Dr R. Balasubramaniam
Are investors, NGOs ready for a Social Stock Exchange?
Civil Society News, New Delhi
The idea of having a Social Stock Exchange in India has been circulating since it was proposed by Union Finance Minister Nirmala Sitharaman in her budget speech last year.
Social entrepreneurs face multiple challenges in raising funds for their causes. A structured mechanism would potentially help them find support and scale up more easily.
But what exactly is a Social Stock Exchange and how should a social enterprise be defined? Will investors be ready to support good ideas for ‘low’ or ‘no’ returns? Will NGOs be able to transit to this new mechanism?
Dr R. Balasubramaniam has done a detailed report on the concerns and opportunities that emerge from a Social Stock Exchange. He is a physician by training and is the founder of GRAAM (Grassroots Research and Advocacy Movement) (GRAAM) and of the Swami Vivekananda Youth Movement (SVYM).
Much of his time has been spent in villages, but he connects easily with the worlds of business and government and knows a thing or two about the functioning of companies.
The Security and Exchanges Board of India (SEBI) has also put together a report on a Social Stock Exchange. But Balasubramaniam brings to the table insights of a different order.
He understands only too well the strengths and frailties of voluntary organizations. His report goes much beyond finance to explore the possible boundaries and internal dynamics of a Social Stock Exchange in India. It is also particularly useful that he looks at the experience in other countries like Britain, America and Canada.
Civil Society had a long conversation with him on Zoom — he at his base in Mysore and we in Gurgaon:
What exactly is a Social Stock Exchange?
Let’s talk about why people get into business – to get good returns. That is the normative understanding of business. And when they list their company on the stock exchange the intent is to access resources from the public to build their company. In return, the investor gets dividend. To ensure these companies are regulated and transparent, a regulatory body validates their declarations. That’s how the concept of a stock exchange came in.
The concept of a Social Stock Exchange (SSE) is very different. The essential difference is that companies on such an exchange don’t exist for the profits of any person. Instead their purpose is a larger social good. But the exchange plays a role similar to that of a stock market regulator. It gets entities listed, the investment, financial instruments validated whether it’s a debenture, an equity investment, or a debt instrument. The companies transparently disclose if they are making profits and the investor’s interest is also protected. While the investor can expect near market returns, the intent and primacy of the listed entity is social change and development.
Over time stock exchanges have been evolving due to the difference in thinking amongst companies. Companies started coming under pressure to mitigate harm they were causing to the planet. Investors began looking not only at profits, but also at how good the company’s environmental obligation was or its social obligation or its governance in terms of disclosure. And so companies moved to what is traditionally known as ESG (economic, social and governance) thinking. In the world of business, they call it the triple bottom line – people, planet and profits.
Based on these understandings, the United Nations proposed the idea of the Social Stock Exchange Initiative (in 2009) where such disclosures would be mandated, and companies would get returns along with declaring the social good they were creating. So private gains began getting merged with the notion of social gains. Different companies have attempted this, essentially creating social enterprises whose primary terms of existence is to create social good and also ensure that the investor gets some fair returns.
Are you saying like in a conventional stock exchange people would be able to buy and sell shares and so on?
Ideally yes. But let me also provide a caveat. There are close to 14 Social Stock Exchanges globally in several countries in different stages of evolution. Not a single one can be called fully functional and successful.
The ideal is if you can list, declare and trade. Let’s say you invest in the Swami Vivekananda Youth Movement and we give you shares and a certain amount of dividends. Tomorrow say someone is interested in buying those shares from you. If they can do it then that’s a well- functioning stock exchange. It’s only in the Canadian Stock Exchange that a reasonable amount of trading is being transacted. Most of the other stock exchanges haven’t fully evolved to this stage.
Read Dr R. Balasubramaniam's study on a Social Stock Exchange here.
In my report I have classified five Social Stock Exchanges in the trajectory of reaching a stock exchange. Six are in different stages of evolution. Many are just matchmaking portals. You can’t call them a stock exchange in the real sense of the word.
But the idea of a Social Stock Exchange is to attract investment in causes which are crying out for funds and support?
