Social Stock Exchange in India: Scrutinizing the Vision

[Prachi Agrawal is a 4th year B.B.A., LL.B. (Business Law Hons.) student and Stuti Bhargava a 4th year B.A., LL.B (Business Law Hons.) student, both at the National Law University, Jodhpur]

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.”

– Nirmala Sitharaman

In her budget speech in 2019-2020, the Finance Minister of India introduced the prospect of an electronic fund raising platform – a Social Stock Exchange (‘SSE’). While the concept in itself was not novel, envisioning it in the Indian setup was a bold move. As a preliminary introduction to the idea, she conceptualized the SSE as a platform that would list social enterprises and voluntary organizations (i.e., those without a profit motive) for the ‘realization of a social welfare objective’. In this envisioned plan, the SSE was to fall within the regulatory ambit of the Securities and Exchange Board of India (‘SEBI’). However, while its structure was still unclear, the aims  were clear – first, to take the capital markets to the masses and second, to help these organizations and enterprises raise funds.

To further concretise the idea, the SEBI eventually laid the foundation by setting up a working group in 2019. The objective behind forming this working group was to come up with recommendations to give form and structure to the vision of SSE. Consequently, on 1 June 2020, the report of this working group (‘Report’) was brought into the public domain. While critiques have applauded the government for the idea and the recommendations that have followed, several questions have simultaneously been raised about the efficacy of such a plan.

Critical Analysis: Loose Ends In The Vision

While the report of the working group, without a doubt, paints a perfect picture of the ecosystem amenable for the growth of SSEs, it does not quite answer the questions as to the efficient implementation of intricacies involved in the functioning of the platform.

Firstly, while the Report acknowledges that the SSE requires a different and conducive environment for growth considering its social nature, at the same time it recommends that the SSE be housed within the existing stock exchanges i.e., Bombay Stock Exchange and/or National Stock Exchange. Consequently, the SEBI would act as the regulating body. Section 11 of the SEBI Act, 1992 lays down the functions of the Board. However, nothing in the aforementioned provision hints at SEBI’s obligation to create awareness among investors, something which is quintessential to kick-start an SSE in the country. If the primary idea behind an SSE is growth, development and increase in resources of the social sector, should the SEBI be designated with the additional responsibility of acting as the anchor to the SSE? The answer, in the opinion of the authors, is an emphatic no. This is primarily because the SEBI already has a list of powers and functions that it is supposed to perform or undertake. In theory, managing and regulating the SSE is only one additional responsibility. Practically however, it would overburden the SEBI.

Secondly, the report also fails to provide concrete definitions of terms like ‘for-profit social entreprise’. The working group, in its recommendations, emphasized upon the fact that there is diversity of interpretations as far as the meaning and scope of ‘for-profit social entreprises’ is concerned. In the authors’ opinion, it would then lead to the constant re-consideration of the entire discussion undertaken by the working group until a concrete definition is formed.

Thirdly, a necessary presumption with which such a system of an SSE operates is the equation of non-profit organizations with the for-profit social enterprises. Both the aforementioned categories of institutions have different structures and a distinct approach of achieving their goals. This would result in unwarranted entry of private profit-driven players into the social setup. It is not clear that for-profit entities will prioritise social benefits over profits. The second defect is with respect to the financial illiteracy and ignorance of the investors. With the retail investors accounting for almost 38% of the equity market in India, it is essential for them to understand the nature of organization that they would invest in. Providing a platform with two very different types of institutions is bound to create confusion for them, resulting in the SSE losing its appeal for the investors.

Fourthly, a combined reading of the intention and the consequent actions of the finance ministry poses uncertainty. The recommendations of the working group provide for tax incentives to invest in a social enterprise. However, the 2020-2021 Union Budget mandates that the not-for profit organizations will have to apply every five years for income tax registration to ascertain their charitable status and will also need to renew their 80(G) certificate that provides tax relief to the donors. Post the expiry of the five-year period, the institution as well as the investor would be subjected to uncertainty with respect to the tax exemptions, that the following period of non-registration would pose. Not only does such an announcement hint at the confused state of understanding and bolster several questions as to the survival of the not-for-profit sector, it would also leave the investors and the institutions prone to uncertainties, as has been explained above.

