India: ESG Push In Indian Capital Markets : Social Stock Exchange (SSE) Framework

1. INTRODUCTION

The authority on capital markets, Securities & Exchange Board of India (SEBI), has announced a framework for the social stock exchange in 2022 to give social businesses another option to raise money.

The recommendations of a working group and technical group, assembled by the regulator, served as the foundation for the development of the Social Stock Exchange (SSE) framework.

A social stock exchange is a venue for social entrepreneurs involved in making a positive social impact to list shares and raise money. Such an exchange would be beneficial to businesses seeking funding as well as sociable investors looking for legitimate businesses operating in the social sectors. It would be a different component inside the existing Indian stock exchanges. Unlike traditional stock exchanges, SSE has a higher purpose that should be represented in their governance, structure, and operations.

2. WORKING OF SSE AROUND THE WORLD

A recent development in India is the Social Stock Exchange (SSE), which essentially allows social entrepreneurs to list themselves in order to raise funds in the form of loan or equity. The Hon'ble Finance Minister had recommended that we begin initiatives towards the same under the regulatory purview of SEBI as stated in the 'budget address' for FY 2019-2020. Conclusively, a Technical Group was established in May 2021 after the Working Group on Social Stock Exchange was established in September 2019. The SEBI published a notification on July 25, 2022, to alter the SEBI (Issue of Capital and Disclosure Requirements), 2018 and add Chapter X-A, which only discusses Social Stock Exchange.

Brazil was the first country to implement an SSE in 2003, however, it is no longer in use. The establishment of Social Stock Exchanges around the world is depicted in the following table:

*Among these, only three are active including Canada, Jamaica and Singapore; while the other four are no longer in operation.

3. KEY TAKEAWAYS FROM THE INTERNATIONAL SCENARIO OF SSEs

3.1. A Key Part Of Influencing SSE Structure Is Played By Domestic Regulations And Tax Laws

Some countries provide legal recognition to social enterprises to facilitate their listing and ensure that such organisations generate financial as well as socio-environmental returns. Others allow and receive, in addition to receiving donations, enabling them to float debt instruments. Some countries have specific mechanisms on stock exchanges that allow unlisted securities to be traded or provide exemptions from full disclosure and sale requirements.

3.2. For-Profit And Non-Profit Organisations Are Housed In Most SSEs

Developed countries with mature financial and capital markets have used SSEs to strengthen impact investing spaces for revenue-earning non-profits and for-profit entities, while developing countries have tried to be more inclusive of non-profits. The SSE structure may favour organisations not necessarily based on their quality or efficiency, but on their market language, or employing English-speaking talent from the private sector, instead of focusing on smaller local and/or grassroots organisations. All SSEs offer a variety of capacity-building services to social organisations, ranging from basic support to meet the eligibility criteria, monitoring and reporting assistance, to customized services such as business consulting.

3.3. SSEs Concentrate On A Few Prominent, Thematic Areas

While SSEs are generally cause-agnostic, they are likely to perpetuate funding imbalances towards thematic areas that are more visible and lend themselves to revenue streams. A review of 123 projects listed on six SSEs showed that environment projects were the most popular (25% of all projects), primarily because of the dominance of social businesses in sectors such as clean technology. These were followed by projects focused on livelihood, healthcare, and people with disabilities. Mental health, gender-based violence, care of the elderly, and policy-advocacy projects were less common. Most SSEs prioritize project financing over raising core funds to help set and scale organisational processes and systems.

3.4. Even Though SSEs Permit A Variety Of Donors And Investors, Institutional Investors Are More Prevalent

All currently operating SSEs accept institutional as well as retail investors, including those who make one-time and smaller gifts (foundations or high-net-worth individuals with regular and larger donations). The absence of acceptable products that strike a balance between risk and return, regulatory restrictions, and the high cost of servicing them, limit options for ordinary investors. In order to generate demand for their services and educate stakeholders on the conditions and subtleties of funding social organisations, the majority of SSEs also lay strong emphasis on educating investors and donors.

3.5. SSEs Have Robust Metrics For Measuring And Reporting, But They Do Not Always Capture Impact

All SSEs require impact measurement and reporting from social organisations pre- and post-listing, but reflect the challenges faced by the social sector in developing robust, contextualized outcome metrics and templates. Output indicators, such as coverage in terms of the number of people impacted, are the most commonly reported metrics. Some SSEs require mandatory third-party verification of reported impact. Most SSEs measure their own impact based on the number of projects and thematic areas they have supported along with the amount of funds raised.

Very few SSEs are able to capture wider changes to the social organisation ecosystem, including the enabling, standardizing policies and lower transaction costs they claim to catalyse.

3.6. Scale And Sustainability Challenges Are Faced By SSEs

Of the eight SSEs considered in the study, three are active (Canada, Jamaica, Singapore), one (India) is proposed and four (Brazil, Portugal, South Africa, UK) are no longer in operation. Social stock exchanges' ability to cover their costs, as well as the experimental nature of early SSEs, were highlighted as relevant factors in SSE sustainability. Seven SSEs got charity money to help them develop and launch their businesses, but this was frequently not enough to cover operational expenses because the SSEs did not charge enough for their services due to lack of scale and demand.

3.7. SSEs Could Contribute To The Development Of The Social Sector

Most SSEs have played a role in strengthening social sectors in their respective countries through the introduction of standardized impact reporting and benchmarks, prompting policy changes to empower the sector, encouraging transparency and building trust among various stakeholders such as the government, social organisations, businesses and the public. However, this role has been limited by the relatively small reach and duration of many SSEs.

4. SOCIAL STOCK EXCHANGE IN INDIA

The Hon'ble Finance Minister as part of the Budget Speech for FY 2019-20 had proposed to initiate steps towards creating a social stock exchange, under the regulatory ambit of Securities and Exchange Board of India, for listing social enterprise and voluntary organizations.

Subsequently, SEBI, in September 2019 constituted a working group (WG) to make recommendations w.r.t possible structures and mechanism within securities market domain. The working group consisted representatives of stakeholders active in the space of social welfare, social impact investing, representatives from Ministry of Finance, the stock exchanges and NGOs.

The working group had a series of consultations with various stakeholders including voluntary organizations, social enterprises and philanthropic organizations in order to assess the difficulties faced by them in raising funds/ donating funds.

Accordingly, SEBI in September 2020 constituted a Technical Group on SSE that was tasked to recommend on matters related to scope of work, eligibility criteria and regulation of social auditors. The Technical Group (TG) also considered the public comments received in respect of the WG report. The TG built upon the recommendations of the WG.

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