How Social Stock Exchange will help raise funds, regulate social sector

It promises to be a win-win for both. On the one hand, it gives an opportunity to NGOs with limited financial means to raise more funds from diverse sources and new financial instruments. On the other, donors and philanthropic bodies are assured that their money is going to credible and legitimate organisations that will give them the social impact report of how the fund is being used — thereby reducing the trust deficit.

What we’re talking about here is the “Social Stock Exchange” (SSE), an idea mooted by Finance Minister Nirmala Sitharaman in the Budget speech. The exchange would be set up under the regulatory ambit of the Securities and Exchange Board of India (SEBI) to support voluntary organisations and social enterprises. A committee set up by the regulator under former Tata Sons director, Ishaat Hussain, has put together details of the SSE that would impact over 3.3 million bodies: NGOs, Section 8 companies, charitable trusts, societies and social enterprises for profit.

Both non-profit social organisations (NPO) and for-profit social enterprises (FPE), which tackle serious social problems — from life expectancy to disparity in incomes and gender inequality — need funds. At 119 out of 169 countries, India’s rank in the Human Development Index leaves a lot to be desired and is out of sync with the government’s ambition of touching a GDP of $5 trillion by 2024.

So how will the SSE work?

It will be housed within the stock exchanges of BSE and NSE, and will leverage the existing infrastructure. NPOs looking to raise funds will have to list themselves on the exchange, but to do so they will have to meet minimum standards of reporting on the social impact of the project, governance and financials. These standard will become more rigorous and refined with time.

While in the initial phase, the NPEs have to self-report after a certain period (6-12 months), later mandatory independent social impact auditing will be undertaken. Just like in a regular stock exchange that needs auditors and brokers, similarly SSE will need companies to undertake social impact auditing. There will also be information repositories, which will help the NPOs in building reporting standards. “The exchange helps in the discoverability of an NGO by a donor. An NGO, say in a remote area of Bihar, will have no other way to connect with, say, someone in Mumbai who wants to fund a project in the same area. But through the exchange, it can. This will immensely benefit small NPOs,” says Priyaka Nagpal Dhingra, a member of the committee drafting the SSE report and executive committee member of the ATE Chandra Foundation.

The non-profit entities will raise money by floating zero coupon, zero interest bonds, which will be listed on the SSE with a tenure equal to that of the project. This is like a donation certificate where the investee’s funds get written off their own books. But it could also get some tax benefits.

FPEs, meanwhile, can use the SSE to raise equity and list themselves just like any other company. The key difference is that they also have to follow more rigorous social reporting standards. But this is not the only way that the non-profit and for-profit organisations can raise money. The committee has recommended other instruments too, which are already permitted but need to be activated. One such example is the Social Venture Fund (SVF), permitted by the SEBI, where investors pool in their resources and multiple NPOs finish one large project. Nagpal Dhingra says this will particularly help small NPOs get funds.

Investors may also give the funds as grants. Or, raise money through social impact bonds of different kinds. For instance, an investor can provide funds upfront to an NGO but will be repaid with some return if the social outcome is achieved by the funder. But the funder also runs the risk of losing the investment if the outcome is not achieved. Foreign funds, the report says, should be allowed through this route.

Even traditional mutual funds can be leveraged for social funding. The only difference being that the returns generated get channelised towards financing the NPO. The HDFC Cancer Fund, for instance, is funded this way.

The committee has also recommended sops to attract more money. It has pushed for allowing corporate social responsibility (CSR) funds to flow into the zero bonds and permitted their expenditure in the SSE to be tax deductible. It has also suggested the removal of 10 per cent cap on income eligible for tax deduction, and also to retain 80G under the new tax structure and allow 100 per cent exemptions.

But there are serious concerns from NGOs themselves. Says a trustee of an NGO based in Kolkata: “I barely have funds to run my NGO. Now listing would mean hiring experts to do the paper work. So I have to spend more money. What we fear is that most of the funds will be cornered by the big boys who can hire experts.”

Many also argue that they are already over regulated: They have to report to the state charity commissioner, to the income tax departments, and to the home ministry if there are foreign funds involved.

Noshir Dadrawala, CEO, Centre for Advancement of Philanthropy, points out: “The emphasis is largely on for-profit enterprises, which have not been clearly defined at all. They could become smart businesses with a halo on their head. Also, the focus seems to be on Section 8 companies and there is no mention of charitable trusts or societies, which form the bulk of the NGOs. Section 8 only includes the new kids on the block.” He is also worried that those listed on the exchange might become an “elite club” which will corner a lion’s share of the benefits at the cost of others.

There are others, like Sanjay Patra of INDIADonates, who fear that the sector’s “innovation and creativity” might get killed and its “risk appetite” reduced with the focus on outcome. Others say they are not clear how investors will make returns, and that there is no clarity whether the various instruments for raising funds will eventually trade on the exchange. And, of course, SEBI has to list out the rules and regulations of the finer workings of the exchange.

Some concerns have, meanwhile, been addressed. For instance, a capacity building fund of Rs 100 crore has been recommended by the committee to assist NPOs, especially the smaller players, to list and improve their reporting standards.

India might not be the first country to have a social exchange. But with the government’s support, a significant step has been taken to make a transformational change. The jury is out on whether it will deliver the goods.