An over-engineered social stock exchange?

If Brazil, South Africa, Portugal, Canada, Singapore, the UK and Jamaica can have one, so should we. I am talking about a social stock exchange (SSE). The finance minister in her 2019 Budget announcement called for the creation of an SSE, and the Securities and Exchange Board of India (Sebi) in its September 28 board meeting this year approved the creation of such an exchange. 

The intervening period was spent by Sebi first, in setting up a working group under Ishaat Hussain, which submitted its report in May 2020. The regulator then followed this by setting up a technical advisory committee under Harsh Kumar Bhanwala to dot the i’s and cross the t’s. This group’s report was placed for public comments in May 2021. Following this, Sebi’s board approved setting up of SSEs this September, under its regulatory ambit. 

The working group saw the SSE as “not only a place where securities and other funding structures are ‘listed’ but also a set of procedures that act as a filter, selecting-in only those entities that are creating measurable social impact and reporting such impact.”

The committee expected that setting up an SSE will bridge the funding gap that the social sector players often run into, institutionalising the measurement, and reporting of social impact and mainstreaming the social sector for a wider set of investors. The technical committee detailed the eligibility, registration and listing requirements, the funding instruments, disclosure requirements, both initially and on an ongoing basis, social audit norms, etc. In other words, all that is needed to operationalise the platform.

Will the exchange take off? After all, just three of the seven exchanges that were set up still survive —  those in Canada, Singapore and Jamaica.

With over Rs 246 billion spent by companies on corporate social responsibility in FY20, the social sector is now deep. In fact, this money spent by corporates is just one part. Their presence is helping institutionalise the sector, with more innovation, tighter measurement of impact, and more robust practices. But there is this other slice of over 3.1 million non-governmental organisations, or NGOs (as of 2015), and counting. From those working to preserve the marine ecosystem, to providing free mid-day meals, to improving education outcomes, to spreading awareness about pet care and hygiene, the sector is both wide and vibrant and all of whom can expect to benefit from the SSE.

A clarification on the label itself is needed. The SSE creates an impression that NGOs like Pratham, Akanksha, Central Square Foundation or PRS Legislative Research will now list and trade. That the SSE’s will be set up as a part of the existing exchanges strengthens this impression. The intent, however, is to enable entities that are listed on the SSE to access “donations,” to help them meet their objectives through predefined instruments. (Though in this period of market excess and irrationality, it is not unrealistic to expect such an interpretation. After all, like many unicorns, these entities too are constantly raising money and giving it away, albeit with an altruistic motive). 

Further, having called it an exchange, the finance minister then had to turn to Sebi; and in asking Sebi to steer the process, the finance minister propelled the market regulator outside its comfort zone. Long used to separating the good from the bad, Sebi was suddenly asked to focus on the well-meaning. Sebi very competently set up the two committees discussed above to find a solution, and given its DNA, then boxed the SSE into a framework that it understands and can regulate. And while to an extent, it may have over-engineered the SSE, Sebi has also allowed for what it calls “registered entities”. Going the full distance will help the larger and more sophisticated social enterprises, but pushing for registration and then “verifying” a slew of NGOs will cover more ground and position the exchange to become a “trusted connector”. 

We know that those operating in the social sector need a steady flow of funding. Consequently, their ability to spend on programmes waxes and wane. At the other end, those donating can never be sure of how efficiently the entity is spending money or what a social enterprise governance framework is. Registered entities will be able to bridge this gap because they will disclose their governance structures and processes, financial parameters and publish their impact studies on an ongoing basis. This registration will bring greater transparency to their operations, without the burden of a full listing, while giving them the much-needed visibility. 

NGO Darpan, a database maintained by the Niti Aayog, has already set the ball rolling. It has self-declared data for over 129,000 NGOs. The Sebi regulated exchanges, purveyors of corporate data, can easily take things forward. The next step for them will be to collect the data, validate it and layer it with an evaluation framework across well-defined governance and financial parameters. As “trusted connectors”, they can facilitate donors in selecting causes, geography and effectiveness of spending. Allowing the public to donate directly, will enhance their offering. True, the focus on getting more and more entities to register is not exploiting the full benefits the exchange has to offer, but it has the potential to deliver the greatest good to the greatest number. 

The writer is with Institutional Investor Advisory Services India Limited. Twitter handle: @AmitTandon_in