The world of social sector development is always starved of funds but let me put things in perspective. India is a signatory to the UN’s Social Development Goals or SDGs. We have 17 goals we have to achieve by 2030, as a member country. The reality is it will require an expenditure of a trillion dollars annually on the social sector. Right now, the resources of the government, PSUs, civil society organizations all put together come to around $ 440 billion — which means there is a huge deficit of $560 billion, and that you just can’t generate unless you seek private resources.
How do you attract money? A conventional stock exchange markets runs on excitement, bubbles, bull runs, profits…
The working group at the Securities and Exchange Board of India (SEBI) has come out with a report but it has not taken into consideration the issues you are trying to raise. They are talking about the Social Stock Exchange as a single entity. I think there are three components. The stock exchange itself is the regulatory bit. To make it functional a lot of work needs to be done first.
One bucket is the supply side: would I as an investor be keen to invest in an entity where I would see no returns or little returns or lower-than-market returns? There should be a reasonable amount of incentive for me to even think of investing.
The second is regulation: SEBI is focusing on the stock exchange itself. But you need people to assess the company’s work, its impact. Somebody has to make those disclosures measurable to convince the investor and bring in transparency guidelines.
Third, is the demand side: I’ve been on the demand side for more than three decades. I know that we in the social sector only know our social commitments. We never tend to think of profits. In our DNA, it doesn’t exist.
You need to work on creating the ecosystem first before you can even launch a stock exchange.
A social enterprise is a hybrid of social plus enterprise. How will it be valued on a Social Stock Exchange if it comes in with an IPO?
How do you even define a social enterprise? We use this word so casually. The social enterprise is an entity which hasn’t been described by law in India. I know a lot of companies that say they are social enterprises but scratch under the surface and they are formal for-profit companies.
Honestly, every company can say it is doing social good. A car manufacturer can say I am enabling transportation of people, which is a social good. There has to be a legally mandated understanding. Different countries have defined it differently. There are currently 62 different connotations of social enterprise being used around the world.
The closest I would recommend is the British definition. The entity generates profits and ploughs it back into the work it is doing without any dividend to the investor. But it may not be practical in the Indian context. What we are proposing is that the promoters don’t get any returns, but the investor may get less than market returns and get to see social good.
It can be a dicey situation. No NGO says it’s not doing social good. I’ve been in the sector for 40 years and we all declare we are doing good. But how do we measure good? These are uncomfortable questions, which we in the social sector have not asked. One is to measure a social obligation in a way in which it becomes a monetizable commodity for an investor. That is the journey we NGOs have to take first.
I would say define the social enterprise and set out its legal boundaries and obligations. My nervousness is SEBI in its report has deliberately refused to do so.
Is it a challenge to set a value on social enterprises?
A challenge, yes. We have not defined what is social and what is enterprise. We need to put in place a legally mandated obligation of that entity. For example, as a non-profit we run hospitals, schools, charge fees, and charge patients. Our returns are pathetic. If I spend Rs 100, I get back Rs 40. So Rs 60 is still donor dependent. I am allowed to raise revenues because these are health and education activities, permitted by law. But I also run a training institute and a research programme. The current law is very clear: we cannot generate more than 25 percent of our total revenue as user income as an organization.
India’s definitions are so very suffocating because of tax laws. If I generate the 26th rupee I have to shut down as a non-profit entity. Now you say I have to become a social enterprise and give dividends. How do I do it when the legal framework doesn’t permit it?
You need a new and universally acceptable definition of what a social enterprise is?
Which is legally valid and a lot of changes in policy and taxation laws to match up to it. All this has to come first before we set up a stock exchange. A lot of homework has to be done on the social ecosystem before the system is ready to absorb a stock exchange.
How would you value social and enterprise together? Which would take predominance and how would an investor be enticed by a company like this one?
Valuation principles exist globally. There is GRI, IRIS, Buffet’s impact rate of return, ESG disclosure, SASB, BESPOKE etc. Certain standards have been established. When you say social enterprise, is the primacy of its existence social? You try not just to balance the profit logic with the social logic but affirm the primacy of the social logic. That valuation is very critical.
