Social enterprises and impact investing got a renewed impetus from the Securities and Exchange Board of India (SEBI) on September 28, when it gave the green signal for the framework of social stock exchanges in the country
In her first Union Budget speech (July 2019), Finance Minister Nirmala Sitharaman had announced the plan to build a social stock exchange, under the ambit of SEBI.
"It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. I propose to initiate steps towards creating an electronic fund raising platform – a social stock exchange - under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund"
Nirmala Sitharaman's Union Budget speech
Impact investing and social enterprises use capital to invest towards attaining observable or measurable social or environmental benefits; making a profit in the process (for a for-profit enterprises).
The SEBI board's approval is largely based on the recommendations of its own working and technical group, which will allow groups with social impact and intent as its primary goal to raise development finance through a variety of sources that are commonly floated on stock exchanges or are market-linked. The approval of the framework of social stock exchanges moves to pave a pathway for funds for social enterprises via these channels.
The Indian Social Stock Exchange Model
SEBI has outlined a number of regulations that will govern social stock exchanges in India.
First, these exchanges will be separate segments in existing stock exchanges in India.
The social enterprises, who will be eligible to participate can be non-profit organisations (NPOs) or for-profit social enterprises (FPE). However, they will have to primarily work in a social activity among a list of 15 such broad eligible activities.
Though SEBI's announcement does not list these activities, its technical group report released in May this year does highlight 15 areas that would make a social enterprise eligible for participation.
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NPOs may raise funds through:
- Equity
- Zero Coupon Zero Principle bonds
- Development Impact Bonds
- Mutual funds
- Social Impact Funds
Social Impact Funds are re-christened versions of social venture funds, which are AIFs (Alternate Investment Funds) already under the ambit of SEBI. Quarterly data from SEBI shows that social venture funds had cumulatively raised ₹3,671 crore in commitments, ₹2,463 crores in funds and had made investments worth ₹1,105 crores as of March 31 this year. This can be viewed here. The Board also approved reducing the corpus requirements for these funds from ₹20 crores to ₹5 crores.
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While the technical report did outline that several of these avenues such as mutual funds could be a conduit to retail participation and retail philanthropic involvements alongside institutional involvements in social stock exchanges, SEBI's release does not differentiate among potential players who can invest in these instruments.
SEBI further outlined how compliance for them would take place. Initially, only firms or institutions having expertise in social audit would be able to do so. Further, a directorate for social audit would also function under the Institute for Chartered Accountants of India.
Find SEBI's release outlining its Board's approval here.
Social Stock Exchanges Around The World
Social stock exchanges have been opened around the world, but not all of them provide platforms to trade in stocks or any and all financial instruments in the traditional sense. These exchanges come in different formats. These formats can be seen below:
Such exchanges also exist in Brazil and Kenya.
Find SEBI's technical report here.