The idea of a social stock exchange was first proposed by the Finance Minister in her Union Budget 2019-20. More than two years hence, the SSE is finally beginning to see the light of the day.
These couple of years have not been without activity and the Securities and Exchange Board of India constituted two expert groups to give recommendations on conceptualising and operationalising the SSE.
Following the recommendations by the expert groups, SEBI has done well in kickstarting the process for establishing the SSE. For the most part, the regulations notified by SEBI are in consonance with the recommendations made by the expert groups. In particular, the notification of a zero coupon-zero principal bond as a security is a major innovation, as it operationalises the raising of grant funding in the form of negotiable instruments.
However, there are a couple of important areas where the notified regulations fall short of or diverge from the working group recommendations.
The working group on SSE envisaged for-profit enterprises accessing the SSE to raise equity capital from a set of investors who would otherwise not invest in conventional commercial enterprises. The rationale here is that social finance operates at the intersection of philanthropy and commerce, and thus, has a hybrid nature.
Recognising this shift in investor expectations towards the triple bottom-line opens a new source of capital for social-minded for-profits.
In addition to accessing capital from conventional exchanges, such for-profits could also expect preferential access to capital from socially responsible investors. However, the regulations notified by SEBI disallow FPEs from listing on the SSE.
Perhaps, the thought process is that FPEs are well-accustomed to capital markets and, therefore, do not need a new board.
However, in our view, this is a significant lacuna that fails to recognise the spectrum of enterprises that exist between the purely for-profit and non-profit organisations.
Along with the inclusion of for-profit enterprises, the working group outlined two important types of entities that were needed to support the SSE ecosystem—information repositories and social auditors.
There is a sense that social auditors are indeed a new class of actors who will need to become trained and fitted for the purposes of conducting social audits, and SEBI’s SSE framework outlines steps for the development of social auditors.
However, there is no such recognition in respect of IRs, who were envisioned by the working group as actors that would gather and make available information about NPOs. This is another notable lacuna in SEBI’s framework because while a few IRs do already exist, there is equally the need to encourage more such entities to become operational so that the entire universe of NPOs in India can progressively be covered by them.
The establishment and effective functioning of SSE requires close coordination and action among a host of regulatory and statutory entities like SEBI, the Institute of Chartered Accountants of India, the Ministry of Corporate Affairs, stock exchanges, National Institute of Securities Market, the Department of Revenue and the Ministry of Home Affairs.
How well these entities are able to operate in tandem remains to be seen. Also, the regulations notified by SEBI are only a start and rapid progress needs to be made in some areas for the social stock exchange to even begin operations.
Primary among them are the development of disclosures and social reporting standards. SEBI and the ICAI need to come out with clear and objective social reporting and accounting standards, respectively, for social enterprises. It is social reporting that is the main differentiator between social enterprises listed on the SSE and other NPOs and, hence, such reporting needs to be operationalised at the earliest.
As a next step, the ICAI and the NISM need to come out with the training and certification programmes to help develop a cadre of social auditors. The disclosures made by social enterprises gain credibility only when they are audited by competent and independent third-party agencies.
Concurrent with the first two steps, SEBI also needs to ensure that the operational details of listing and raising funds on the SSE are completed quickly. It should be noted here that, in this regard, SEBI has constituted a task force of representatives of exchanges and SEBI to operationalize the SSE framework.
If all works well, social enterprises can expect a thriving marketplace for securing funding in a manner that is transparent and liquid. However, transparency will be key for liquidity, and therefore, many SEs will have to conform to much higher standards of reporting, especially on the impact they create, than they are conventionally used to. This will take time and also require the right kind of regulatory forbearance as well as guidance. We hope that implementation follows vision and SEBI stewards the creation and development of the SSE and its ecosystem successfully.
Indradeep Ghosh is executive director; and Madhu Srinivas is a senior research associate at the Financial Systems Design practice, Dvara Research.
The views expressed here are those of the authors, and do not necessarily represent the views of BQ Prime or its editorial team.
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