Social Stock Exchanges – An innovative network for raising money for social ventures 

Last Updated at: May 26, 2020
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Social Stock Exchange
Social Stock Exchange - An innovative network for raising money for social ventures
When the government imposed a nationwide lockdown on March 20, the stock market was closed. It was only after 52 days that the market attempted to reopen on the 11th of March

 

In the budget session of this year, the Finance Minister proposed the creation of a social stock exchange, under the regulatory purview of the Securities and Exchange Board of India (SEBI) to help support social initiatives in raising money. It should realise that the currency market interaction between investors and businesses only favoured economically viable and profitable ventures. Non-profit organisations have largely remained underfunded and left to look for charity, donations or free resources to make ends meet. This post casts light on an innovative propose framework for generating investing money by social enterprises. While also highlighting its benefits and challenges in implementation. Read more on the Social Stock Exchange in the blog.

It is not enough to be compassionate. You must act. 

– Dalai Lama 

What is a social stock exchange? 

While browsing our social media feed or reading the newspaper, we often come across request pleas for generating money for ailing children, elderly, pets or the poor. These are largely based on appeals for voluntary donations generated at a crowd-sourcing website (for e.g., Milaap being one such notable website) especially in cases of expensive treatments. Akin to a crowd-sourcing platform for fundraising, a social stock exchange is an electronic platform that allows investors to buy shares in a social enterprise that has been thoroughly checked by the exchange platform. 

A social enterprise for this purpose would be a revenue-generating business whose primary objective is societal in nature. For example, clean energy, sanitation, healthcare etc. These platforms can get themselves to list on a social stock exchange in order to raise capital. 

Impact Investments in India

  • Mahatma Gandhi in 1925 laid out a thoughtful list of what he called “social sins” – politics without principles, pleasure without conscience, wealth without work, commerce without morality. For decades, companies in India have continued to exploit natural resources without regard to social manifestations on environment, livelihoods, food availability and poverty. 
  • Governmental interventions such as Environmental Impact Assessments, legislative interventions in the form of laws on environment and property have met with limited success. 
  • Several businesses have also emerged in recent years, aimed at solar energy, manufacturing of alternatives to plastics, clean air etc. An innovative policy tool rooted in returns for investors while also securing positive social impact is the concept of the social stock exchange. 

Given the size of our economy, our population, there is a mounting pressure on the government to provide better social services. However, given the gap between public investment by the government and the need for resources, there exists a lot of scope for private entrepreneurship in the social space. Through impact investing, private sector money can be channel into social enterprises capital, aimed at priority sectors such as education, health, housing, water etc. 

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The necessity for a social stock exchange

  • Currently, there exists no market phenomenon for interaction between social, non-profit enterprises and investors willing to contribute to such projects. 
  • The resource base for most non-governmental, non-profit organisations is limiting to a few investors. Or the funds received from compulsory corporate social responsibility expenditure of large companies. 
  • While capital markets traditionally served the economic needs, the social security exchange would help bridge the gap between capitalist objectives of a business and the need to preserve environmental and societal equity
  • A platform such as a social stock exchange would not just aid the government in securing access to social resources like health and education but also improve the quality and quantum of such welfare initiatives. 
  • While most of us feel strongly about environmental issues, cleanliness, access to education etc, we often find ourselves incapable of contributing enough. Through a social security exchange, investors can align with projects that resonate with their beliefs and values. 

Challenges in creating a social security exchange 

  • Accountability and transparency – While SEBI would be given the responsibility of overseeing such projects, till the government notified proper rules, there would be no clarity in establishing accountability of third parties availing funds from such a platform. 
  • Tax repercussions – While the Income Tax Act in India provides for deductions from income of a person donating to specified charities and government funds, it is unclear whether such contributions to projects enlisted on a social security exchange would be eligible for tax benefits. 
  • Returns in the form of social impact – Unlike a regular market investment with specific returns, the return on investment in a social security exchange would be the social welfare outcome from the project. When outcomes such as social impact, are not quantifiable, there exists ambiguity. The SEBI would have to formalise specific rules and methodology for calculating returns in this context. 
  • New tools and training – Making a special asset class of “social projects” would require many changes in the current market exchange terminology and trading processes. 

Conclusion – Advancing social justice through investments 

Despite the challenges, social security exchanges afford a possibility for ordinary citizens to invest in projects that have the potential to solve social challenges and invest in causes they believe in, without doing “charity”. This globally recognised exchange platform has been set up in many countries including Singapore, UK, Canada and South Africa. By disseminating authentic information on social enterprises and creating a supporting infrastructure, we can foresee a future of impactful roles being assumed by social businesses in the Indian economy. 

Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.