India is currently experimenting with a social stock exchange in an effort to establish a platform that attracts investments for non-profit organisations and NGOs. Although the project was introduced a few years ago, it has struggled to attract significant investors. As a result, both stock exchanges and the government have been approached for assistance. The industry has proposed additional benefits for contributions made to social enterprises through this platform.
The concept of social stock exchange was initially presented by Finance Minister Nirmala Sitharaman during her Budget speech in 2019. Traditional stock exchanges typically facilitate the trading of company shares after capital is raised from public investors. Similarly, SSEs function on the same principle, allowing investors to purchase stocks from listed not-for-profit organisations focused on social goals.
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What is a social stock exchange
A social stock exchange differs from traditional stock exchanges in a crucial aspect: the funds invested in SSE-listed entities are considered donations. Consequently, investors are unable to earn returns on these securities or trade them like regular shares. In essence, SSE serves purely charitable purposes, acting as a meeting point for donors and social enterprises. Its primary objective is to generate funds for organisations dedicated to social causes. As a regulated platform, SSE grants companies access to greater capital. The platform’s framework draws from global best practices observed in countries like Singapore, Brazil, South Africa, the United Kingdom, and Canada.
It is important to note that investments from corporate social responsibility (CSR) initiatives fall outside the scope of SSE regulations, resulting in these investments being ineligible for tax benefits under Section 80G of the Income Tax Act. Presently, the National Stock Exchange (NSE) has onboarded 18 organisations onto the SSE, while the Bombay Stock Exchange (BSE) has registered 14, as indicated on their respective websites. However, no fundraising activities have occurred through the SSE so far.
A significant obstacle hindering fundraising through SSE is the fact that companies and individuals are already contributing to CSR activities and other social causes. This reduces their incentive to invest in SSE. As a solution, the industry has called for additional benefits to encourage participation in the platform.
Numerous social enterprises are in the process of seeking registration on SSE. However, they face concerns related to audit and compliance costs, procedural complexities, and the effort required to convince investors, particularly for debt issuances.
Organisations opting for SSE registration must commit to operating as charitable trusts for a minimum of three years, complete with a valid PAN. Since these entities will be raising funds for social issues, they are mandated to provide audited annual impact reports, encompassing both quantitative and qualitative aspects of their social impact.
Currently, SSE is accepting applications from entities working in areas such as hunger eradication, inequality reduction, sports training promotion, financial inclusion, slum area development, disaster management, education, and art and heritage preservation. However, certain entities, such as corporate foundations, political or religious organisations, and trade associations, are excluded from participation.
Need for a social stock exchange
It is an established fact that both corporations and high-net-worth individuals (HNIs) often wish to contribute to society beyond a certain threshold. Throughout history, this has manifested through funding religious establishments, educational institutions, hospitals, and more. In contemporary times, socially conscious individuals are increasingly concerned with addressing urgent issues like gender equality, child rights, poverty alleviation, education access, and climate change. Philanthropy and charitable causes are integral to every civil society.
However, social enterprises frequently struggle to secure the necessary capital for meaningful social welfare projects and often face challenges in accessing conventional funding sources. SSE platforms have the potential to play a pivotal role by connecting transparent and accountable organisations with willing corporations and individuals. Through regular audits of social activities and impact reporting, SSEs can enhance transparency.
Managed effectively, this platform has the potential to reshape philanthropy within the country while also alleviating the government’s burden of addressing social welfare concerns. Industry experts believe that SSE offers a unique avenue for investors that traditional donations cannot provide.