By Trisha Shreyashi & Aditya Kumar,
In the spirit of financial inclusion, the Securities & Exchange Board of India (SEBI) approved the creation of Social Stock Exchanges (SSE) on September 28, 2021. These entities shall encompass non-profit organizations & for-profit companies under their ambit of social enterprises (SE). Such organizations struggle for sufficient fund support. This idea of SSE prioritizing impact investment and social returns was first floated in India in the 2019 – 2020 budget. It gained momentum during the pandemic bringing the spotlight on the need for social capital to relieve the adverse effects on the vulnerable. SSE is a regulated funding platform, projected as an enabler of capital access for such SEs.
All such SEs that demonstrate social intent & impact as their primary goal are eligible to participate in SSE. Such primacy will be determined by the public benefit test devised with three filters of target population, activities engaged, and activity volumes. It ought to target the underserved and less privileged, in any of the 15 broad categories of social welfare activities specified in the SEBI technical committee report, 2021 such as eradication of malnutrition, poverty, inequality, promotion of gender equality education, healthcare, preservation of nature etc. And, 67% of the SE’s activities ought to qualify as eligible social welfare activities to be able to list themselves on the SSE. The listed SEs will then be able to raise capital through equity, zero-coupon bonds, mutual funds, social impact funds, and development impact bonds.
Presently, the SEs receive funding via CSR, philanthropic donations, crowdfunding etc. SSE, providing a unified funding channel, will act as an umbrella organization to monitor due diligence, reporting and standardized disclosures of the listed SEs. The SEs listing herein would be subjected to enhanced continuous disclosures encompassing financial, governance and social impact aspects. Although the listed SEs will enjoy tax benefits, they would be subject to mandatory social audits by auditors certified by National Institute of Securities Markets and self-regulatory sustainability directorate certified by Institute of Chartered Accountants.
While this unified social financing platform protects beneficiaries and impact investors, it also creates an explosive conflict of interest that could harm the very lives supposed to be improved. Operating at an intersectional hybrid blend of commercial imperatives and social philanthropy, meeting ambitious growth targets might plague the listed SEs to sway away from the social mission. The 2010 Andhra Pradesh microcredit crisis is one such instance where the SE became embroiled in aggressive debt collection practices owing to over-lending in the growth stage, leading to debt-traps and suicides. Such drifts in financing trends from grant-based to equity-based affirms the need for monitoring and regulation. SSE might be able to strike balance with the complicated proposition of unlocking large pools of social capital via conventional capital structures, subject to healthy practices.
The SEs will now be subject to close monitoring and regulation of transactions made by them, the need for which has been highlighted in use of trusts to evade taxes in the Pandora papers leak. Usage of SEs like trusts as a tax avoidance model for corporations has been a routine stratagem. Corporations now shall not be able to erode off profits in the name of philanthropy and CSR via listed SEs. However, the unlisted SEs are still beyond the purview of these regulations.
Globally, SSEs have been set up in Brazil, Portugal, South Africa, Jamaica, the UK, Canada & Singapore. However, only the Jamaican, Singaporean, British and Canadian social stock exchanges are presently functional. The SEBI working group report, 2020 for establishment of SSE has acknowledged the regulatory loopholes and institutional drawbacks of such global SSEs. It has rightfully crafted the SSE as a segment of high-turnover stock exchange like: BSE or NSE. This addresses the issues of insufficient income and finance operating costs of the exchange through its fee structure, while maintaining brevity in regulation. SSE thus projects the potential to uplift those at the bottom of the socio-economic pyramid. However, the measurement of social impact in metric terms remains a major challenge in analyzing returns on this investment, for investors, auditors and regulators alike.
(The authors are legal professionals, presently a part of the National Institute of Securities Markets (NISM) academia. Views are personal and not necessarily that of Financial Express Online.)
