By Trisha Shreyashi & Aditya Kumar,
In the spirit of economic inclusion, the Securities & Exchange Board of India (SEBI) authorized the creation of Social Stock Exchanges (SSE) on September 28, 2021. These entities shall encompass non-profit organizations & for-profit firms below their ambit of social enterprises (SE). Such organizations struggle for enough fund assistance. This thought of SSE prioritizing influence investment and social returns was initial floated in India in the 2019 – 2020 price range. It gained momentum throughout the pandemic bringing the spotlight on the require for social capital to relieve the adverse effects on the vulnerable. SSE is a regulated funding platform, projected as an enabler of capital access for such SEs.
All such SEs that demonstrate social intent & influence as their main aim are eligible to participate in SSE. Such primacy will be determined by the public advantage test devised with 3 filters of target population, activities engaged, and activity volumes. It ought to target the underserved and significantly less privileged, in any of the 15 broad categories of social welfare activities specified in the SEBI technical committee report, 2021 such as eradication of malnutrition, poverty, inequality, promotion of gender equality education, healthcare, preservation of nature and so forth. And, 67% of the SE’s activities ought to qualify as eligible social welfare activities to be in a position to list themselves on the SSE. The listed SEs will then be in a position to raise capital via equity, zero-coupon bonds, mutual funds, social influence funds, and development influence bonds.
Presently, the SEs obtain funding through CSR, philanthropic donations, crowdfunding and so forth. SSE, giving a unified funding channel, will act as an umbrella organization to monitor due diligence, reporting and standardized disclosures of the listed SEs. The SEs listing herein would be subjected to enhanced continuous disclosures encompassing economic, governance and social influence elements. Although the listed SEs will delight in tax positive aspects, they would be topic to mandatory social audits by auditors certified by National Institute of Securities Markets and self-regulatory sustainability directorate certified by Institute of Chartered Accountants.
While this unified social financing platform protects beneficiaries and influence investors, it also creates an explosive conflict of interest that could harm the extremely lives supposed to be enhanced. Operating at an intersectional hybrid blend of industrial imperatives and social philanthropy, meeting ambitious development targets could possibly plague the listed SEs to sway away from the social mission. The 2010 Andhra Pradesh microcredit crisis is one such instance exactly where the SE became embroiled in aggressive debt collection practices owing to more than-lending in the development stage, top to debt-traps and suicides. Such drifts in financing trends from grant-based to equity-based affirms the require for monitoring and regulation. SSE could possibly be in a position to strike balance with the difficult proposition of unlocking massive pools of social capital through traditional capital structures, topic to healthful practices.
The SEs will now be topic to close monitoring and regulation of transactions made by them, the require for which has been highlighted in use of trusts to evade taxes in the Pandora papers leak. Usage of SEs like trusts as a tax avoidance model for corporations has been a routine stratagem. Corporations now shall not be in a position to erode off income in the name of philanthropy and CSR through listed SEs. However, the unlisted SEs are nevertheless beyond the purview of these regulations.
Globally, SSEs have been set up in Brazil, Portugal, South Africa, Jamaica, the UK, Canada & Singapore. However, only the Jamaican, Singaporean, British and Canadian social stock exchanges are presently functional. The SEBI working group report, 2020 for establishment of SSE has acknowledged the regulatory loopholes and institutional drawbacks of such worldwide SSEs. It has rightfully crafted the SSE as a segment of higher-turnover stock exchange like: BSE or NSE. This addresses the troubles of insufficient revenue and finance operating fees of the exchange via its charge structure, although sustaining brevity in regulation. SSE as a result projects the prospective to uplift these at the bottom of the socio-financial pyramid. However, the measurement of social influence in metric terms remains a important challenge in analyzing returns on this investment, for investors, auditors and regulators alike.
(The authors are legal pros, presently a element of the National Institute of Securities Markets (NISM) academia. Views are individual and not necessarily that of TheSpuzz Online.)