So, we need a new breed of assessors who can measure social impact. What SEBI and for-profit stock exchanges have today are market valuers, who understand the enterprise part of the system. Either they need to be trained or we need a new brand of assessors and valuers who are actually trained in social impact and then deputed to measure before the enterprise comes into an IPO. Tools to do this exist.
What happens to a social enterprise which is hugely successful beyond its social goals and has multiplied its commercial possibilities? Take the example of Body Shop.
You know these questions have to be tested as we go along. I don’t have a ready answer, but these are troubling questions. That is exactly the reason why we have to get this whole concept clear in the first place.
As much as I am a votary of the Social Stock Exchange, my fear and concern is that it is being used as an instrument possibly to have two or three kinds of impact.
The first is: does it mean that it absolves the government of its social responsibility?
Just because I get private sector investment does it take away the mandate of any government to serve its citizens and reduce its social sector investments? Or become an excuse to reduce spending on the social sector?
The second challenge is that the ecosystem is altering rapidly. If the proposed changes to the draft CSR Act are actually implemented, it will virtually eliminate societies and trusts from the ambit of receiving CSR grants. There is a huge effort to promote Section 8 companies as a vehicle for social sector development. If the stock exchange is going to be defined and framed to promote only Section 8 companies, it could become a vehicle for re-channelizing funds from a profit-making company to itself but declared as a non-profit entity. It may not really need the social sector space at all. It may just become a way of transacting within your own ecosystem.
The third fear I have is of investor pressure on social sector enterprises to just generate dividends and profits. Over time, we may lose the very mandate we started out for. Currently, the way the SSE is being structured only large global NGOs or social enterprises with the DNA of enterprises will be able to move into that space. It will virtually kill off small and medium NGOs.
The exchange has to be so designed so as to provide space for everyone. We mustn’t forget that philanthropy in our country is a cherished cultural process. Small NGOs will have no way of understanding what a financial instrument is.
How will managers of these companies listed on a Social Stock Exchange be rewarded? Sweat equity, bonuses…?
You are already making a premise that this stock exchange will be set up. That’s my fear. The background for creating the ecosystem is a very, very important step. It’s a precursor step, which will take at least three to four years at the very least.
Thailand began creating an ecosystem for a Social Stock Exchange 10 years ago. They told non-profits, you can’t forever be dependent on philanthropy, you need to generate your own revenue to sustain your work. They are only now contemplating a Social Stock Exchange after creating a appropriate ecosystem.
In 2013, the United Kingdom set up its Social Stock Exchange as part of the London Stock Exchange. About 11 or 12 companies are listed there. Why isn’t everybody jumping in? Because the regulatory measurement of performance is so rigid. In India, it’s so weak, everybody will actually jump in.
The UK government brought in a new law to create a new entity, which is neither an NGO nor a true enterprise. It’s called a Community Interest Company (CIC). And they clearly defined this animal, its performance, what it does, its qualifications for being listed. They also created a market opportunity for CICs. They said the first priority for all government contracts, all opportunities, will be given to CICs.
In America a similar process exists but it is more market driven. A non-profit started the concept of B-Corp or the Benefit Corporation. Such corporations must exist for the benefit of society. The corporation self-declares it is a benefit corporation. It has to go through a rigorous and methodical assessment to get a certificate qualifying as a B-Corp.
It is not a legally recognized entity. But over the last 20 to 30 years, state legislatures have passed laws recognizing the validity of a B-Corp certificate. Everything is listed: salaries, amount of business you do and so on. It is regulated and declarations are measured. Only then are you eligible to get listed and you get tax incentives. There is also the Low-profit Limited Liability Company or the L3Cs.
My fear is that the SEBI working group report simply builds instruments that enable a for- profit company to declare itself a social enterprise. There is a real danger in that.
My feeling is NGOs aren’t ready with the existing laws. Instead of investing time changing all the laws why not create a new legal entity? Let’s take the best of the DNA from the CICs and the B-Corps, put in the regulatory processes, and allow a new animal to arise. Allow it to mature over three to four years and then get them listed in the stock exchange. That’s the ecosystem you need to prepare.
When we are looking at market mechanisms for raising money for social good, shouldn’t we debate these things out first?
