprofits for the SSE. The Ministry of Corporate Affairs could also authorise the trading of CSR spends between companies with excess CSR spends and those with deficit CSR spends, on the SSE.
Foreign entities should be allowed to invest in SVFs listed on the SSE, as investors would not be taking decisions for the investee nonprofit, nor have any discretion on deployment of their funds. The rules under the Foreign Contributions (Regulation) Act (FCRA) would need to be clarified to enable this.
India’s tax and fiscal policies should be amended to encourage participation in the SSE. Here’s what these changes could look like:
- Allow philanthropic donors to claim 100 percent tax exemption for their donations under 80G to all nonprofits that benefit from the SSE. Currently, donations to private nonprofits with 80G certification can get only 50 percent tax deduction, whereas donations to government entities are eligible for 100 percent.
- Allow all investments in securities or instruments of nonprofits listed on SSE to be tax deductible.
- Remove the 10 percent cap on income eligible for deduction under 80G.
- Allow first time retail investors to avail a 100 percent tax exemption on their investments in mutual funds under the SSE, subject to an overall limit of INR 1 lakh.
- Allow corporates to deduct CSR expenditure that goes to the SSE from their taxable income.
For nonprofits and social businesses
- Allow a tax holiday of five years to social businesses listed on the SSE, from the time of first listing.
- Fast-track the process of getting 12A, 12AA, and 80G for nonprofits doing social and financial reporting.
- Increase the limits under the Income Tax Act on charitable institutions raising funds from commercial or semi-commercial activities to 50 percent from the current 20 percent. This would help nonprofits become more sustainable.
- Re-evaluate the current budget proposal to make renewal of registration under 80G periodic.
How can the SSE be leveraged during COVID-19?
In the current context of the COVID-19 pandemic, there is a heightened need for social capital to rebuild the livelihoods of thousands in the country. The SSE is envisioned as one of the possible solutions to this pressing problem, as it will unlock large pools of funding and enable commercial capital to partner with social capital. For instance, a ‘COVID-19 Aid Fund’ can be set up by the SSE to facilitate pay-for-success bonds, particularly to finance the work of nonprofits that are providing relief to affected communities.
Many social businesses are also working to solve problems caused by COVID-19. For instance, microfinance companies are allowing clients from low-income households to delay their debt repayments. However, the scale of such relief work is limited by the willingness of upstream lenders to allow the same to the microfinance companies. Here, the COVID-19 Aid Fund could be used to provide loan guarantees to social businesses that wish to extend support to their communities.
- Read the working committee’s full report to understand the vision of the SSE in greater detail.
- Explore the various active social stock exchanges from around the world.
- Read lessons from the founder of the world’s first social stock exchange.