Why the social stock exchange is bad for for-profit social enterprises

In the FY 2019-20 budget, CFO Nirmala Sitharaman highlighted the need for a Social Stock Exchange (SSE) and on September 28, 2021, SEBI approved the establishment of SSE.

Entities will include non-profit organizations (NPOs) and for-profit organizations (FPOs) targeting the less privileged and underserved in any of the 15 broad categories of social protection activities specified in the SEBI Technical Committee report .

Activities such as the eradication of poverty, inequality, malnutrition, promotion of health care, education for gender equality, nature conservation, etc. have been listed in accordance with Schedule VII of the Companies Act 2013. social welfare activities should be considered eligible activities.

NPOs and FPOs currently receive funding through crowdfunding, CSR activities, philanthropic donations, and more. development impact bonds.

Having a stock exchange like this would be useful not only for social enterprises looking for funds, but also for investors looking for companies doing business in the social sector. The SSE will help build investor confidence to invest funds in SEs, as it promotes transparency. Listed SEs will be subject to enhanced continuous disclosure encompassing financial, governance and social impact. They will also be subject to mandatory social audits.

Around the world, SSEs have been created in Brazil, Portugal, South Africa, Jamaica, Canada and Singapore. Its narratives have not expanded in developing countries due to a lack of meaningful literature and a lack of analysis on the SSE. Currently, Jamaican, Singaporean, UK and Canadian social scholarships are operating.

Social scholarship aspirants face many challenges. First, the difficulty of quantifying and standardizing social impact measures within and across sectors (such as poverty, health, education, environment). Even with the development of standardized tools such as GIIRS and IRIS, measuring and evaluating impact remains problematic.

Various jurisdictions around the world have determined that registration on SSE is limited to medium and large businesses. The growing list of social enterprises listed on the Canadian and UK SSE recorded a median turnover of $4.7 million and $8.2 million, respectively. He presented a varied scenario where only mid-sized market players get the maximum share of listing on the exchange. The scope is therefore restricted for smaller players despite the fact that India’s SSE is a government-led push.

While the idea of ​​a social exchange is noble and can help SEs raise funds and reach the general public, the question is, should both FPO and NPO be part of this exchange? Will it be beneficial for both?

SSE considered NPO and FPO as social entities; however, this will be detrimental to the growth of the FPO sector. Investors will not be able to tell the difference between FPO and NPO. NPO creates social impact and does not generate return on investment, while FPO works to create impact and generate profit. Considering them on the same platforms will cause FPO to lose potential investors who focus on social impact and ROI.

Once the SE is listed on the SSE, its valuation will depend on how the shares move on the secondary market. However, investors will not invest with the expectation of a dividend or return on investment. They will invest to support the social cause. This will affect the valuation of the SE, in particular. FPO and further impacting them in the next funding cycle.

Retail investors are not well educated financially, and dealing with FPO and NPO on the same platform will confuse them. Retail investors may prefer to invest only in an FPO because they will be able to earn a return while helping a cause. They won’t be able to tell the difference between the two, which will further disengage them from investing in SSE. This will undermine the goal of the ESS to motivate retail investors to invest in NPOs and FPOs.

Providing financial education will motivate and educate investors, such as DFIs and retailers, to invest in NPOs through SSE.

To facilitate the process, the FPO should be more aligned with the regular stock exchange and the rules of the game should be changed. Business-oriented enterprises should be compelled to adapt and evolve as commercial and social enterprises. A new index – ESG, can be created on the regular exchange to facilitate FPO and encourage companies to work for social impact. Moving FPOs and commercially oriented businesses on the same platform will benefit the country. This will add pressure on companies, and they will feel compelled to start working on environment, social and governance (ESG).

By dealing with NPO and FPO on different platforms, investors get clarity on the type of organization they are backing. They get the right to choose to invest in a business working solely for a social cause.

There is ambiguity regarding the activities covered for recruiting an SE. For example, NPOs working for the welfare of veterans, war widows and dependents of the armed forces will be able to enroll on SSE; however, there is no clarity that the FPO only hires veterans. FPO will struggle to qualify among the 15 activities listed to enroll them in the ESS, even if their business model supports the cause.

To conclude, before deploying SSE, the government must work on the clarity of the different rules and regulations, check how each social impact organization can benefit from the platform and, above all, make a clear distinction between FPO and NPO. . SSE should focus entirely on non-profit organizations. It is advisable to bring business entities and the FPO closer because nowadays business entities are also focused on creating social impact.

Although SSE is a separate segment from the existing Indian stock exchanges, their governance, design and operations should reflect the deeper purpose they serve.

(Arvind Agarwal, Co-Founder and CEO, C4D Partners)

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Posted: Saturday, April 30, 2022, 10:11 p.m. IST

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