• Lex Specialis

Social Stock Exchange: An Apparatus for Channelled Economic Growth

Padmini Subhashree*

A panel established by the Securities and Exchange Board of India (SEBI) under the Chairmanship of Ishaat Hussain, Director at SBI Foundation and former Director at Tata Sons, has submitted its Report on the creation of Social Stock Exchanges (SSEs) in India. The idea for SSEs was broached by the Finance Minister during her budget address 2019-20 with an aim to comply with social welfare objectives in relation to financial growth and inclusion.  The SSEs are essentially a listing forum which enables voluntary organizations to raise capital for their social efforts. The Report has made an apposite effort to design the foundation and framework of instruments, rules, policies and personnel that will go into making SSEs a market reality in the country. It has emboldened the idea of affecting social reforms through a regulated market mechanism and directly borne out of corporate purses.

To begin with, the Report devises funding instruments for Non-Profit Organizations (NPOs) and For-Profit Enterprises (FPEs), owing to the distinction in their financial needs and operations.

For NPOs:

These include societies, trusts and not-for-profit companies set up under Section 8 of the Companies Act.  Normally, they raise funds via donations, foreign contributions, CSR grants or from government schemes. The prominent question that arises regarding viability of generating funds for NPOs at an exchange is how they are going to raise equity or debt securities since they aren’t revenue-generating institutions. This has been addressed via conception of the zero coupon, zero principal bonds, which will be listed in the SSE with a tenure matching the duration of the project that is being funded. The idea is to enable funding from investors who wish to create social impact without the expectation of monetary returns. The only return, however, that the investor expects in this scenario, is the fulfilment of the social impact which the project was designed to achieve.

For FPEs:

These include companies registered under the Companies Act, sole-proprietorships, partnership firms, HUFs and limited liability partnerships. The SEBI (Alternative Investment Funds) Regulations, 2012 provides an existing funding mechanism for FPEs via the AIF/SVF channel. Section 2(v) defines Social Venture Funds (SVFs) as a type of Alternative Investment Fund (AVF) that invests primarily with the purpose of promoting social welfare or providing social benefits.

Instruments of Investment

Although the zero coupon, zero capital bonds are a novel instrument fashioned in the exercise of raising funds for social causes, the path to administering them is devolved by making use of common funding structures as described further. The first such structure is through a public offer of close-end Mutual Funds to investors. The returns on these funds are to be channelled towards NPOs of the investor’s choice. The second is through issue of Social/Developmental Impact Bonds (SIBs/DIBs) which are fairly new initiatives and very effective tools for execution of pay-for-success schemes. What this means is that the investors are repaid with an additional return by outcome funders if the project they invested in bears expected social outcomes, and vice-versa, lose their investment if the outcomes are not met, thus enforcing success as a requisite to pay. The third and final structure is called the grants-in, grants-out mechanism which is defined under Section 16(4) of the SEBI (AIF) Regulations as financial grants in the amount of not less than INR Twenty-five lakhs that are contributed for utilisation towards social ventures without any profits or gains accruing to the provider of such grants. However, the Report emphasises the diminution of the phrase muted returns in the Regulations since it is misleading in its current definition and can act as a deterrent to investment.

One of the defining features of the Report is the suggestion made to impose social-impact reporting requirements for all the participating entities in the proposed SSE across the board. The idea to standardise impact reporting gives credence to the NPO’s or FPE’s actual efforts undertaken to create social impact and is therefore helpful in giving the investor an impression about their commitment to the goals. The reporting standards along with the creation of Information Repositories (IRs) and social auditors are expected to give rise to a culture of corporate social accountability and effective decentralisation of funds resulting in direct social benefits acquired by the needy owing to trickling down of corporate funds. The pay-for-success model is reliant on these essential reporting standards since this is the way for investors to find out which NPOs or FPEs to contribute to, depending upon the success of their operations.

