Social Stock Exchange: India Perspective

In its report published in June ’20, the SEBI SSE Working Group recommended the setting up of a social stock exchange (SSE) under the aegis of the SEBI, outlining the structure and working of such an institution. As recommended, the SSE will serve as a platform to facilitate social sector funding and provide much-needed stimulus to the entire impact funding ecosystem. This article deliberates on the need for an SSE, reviewing some of the provisions and recommendations made relating to its functioning and ultimately focuses on some areas of practice and opportunities that may emerge from a full-fledged implementation of the proposed platform.

Need for an SSE

Several countries across the globe have implemented some version of an SSE, namely Brazil, UK, Canada, Singapore and South Africa. The following are some of the reasons why instituting an SSE becomes especially relevant in the Indian context:

• As per findings, India faces a financing gap of $565 billion[1] in meeting its UN Sustainable Development Goals (SDG) by 2030. Recent moves such as CSR might not been adequate in bridging this gap and other measures are required to accelerate the process.

• Currently India has over three million nonprofits of varying sizes and effectiveness operating in India. Meeting SGD goals require high impact solutions to be implemented at scale. The impact measurement mandated by the SSE will make effective nonprofits easily discoverable and give them more avenues to obtain funding

• The SSE will also serve as means to bring conversations around social impact to the mainstream thereby increasing public awareness on the same

• The Indian nonprofit sector has traditionally suffered from lack of funding and regulatory support. There are several instances of promising organisations’ inability to scale their solutions due to lack of formal funding channels or capacity

The SSE and its Functioning

The SSE will function much like the stock exchange with the exception that it will mandate the adherence to a common social impact reporting framework rather than reporting of just financial information for entities listed on it. The organizations benefiting from SSE will be classified as either NPOs (non-profit organisations) or FPEs (For Profit Entities).

Reporting Framework: Both types of organisations will be required to follow a common reporting framework that will push all organizations to clearly state the cause they address, the target beneficiaries and the impact created (on its reach, depth and inclusion aspects). Additionally, FPEs will be subject to third party verification in the medium term.

A laudable provision, in this regard, is the proposal of the Capacity Building Fund to aid smaller non-profits in meeting the costs of complying with the minimum reporting.

A very pertinent issue from impact assessment is how it can be measured for causes in which outcome is qualitative rather than quantitative – for instance, in measuring improvement in quality of life of women, on the dimension of, say, dignity, proxies such as instances of cases of domestic abuse recorded may not have a causal correlation with the intervention. Using methods such as surveys would not only be time-consuming and subject to interpretation but may also tend to be leading if not carefully designed, thus invalidating the results obtained therefrom. Additionally, some outcomes may surface over the longer term rather than within the reporting period under question.

Benchmarking organizations in the same sector is also a herculean task since an organisations may be targeting a goal different from its counterpart working towards furthering the same sustainable development goal. For example, in addressing SDG 5, Gender Equality, one organization may focus on eliminating sexual abuse and trafficking while the other may work towards empowering women entrepreneurs. The relevant impact metrics to determine the effectiveness of both these organizations in furthering their respective causes will not be common, creating difficulties to compare them at not just the investor level but also the rating agency’s end.

Another issue here is being able to isolate the impact of the interventions from external influences such as policy changes or other macroeconomic variables. Accurate measurement such as RCTs will prove to be more time consuming and expensive than is warranted.

While coming out with eligibility criteria for NPOs and FPEs, it will be important to set standards in such a manner so as to not restrict smaller social enterprises from accessing capital through the SSE but be able to gauge whether the intent to deliver impact is present, besides the credibility of their solution and operating model.

Most of the above issues have been recognized in SEBI’s Report and require careful consideration. Given the large number of NPOs and social enterprises in the country, there is a need for reporting to be as objective as possible, atleast at a preliminary level, so that large volumes of data can be assessed quickly. Hence, some standard impact metrics will have to be formulated and required to be reported.

Financing: For this purpose, FPEs and NPOs will be treated differently, and hence due to the inherent difference in their ability to generate profits, separate forms of financing will be available to them.

FPEs can get their equity and debt instruments directly listed on the SSE, while NPOs cannot, due to their legal structure and non-profit orientation. They, however, will have access to zero coupon zero principal bonds which will essentially work as donations.

Other than this, both NPOs and FPEs will have access to finance through Social Venture Funds (SVFs) whose securities will be allowed to be listed on the Social Stock Exchange. Other pay-for-success structures such as SIBs and DIBs are already prevalent in India but lack visibility. Instituting the SSE may give stimulus to such financing and make the sector more Impact-Bonds-ready.

