Designing a social stock exchange

Illustration by Binay Sinha
During her Budget presentation, Finance Minister Nirmala Sitharaman proposed a social stock exchange (SSE) under the regulatory ambit of the Securities Exchange Board of India (Sebi) to support social enterprises and non-profits in raising funds. SSEs can be helpful in bringing in significant additional capital to support entrepreneurs working to improve the lives of underserved populations, thereby accelerating inclusive growth.

Currently, there are no dedicated online information or investment platforms to serve “for-profit” social enterprises. As for non-profits, it is estimated that there are about 3.1 million non-government organisations (NGOs); 25 per cent are engaged in religious activity, 22 per cent in community service, 20 per cent in education, 18 per cent in sports and culture, and 7 per cent in health services, according to research conducted by McKinsey for Omidyar Network India.

Some privately-owned crowdfunding platforms for non-profits do exist, but cover only a small fraction of NGOs. There are a couple of information and accreditation platforms — GuideStar verifies, certifies, lists, and provides information on NGOs for potential donors. It has certified about 1750 NGOs. GiveIndia connects donors to causes they care about and lists about 500 NGOs on its platform, of which about 200 are ‘GiveAssured’, i.e. periodically accredited by GiveIndia.

Globally, at least ten SSEs have been set up, including in Canada, the UK, Singapore, Kenya, South Africa, Brazil, Portugal, Mexico, Austria and Jamaica. They differ by (i) types of organisations listed — “for-profit” vs non-profit; (ii) services offered — directory-only, matching funders and organisations and providing for direct online fund-raising; (iii) ability to trade securities — currently only 12 companies on UK’s SSE can trade; (iv) methodology for accreditation of organizations and investors; and (v) the ability of retail investors to participate. Distilling key global learnings will be vital in ensuring that the Indian initiative is best positioned for success.

What are some of the initial considerations in thinking about an Indian SSE?

The funding process has several components: Information availability, matching of funders and organisations, accreditation/certification, fund-raising, and trading of securities. Currently, Indian stock exchanges enable trading of listed securities and reduction of information asymmetry between funders and recipients. They do not provide matching and certification services. Therefore, at the outset, clarity about which components of the fund-raising process the SSE is trying to address is important. We then need to examine whether all these activities are permissible under the current regulatory framework of Sebi and the stock exchanges. 

A two-pronged approach would be required in conceptualising an SSE, since the issues relating to “for-profit” social enterprises and non-profit organisations are very different.

In the case of “for-profit” social enterprises, a SSE can potentially help in raising their profile and visibility, attracting new equity and debt funders. However, the definition of a “social enterprise” needs careful thought. Our experience in working with 50 early-stage social entrepreneurs has shown that not all purpose-driven entrepreneurs want the “social entrepreneur” tag, to avoid the risk of such a classification resulting in lower valuations. A SSE can be particularly useful for social enterprises which are not “venture investment-like” and offer more modest financial returns. 

We also need to understand whether special measures are needed for “for-profit” social enterprises or if the regulatory provisions that already exist for smaller companies to raise equity and debt are adequate. An assessment of how effective the current provisions are and what efforts are required to enable social enterprises to fully leverage them would be useful. 

For non-profits, a SSE can enable fund-raising as well as information on operations and financials through standardised reporting. Ideally, certifications and accreditations should be provided by independent organisations outside the SSE. In a survey conducted by The Bridgespan Group, over 60 per cent non-profits cited limited funding as a moderate or significant constraint to scale. A fund-raising platform that has regulatory oversight can improve credibility and help ameliorate the difficulties non-profits face in fund-raising. For donors, high quality and standardised reporting can boost confidence to provide more funding. If common minimum standards were established as eligibility criteria for listing (such as annual statements in standard formats) the greatest impact would be improvement of organisational practices, as non-profits would be incentivised towards this. Moreover, a market for supporting non-profits to improve practices will develop. This will increase funding flows, and eventually support non-profits in scaling up. 

A realistic and multi-year phased rollout of standards is desirable, or else most non-profits may find it too onerous to list on a SSE. Non-profit organisations are predominantly very small — seven out of 10 have one or no full-time staff — with very limited budgets. Other considerations for an SSE include the ownership, operating model and institutional structure. For example, can it be housed under the current stock exchanges, or is a separate institution required and desirable? 

India is already a hub for social innovation. We now have an opportunity to be thoughtful about the above considerations and build a globally unique approach for robust and effective social stock exchanges.    
Roopa Kudva is managing director and Raahil Rai is chief of staff at Omidyar Network India, an investment firm focussed on social impact