Govt's social stock exchanges proposal may face disclosure roadblock

Illustration by Binay Sinha
The government’s Budget proposal to introduce the concept of social stock exchanges (SSEs) in the country could face disclosure roadblock. Non-governmental organisations (NGOs) say the proposal to follow most of the reporting requirements mandated for listed companies, along with the additional requirement of social auditing, could prove to be a major impediment.

This may restrict civil societies to go for voluntary listing. It will add to the regulatory burden, say industry experts. NGOs are already being regulated by multiple agencies and have to follow stringent rules. An SSE is a platform that allows NGOs and voluntary non-profit organisations to raise capital for social purposes. “The thinking within the Securities and Exchange Board of India (Sebi) is that these civil societies have to undergo social audit process and certification and also proper disclosure on a continued basis,” said a regulatory source. He added that the Sebi-appointed technical panel is finalising the onboarding mechanism and eligibility criteria for these firms. Social audit measures are an assessment of how the company is achieving its goals or benchmarks for social responsibility. It is not a mere numbers game, as in a normal audit there are no norms for measuring social change. The regulator is of the view that it has to impose these additional checks and balances. Not doing so runs the risk of inviting fly-by-night entities.

However, according to people in the sector, the whole argument of bringing in more transparency is flawed. Even after adhering to the Foreign Contr­ibution (Regulation) Act (FCRA), 2010, the government continues to crack down on civil societies. Amnesty International being the latest example.

Biraj Patnaik, executive director, National Foundation for India, said, “NGOs in India are perhaps the most regulated anywhere in the world, with multiple regulatory authorities, including the income-tax, Ministry of Home Affairs, and the Registrar of Societies. With multiple layers of accountability, the transparency and governance requirement from NGOs are much higher. Therefore, there is little merit in creating yet another additional layer of regulations in the form of social audits, even if it’s voluntary at this stage.”

“The idea of setting up an SSE, which has not taken off successfully anywhere, is premature. It is ironic that on the one hand, the government is shrinking civic space through changes in the corporate social responsibility (CSR) laws and FCRA laws and, on the other, is talking about creating a new mechanism for capital flows into areas of work that the government would like to see happen,” added Patnaik.

Fundamentally, the idea is flawed because if you want to ease business for NGOs, it has to be looked at holistically and must cover all areas of non-profit regulation. A level playing field, including for foreign capital inflows, would be a good first step, instead of the proposed SSE, added Patnaik.

Some of these concerns among civil societies were raised at a recent meeting with the Ministry of Finance, while discussing SSEs, another source said, adding the regulator would need to take a cautious approach, as NGOs could be vulnerable to risks of money laundering. 

So far, the Sebi-appointed working group defined the core approach and now the technical committee is working on details such as eligibility criteria, impact and financial reporting standards, and how social impact auditors and information repositories would function. The technical group will likely submit its report by the end of this year and then Sebi would seek finance ministry approval. Notably, the regulator has not accepted any of the recommendations of the working group.

Ingrid Srinath, director-Centre for Social Impact and Philanthropy, Ashoka University, and a panellist of Sebi’s technical team, said: “NGOs have already been submitting information to various authorities as well as to their own donors in a very detailed manner. The goal here is to attract new capital to the non-profit sector.... The goal is to attract investors who have never invested in the social sector.”

She further said the platform and the new instruments aim to provide a sense of legitimacy, transparency, and build their confidence to invest in social causes. Initially, there may be only a few thousand organisations eligible for listing, but as the ecosystem develops, more players would come on board.

The data suggests that India has nearly 3.4-million NGOs catering to areas as diverse as disaster relief and advocacy for needy communities.

Echoing similar views, another person said that the reason for keeping such checks and balances is because of lack of data on civil societies in India. Barring few like GiveIndia and GuideStar India, information about many societies, despite their good work, is not available. So through listing, donors/investors would discover potential civil societies and support them. 

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