Lastly, the recommendations provide for the development of information repositories that would provide sector-level infrastructure and ensure availability of credible and standardized information. However, what remains amiss in such an argument is the idea that mere presence of such repositories/bodies does not ensure widespread, accessible information to all categories of stakeholders. With limited awareness about the SSE coupled with the ambiguity as to the role of regulating authority, the target audience would remain in a state of unawareness.

Recommendations: Tying the Loose Ends

The creation of an SSE in any country has to be a journey of trust building and maintaining relationships. Falling in line with this, the present proposed model of the SSE comes equipped with a number of loose ends that need tying. At this stage, it is only wise that the country can learn from the mistakes of other jurisdictions and come up with an improved plan customized to fit appropriately in the Indian setup.

To this end, the primary assertion of the working group that begs scrutiny is the SEBI acting as the regulatory authority for the SSE. While the authors concur with the understanding that the SEBI could aid in establishing the SSE, the same should not be accepted as the apposite form of regulation in the long run. Another issue is the lack of a legal structure and relevant definitions, as discussed above. In the words of the working group, “a declaration of intent to create social impact and a commitment to measuring and reporting such impact is the key to identifying a social enterprise”. While promising, the idea lacks certainty. This makes it important that a definite legal structure be accorded to the social enterprises. Besides this, objective definitions of important terms like social enterprises, social purpose, social impact, etc. should be made clear at this stage so that further developments may take place accordingly. An important lesson that can be borrowed from the UK SSE is the requirement of passing a ‘social impact test’. This test is conducted by independent authorities which ensure transparency and lessens the possibility of corruption creeping into the system.

From an Indian perspective, an important step could be to undertake sensitization and solicitation for and from different class of investors through both online and offline modes. Since the investment prospect in an SSE lacks the promise of financial return, it is of dire need to induce the investors to contribute. In order to induce, educate and encourage investors, India could consider following the footsteps of the UK government which sought to open regional social-enterprise development centres and sent ambassadors to educate local communities. Furthermore, a website maintained by the social enterprise publishing the information of the retail investors would help create a feeling of belongingness and trust between them and the enterprise. With respect to the institutional investors, the SSE could come up with an index of sorts where the institutions contributing the most would be ranked accordingly. Since the institutions would be able to use this to advertise themselves and gain profits in their own ventures, they might feel motivated to contribute. Considering the foreign investors are a major source of investment, special efforts to sensitize and incentivize them should be made.

Another important step would be to provide a hassle free exit option to the social enterprises. While complexity must be avoided, the relevant stakeholders and their rights and liabilities should be materially defined. Not only will this encourage smaller organizations to register themselves on the SSE, this would also avoid unnecessary disputes at the time of exit of these social enterprises.

Importantly, the working group in its Report suggested that a Covid-19 fund be set out “to support and fortify social structures that are in danger of collapsing because of Covid19.” While the objective of creating such a fund is clear and holds merit, it seems to have overestimated the reach and pace of the implementing authorities. The tools needed to fight in the aftermath of the Covid-19 pandemic have to be quick and effective. The possibility that the implementation of such a plan may take time, and possibly too much time before it actually materializes, is not duly considered.

Conclusion: The Way Forward

The idea of SSE has seen limited growth and success in foreign jurisdictions which adds to the skepticism with regard to the success of the platform. As far as India is concerned, while the idea of an exchange seems appealing in theory, its implementation would be a hefty task for the regulatory authority.

The Indian social enterprises are hardly investment ready in today’s time. Learning lessons from the UK SSE, we might need an independent social investment market builder, to help them understand the implications of being listed and raising equity capital, among other things.

The working group at a point in the Report observes, “fund raising through SSE also ensures accountability, transparency and periodic reporting of impact.” However, no concrete steps to achieve transparency, accountability and efficacy have been outlined. For the SSE to secure the objectives that have been set out, it is important that its reach be widened. While the working group espouses a self-declaration approach wherein the entities would be required to declare as to whether they would want to qualify as social enterprise and consequently adhere to the standards set for the same, it is imperative that it also provides a mechanism of sanctions for non-compliance with standards.

The central point of argument here is that there is much to be done, before the SSE can materialize in the form and vision that was initially set out. While the recommendations of the working group could definitely count as the first step towards setting up an SSE, there is no doubt as to the fact that the recommendations still leave much to be desired.

Prachi Agrawal & Stuti Bhargava

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