Decoding framework of social stock exchange model in India

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By Rajan Samuel

In her maiden budget speech in 2019, finance minister Nirmala Sitharaman proposed the creation of a social stock exchange in India under the ambit of market regulator Securities and Exchange Board of India (SEBI). The SSE is envisioned to work like other bourses and pave the way for increased social sector spending in the country to realise the broader social objective of an inclusive community and society. With a view to lay the groundwork for the implementation of the SSE model in the country, a working group was formed by SEBI in September 2019 under the chairmanship of Ishaat Hussain, chairman, SBI Foundation. Following consultations with stakeholders comprising philanthropic organizations, NGOs and stock exchanges, the working group suggested measures to facilitate fund raising by social enterprises and voluntary organisations.

The executive summary of the report submitted by the working group talks of supporting flow of funds and enabling fund-raising structures. The current SSE structure emphasises on placing for-profit enterprises (FPEs) and non-profit organisations (NPOs) in the same category. We need to articulate here that two-window clearance mechanism is needed under SEBI for both for profits and non profits. There needs to be one market regulator, but tasks like accreditation, listing, issuing instruments and applications should be executed through two verticals. A lot of concessions have been given to Section 8 companies that can raise funds through debt, equity and capital raising instruments like mutual funds and zero percent bonds. The onus should be on enhancing the range of instruments and structures available and not replacing or diluting anything that is already in existence.

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For-profit enterprises come under the ambit of the Foreign Exchange Management Act (FEMA) while non-profits are regulated by the Foreign Contribution (Regulation) Act (FCRA). An NPO is not entitled to make any investments under FCRA, but acts as an aid to qualify support received from overseas. The Act has a fool-proof system for tracking the flow of the aid.

The activities of both for profits and non-profits need to be regulated through self regulatory organisations (SROs). The SRO model can be implemented on the lines of Sa-Dhan which is an association of micro finance institutions and has been appointed as an SRO by the government of India and the Reserve Bank of India (RBI). An efficient SRO framework will ensure that there is total adherence to all registrations and regulatory compliances. Rating should also be a mandatory requirement for non-profits registered with SEBI and should be done through a third-party rating agency. The rating process encompasses governance, management capacity, programme performance, systems processes and impact that will be created. Accreditation for non-profits can come from organisations like Guidestar India after assessing their transparency and accountability levels.

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Given the diversity of the interpretation the term has, we have not sought to define a social enterprise. However, a definition provided by Mohammed Yunus who started Grameen Bank in Bangladesh states that social enterprise is one where the returns are not taken out of the organisation. They are ploughed back into the organisation for fulfilling its objectives. Here, a counterargument arises stating that Section 8 companies are entitled to take equity in which case returns will need to be estimated for equity investment. Hence, putting NPOs under social enterprise is not the right way of doing things.

NPOs should be classified into 5 categories: national-level NPOs (organisations having footprints in more than 10 states), state-level NPOs, regional players (organisations working in more than one state), district-level NPOs and city-level NPOs. These are community based organisations (CBOs) whose classification depends on the focus, intervention and areas of operation.

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In any disaster, there are three stages; relief which is undertaken by the government with the support of NPOs, recovery and reconstruction. In these three stages, immediate funding is needed to respond to a disaster in an effective manner. Currently, there is no provision for NPOs to reserve funds for unforeseen disasters, NPOs along with corporates need to create a pool of disaster reserve funds as a part of social stock exchanges. These funds can be stocked using disaster relief bonds or mutual funds and can be immediately deployed during a disaster.

There has to be a leverage ratio for NPOs and SSEs should come out with creative ways for providing leverage to these NPOs. Locally raised income (LRI) will provide incentives and motivate NPOs to raise local money to leverage more resources through the stock exchange.

(Rajan Samuel is the managing director of Habitat for Humanity India, non-profit organisation. Views are personal.)