I absolutely agree with you. The finance minister announced the intent of the government to set up a Social Stock Exchange in the budget and that is the law of the country. The government is going to set it up. If it is set up in a hurry it could possibly fail. Five years later the government down the line will say, we tried, and it didn’t work. We will lose the opportunity of finding private resources for public good.
Most members of the working group set up by SEBI are from the finance sector. There is just one social sector representative. There is no one to even say what is social sector. The government is the primary stakeholder. The ministry of corporate affairs did not participate in the deliberations. A report that signifies such a paradigm shift cannot go ahead without the government’s blessing. The MCA has to be a stakeholder in this narrative and stay engaged.
My fear is that we are going to end up with an entity that is only going to promote private interest. Elite capture is a reality in most countries, not just in India. I am worried that the Social Stock Exchange will yield to elite capture. And we will lose the entire narrative of social sector development.
Six months of debates should happen and then thinking on what needs to be done. As a precursor draw a road map that leads to the formation of a Social Stock Exchange. Let’s do the background work first because social sector development is too important to be just left in the hands of the private sector.
So, the Social Stock Exchange in some form or the other has been happening globally. Where did the idea originate in India?
Honestly I have no evidential basis. I can only guess. Somebody must have read about it or may be the UN put pressure. My belief is that when the UN announced the initiative they looked at existing stock exchanges evolving or setting up cells within themselves to look at sustainability.
The Bombay Stock Exchange (BSE) has got a sustainability stock initiative cell, so has the National Stock Exchange (NSE). There are mechanisms for ESGs, and a lot of focus on small and micro enterprises. Work is being done in India and whoever suggested this hasn’t examined the lessons we can learn from ongoing systems. I mean do we even need a social stock exchange.
I am for a Social Stock Exchange. But we haven’t got our act together. The ecosystem has not been created. The SEBI report talks of international investors coming into India. Almost 74 to 80 percent are foreign investors. We have just six or seven known impact investors from within India as of today.
They are asking for the FCRA law to be amended. We look at NGOs with suspicion, but we somehow think legitimizing a social enterprise that is looking at international impact investment as okay. These are contradictions we have to resolve.
A great many NGOs are actually private limited companies, as your report says. Would they be able to seize the opportunity given their current status?
Absolutely no. We are a reasonably large NGO in Karnataka. I will not be able to absorb the financial instruments being proposed today. A CBI report to the court says we have 3.1 to 3.2 million NGOs in India. The SEBI report only looks at organizations which are in the domain of Information Repositories (IR)and even names them: Guidestar, Credibility Alliance, Darpan of the Niti Aayog. As of last month, only 93,000 NGOs were registered with Darpan, which is a government portal.
If that is India’s information repository then around 3.1 million NGOs are completely left out. You have to measure NGOs according to the good work they are doing not according to their ability to brand themselves and write flashy reports. Use this opportunity to incrementally build up this sector and increase their capacity in processes and governance.
Philanthropy is not going to die just because an investor opportunity is created. We need NGOs that fulfill critical functions. Look at the migrant crisis that emerged during the lockdown period. Without NGOs that crisis would have been disastrous. They stood up to the cause and they delivered.
NGOs are one of the largest employers in this country. Just because we don’t formally declare how many people, we employ we don’t get support. Everybody else, like small and medium enterprises get support. They are all seen as wealth creators. We are also wealth creators. You don’t monetize the social wealth that we create.
A huge number of people are getting laid off in the NGO sector. About 30 to 40 percent of NGOs will disappear next year because the entire financial spectrum is going to change. Let’s look at options of strengthening the sector because civil society is a very mature representation of democracy. It is not a threat to democracy. It is integral to our growth and evolution.
I see the Social Stock Exchange as a neutral regulatory umpire for one set of civil society organizations which have the capacity to understand the financial instruments involved and can inspire investor confidence. This small band can grow over time. Let the existing band flourish till they may die a natural death. Allow an organic evolution and don’t forcibly fit into an imitative model you bring from abroad.
Let’s get an indigenous stock exchange, culturally acceptable and contextually relevant. We can learn from global models and evolve an even better one. There is no successful Social Stock Exchange in the world. This may be an opportunity for India to be the jagatguru we want to be.