Reporting Standards

In addition to devising investment routes into the social sector and the economy which is facing a crisis in the aftermath of the COVID-19 pandemic, the Report suggests a bundle of policy changes to affect a smooth transition into a regime of regulated social-sector investment. The need to include contributions made to SSE-listed NPOs and FPEs in the Draft CSR Policy Amendment Rules 2020, instead of those only made to Section 8 companies that are registered with the Ministry of Corporate Affairs (MCA). It not only gives credibility but also visibility to the NPOs in their fund-scouting endeavours. It is also recommended to build a capacity-building fund in the order of INR 100 crores by inviting contributions from body corporates and organisations with assured tax benefits and fiscal incentives. This fund is to be utilised for sector-specific development work such as organising IRs, implementing reporting standards and creating awareness towards establishment of fundraising initiatives and the SSE itself. The most outstanding recommendation is, however, with regard to creating and enforcing a mechanism of tradability in CSR expenditure among companies. It means companies with less CSR-spend can pay companies with excess CSR-spend to reimburse the latter’s excess expenditure in exchange for CSR certificates

The Working Committee has consciously desisted from according a definition to ‘social enterprises’ citing that organisations must adopt a self-declaratory approach to assume a social character, if they wish to, thereby conforming to social impact reporting standards, which will eventually determine their nature based on the performance of social welfare activities. Although the reasoning seems fair, it makes one wonder whether there ought to be a basic overarching definition devised for NPOs which assume social importance through their work before enlisting on a social stock exchange. On the issue of regulation and monitoring of SSEs, the Report suggests creation of a Self-Regulatory Organisation (SRO) to bring together existing IRs and help create new ones, along with overseeing the functioning of the SSE. While it is true that SROs are increasingly becoming the models for sectoral and organisational management, given the fact that SSE is a novel initiative in the Indian economic landscape, and is potentially going to be an instrument of immense social implication, its regulation shouldn’t ideally be accorded to an SRO that neither has statutory backing nor any binding sanctioning power. The role of the SSE will be vital in channelling funds worth millions to the socially disadvantaged sections. Thus, in the event of fraud, embezzlement or criminal misconduct arising in its operations, there must be a robust regulatory body equipped with sufficient adjudicatory power to deter such behaviour.

SSEs elsewhere

SSEs established in other countries are quite varied in their designs and objectives. For example, in the UK, the SSE is in the nature of a directory of companies that have passed the social impact test, the meaning of such impact remaining ambiguous. In Canada, the SVX (Social Venture Connection) is an information exchange where companies are listed as per their impact ratings.  Singapore’s IIE (Impact Investment Exchange) allows equity investments in startups or small companies with a social impact. Interestingly, in certain investments, there is a provision for returns even in cases of non-realisation of the social impact. Brazil’s Socio-Environmental Impact Exchange (BVSA) was the first-ever SSE to be set up and bears closest resemblance to the Indian model in that it allows for investments in time-bound projects from private funders. The South African SASIX has a system for buying shares of a certain value, the proceeds of which go towards funding specific projects.

All these models are essentially in the nature of connectors or matchmaking institutions that enable contact between the investors and investees, as opined in the Report and the proposed Indian framework leaves them all behind in terms of workability. Also, the terrain of all their efficacies is highly uneven. In Singapore and South Africa, social businesses must have a social focus, whereas in the UK it isn’t a mandatory requirement. The Brazilian model, on the other hand, has a ‘crowdfunding’ nature where it brings in both parties in a business of conjoint interest, without laying much emphasis on the social vitality of those interests. According to the Financial Agency for Social Entrepreneurs (FASE), the issue with low levels of impact investing worldwide (approximately $60 billion) is not that there isn’t enough capital available to generate social and environmental welfare, but that there aren’t enough investable opportunities and targets to do so. Even in the UK which is traditionally known as an impact-investing destination, market players say that a supportive policy environment with practical initiatives is a key to generating impact from the vehicles of social investment.


In the aftermath of COVID-19, reviving the rural economy and aiding grass-root development is of paramount importance. It therefore behoves the capital markets to generate funds and channelize them towards outfits which are actively involved in retrofitting the post-pandemic economic structures. The SSEs can thus fill this infrastructural loophole by bringing a credible, accountable, effective and successful regime of capital flow from the wealthiest corridors to the poorest sections, thereby triggering inclusive growth and development.

*Padmini Subhashree is an alumnus of NUJS Kolkata and currently working at Citizens' Foundation for Policy Solutions


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