Explained: What Is A Social Stock Exchange Proposed In Budget, And How Will It Help Social Enterprises? 

Finance Minister Nirmala Sitharaman, in the Budget last week, announced that the government plans to create a social stock exchange (SSE), a platform on which social enterprises, volunteer groups and welfare organisations will be listed so that they can raise capital. The proposal has attracted much attention, and social entrepreneurs, among others, have said that the move can have a revolutionary effect on how they tap investors for capital.

However, before one can understand what a SEE is, two terms —social enterprises and impact investment — need to be understood.

So, What Is A Social Enterprise?

A social enterprise is a revenue-generating business, but with a twist — its primary objective is to achieve a social objective, for example, providing healthcare or clean energy. But even though profit is not the primary goal, it is an essential part of the puzzle — it ensures the sustainability of the entity.

This in no way means that a social enterprise can’t be highly profitable. In fact, most social enterprises look and operate like traditional businesses. The only catch is that the profit these entities generate is not necessarily used for payouts to stakeholders, but reinvested into their social programmes. A continuous flow of profit helps social enterprises plan and execute long-term programmes, and bring on board the required technology and professionals.

Profit, which makes social enterprises sustainable, differentiates them from charities, which too have a social mission but are fully dependent on donations.

An example of a social enterprise is Bangalore-based SELCO, an entity involved in the ‘delivery of last mile sustainable energy solutions’. SELCO says it “has maintained modest profits in the last eight years with growth rates at an annual average of 20 per cent. It has reinvested its profits back into the company”.

And What Is Impact Investment?

As the term suggests, impact investment is the investments made into businesses with the aim to make a measurable social, economic and environmental impact while also generating a range of returns, from profit to publicity.

Globally, around 1,300 organisations manage $502 billion in impact investing assets, Global Impact Investing Network says. Impact investments are growing in India too, and in six years between 2010 and 2016, the impact investing sector in the country attracted over $5.2 billion. Over $1.1 billion was invested in 2016 alone. And this investment is growing at an annual rate of 14 per cent.

According to a Brookings survey, a majority of impact investors surveyed—around 67 per cent, said they achieve above-market returns. For the survey, market returns are assumed to be 12.5 per cent, and the results were consistent with the surveys carried out by Impact Investors Council and McKinsey.

Therefore, the impact investing sector is likely to continue to grow, which means that the volume of investment may also increase. A large part of this investment will fuel social enterprises, and this is where SSE comes into the picture.

What Does A Social Stock Exchange Do?

Envisioned as an electronic platform, an SSE will bring together social enterprises and impact investors on a common platform. On this platform, investors, like in any other stock exchange, will be able to buy shares (trading of securities or potentially debt, in the form of bonds) of listed entities — in this case of a social enterprise which has a mission aligned to their interests. On the exchange, a listed entity’s value will be linked to its social impact.

This will be helpful in a number of ways:

One, India’s social enterprises ecosystem is growing fast, but in a recent survey conducted by the British Council India on the status of social enterprises, 57 per cent of the entities surveyed identified access to debt or equity as a barrier to growth and sustainability. By bringing social enterprises and investors on a single platform, SSE will provide the latter greater access capital.

Two, an SSE will not only give social enterprises access to capital, but will actually make the exercise much cheaper for them by standardisation of the process and does away with the need to engage and negotiate directly.

Three, impact investors want measurable delivery. But over 27 per cent impact investors in India, a Brookings India survey says, find impact measurement difficult. At least 25 per cent said that finding high-quality investment opportunities was a challenge. Despite the development of tools such as the Global Impact Investing Rating System and Impact Reporting and Investment Standards, evaluation and monitoring the impact of investment and social returns remains a tricky issue.

However, for SSE, stakeholders will develop a framework for monitoring of impact, and social enterprises accessing the platform for capital will be vetted before listing, thus ensuring quality and eliminating some of these issues.

In simple terms, listing on SSE will be a seal of quality for a social enterprise and would provide investors confidence that due diligence has been undertaken.

Four, in the same Brookings India survey, over 44 per cent of impact investors surveyed identified ‘finding suitable exit options’ as a challenge. Lack of a liquid market place means the investors will be overly cautious, resulting in net investment going down. As a solution, SSEs offer exit routes.

Five, easy and cheap capital means that the dependence of social enterprises and welfare organisations will not be dependent on aid from private foreign donors, which comes with ‘strings attached’ in most cases.

The Narendra Modi government has been cracking down on non-government organisations after intelligence agencies accused NGOs such as Greenpeace, Cordaid, Amnesty, and Action Aid for reducing India’s GDP by 2-3 per cent per year. Over the last few years, the government has acted against 13,000 NGOs till 2019 and this, in turn, says Brain & Company, has led to a 40 per cent decline in the flow of funds from external sources.

Six, given that listing on SSE would involve regular audit of impact that social enterprises create, it will promote competition between firms and encourage market discipline. The securities of the best performing social enterprises will carry a premium, and, in turn, the companies that are not efficient will be penalised by the market.

Seven, establishment of SSE will help the rapidly growing impact investment market in India to become a more regulated capital market. The proposed SSE will be regulated by the Securities and Exchange Board of India.

Eight, as impact investment becomes more accessible with the help of SSE, money flowing into sustainable development would increase, reducing the burden on the government. If developed with the right framework, SSEs can emerge as an important channel for international development finance.

Have Other Countries Tried SSEs And Do They Actually Work?

Many SSEs have emerged across the world over the last two decades. Brazil was the first country to have a SSE, set up in 2003. Since then, many countries, like Canada, the United Kingdom (UK), Singapore, South Africa, Brazil, and Kenya, have also followed with their own models. Most of these came up in the first few years of this decade and are still in an early stage.

One of the most successful SSEs is Singapore’s Impact Investment Exchange Asia. Set up in 2013, the public SSE is helping raise an impact investment capital of around $40 million and has built a network of over 30,000 partners. By 2016, the SSE has already raised a capital of $12 million resulting in 26 deals.

The UK’s Social Stock Exchange, which was also set up in 2013, has started delivering. In 2016 alone, its members raised £400 million for, among other things, affordable housing, clean energy, and new healthcare facilities.

Therefore, a number of countries have tried developing SSEs and they have worked too. But a lot depends on the framework, and little is know about India’s plan so far. Studying successful SSE models around the world should be the first step in the development of India’s own SSE.