A question that arises is whether the SSE will, in fact, be helpful in closing the funding gap required for the country to reach its sustainable development goals, or will it merely serve as a medium to channelize the same funds previously collected albeit to organisations that can demonstrate impact better. In order to attract more private funding for the social sector the following should happen:

• Outcome funding through the SSE should be covered under CSR contribution as well as be tax deductible (as also recommended in SEBI’s report) and the threshold for CSR applicability should be reduced to bring in more corporates under its ambit, and/or

• FPEs should be able to provide returns (on successful demonstration of favourable outcomes) comparable to that of shares traded on an ordinary stock exchange for it to an attractive destination for risk investors. Also, some penal provisions on failure to demonstrate target outcomes should be imposed on the NPOs/FPEs in order to reduce the downside risk for risk investors. Not doing so may provide unscrupulous organisations easy means to obtain one-time investment from the market

Stakeholders: Actors involved in the SSE funding ecosystem will primarily include outcome funders, donors, risk investors, accelerators/incubators and beneficiaries for the NPOs, while they will include donors, outcome funders, risk investors, impact investors, impact evaluators/social auditors and beneficiaries for FPEs. Other than this IRs (Information Repositories) will also play a role in maintaining a database of nonprofits and providing standardized information. The purpose that the SSE serves for the NPOs will be to give them better access to capital and incubate them so as to help them deliver the impact envisioned by them. On the other hand, for the FPEs the focus will be to provide for direct listing and other innovative financing structures while pushing them towards better impact creation, measurement and reporting.

Regulations: Several changes in CSR regulations and taxation have been recommended to empower the SSE. One reform that can be considered, is integrating the FCRA, CSR and other reporting requirement into the minimum reporting framework and exempting such organisations from the need to file separate returns to ease processes and avoid duplication.

How can social organisations be SSE-ready?

Data Generation: As a first step, all organisations with reasonable financial cushion, should invest in an effective custom MIS for data generation and subsequent articulation/quantification of impact. Hence, monitoring and evaluation should be given priority in the interim.

Marketing: Depending on how the SSE eventually develops, social sector organizations may have to come up with innovative means of impact story-telling that could appeal more to risk-investors and large donors as opposed to traditional methods to create awareness through awareness drives and exhibits. If the SSE is a success, crowdsourced funding from individual donors may significantly reduce.

Focus on both Depth and Reach: in catering to one dimension, many organisations fail to focus on the other. Large organisations undertake massive expansion drives while failing to monitor the functioning/growth of existing branches or communities. Smaller organisations get so involved enhancing their solution and processes that they lose sight of expansion targets or the motivation to scale-up. An ideal approach would be to run a successful pivot, expand reach, monitor it rigorously for some period and then expand further.

Emerging Opportunities with the setup of the SSE

Social Audit: The provision of third-party verification of impact can give existing large-scale audit firms the nudge to develop a separate vertical for social sector audits. However, existing financial auditors may not be fully equipped or competent to conduct social audits as desired or envisioned. Impact assessment requires a different set of capabilities and outlook. The approach to social auditing will be different in the following ways:

• Assessing ground level impact on a regular basis, in place of being one-time physical verification

• Comprising of teams with experience in the given sectors to be able to verify the qualitative impact

• Using innovative methods of assessment such as surveys, interviews, etc., depending on the cause addressed

The above capabilities can be seen mostly in existing impact consulting organisations. Hence, these may be given the accreditation to conduct social audits as well. However, in such a case, complete divorce between the attest and consulting function may have to be maintained. Existing audit giants will need to induct practice experts into their firms in order to guide the social audit teams. Even a detailed institute guidance may not substitute for direct previous exposure to the impact sector.

Fund Management: While in the short run IRs may carry out the functions of not just data aggregation, but standardizing reporting, benchmarking and rating as well, in the longer run, specialized rating agencies may gain predominance in order to credibly rate the large volume of the instruments listed on the market. The burst in financial activity in the social sector may translate into a spurt in employment opportunities for Chartered Accountants in such rating agencies or impact investing firms. This will include to help the mushrooming NPOs scale their interventions whether as incubators or as monitoring and evaluation agencies. Firms conducting due diligence for outcome funders or institutional donors will also proliferate.

Other Services: Existing practitioners offering MIS solutions may come up with integrated compliance reporting and monitoring tools to ease reporting and compliance challenges for nonprofits. Moreover, there will be increased demand for nonprofit consulting with a wider scope that includes:

• serving as growth accelerators or incubators,

• conducting due diligence for outcome funders or corporate donors

• advising on the right projects to fund as a part of CSR activities

The SSE as envisioned in India combines the features of social stock exchanges and discovery platforms across the globe into an integrated offering. We have no precedent to see how an enabler of the breadth and scale of the Indian SSE, may function. Hence, it will be important to identify the key factors for success of such an exchange, work towards strengthening those and then gradually build the social financing ecosystem around it. In this regard, what may, thus, be critical to help the SSE realise its potential would be the development of a strong impact reporting framework since that is the real value add of an intermediary such as the Indian SSE.

References:

https://www.sebi.gov.in/reports-and-statistics/reports/jun-2020/report-of-the-working-group-on-social-stock-exchange_46751.html

https://www.livemint.com/opinion/online-views/a-guide-to-the-proposed-social-stock-exchange-for-ngos-11593439512319.html

https://www.bloombergquint.com/opinion/social-stock-exchange-new-funding-avenues-for-non-profit-organisations

https://www.bloombergquint.com/opinion/social-stock-exchange-tax-and-other-policy-recommendations

https://www.brookings.edu/wp-content/uploads/2019/07/The-promise-of-impact-investing-in-India.pdf

Image Source: BusinessLine

[1] The Promise of Impact Investing in India, Brookings India, July 2019

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