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There are no easy solutions to broken lives, and rebuilding them may take all our ingenuity. From arranging free cataract surgeries for the poor to educating their children, countless small NGOs have been toiling with all their heart in remote villages beyond the gaze of most people.

But many of them are now staring at an existential crisis as their funding has dried up with most donors focusing on regular covid-19 relief work. Rather than throwing up our hands, perhaps we should look at addressing this situation through the proposal to set up a Social Stock Exchange (SSE).

First mooted by Finance Minister Nirmala Sitharaman last year in June during the budget, the proposal has picked up speed recently. Securities and Exchange Board of India (SEBI) has set up a technical committee on the SSE to develop a framework for onboarding profit and non-profit organisations.

This will look at prescribing disclosure requirements relating to financial and governance goals. It will also dwell upon aspects related to social impact and social audit. Though the concept of an SSE is not novel and has been tried out in other countries, it has real potential to tide over the funding problem being faced by social organizations in India currently.

A New Approach

The idea that a non-profit can directly list itself on the SSE and garner social capital has tremendous appeal, especially during the pandemic-imposed financial hardship. However, the process of creating an SSE is not an easy one; it requires a vigorous review of its efficacy. 

The pitfall in our nation could be that long-drawn out processes to meet regulatory requirements could stymie the potential. Many non-profit organizations doing yeoman’s work lack the financial resources to maintain compliance records, unlike regular companies or enterprises.

Yet there are many challenges to ensuring that funds are not misused. There are around 31 lakh registered NGOs in India. To sieve through them and ensure that the benefit of a crowd-funding platform goes only to the meritorious would be an uphill task without a clear plan to reduce the paperwork.

The first obvious problem is defining the eligibility of the social enterprise that will be allowed to be listed. So far the panel report has proposed the definition to include “a class of enterprises engaged in the business of creating a positive social impact.”’ 

This is to be enforced by certain minimum standard reporting requirements, but the SEBI panel has not defined the criteria in clear terms for differentiating between a social enterprise and a regular enterprise. Any opaqueness in this parameter may have a greater adverse impact in India than other nations.

There is a real danger that the filing procedure may be so daunting that only the well-heeled NGOs may take undue advantage to apply for listing and corner all the aid. If the specific contours of a social enterprise are not well-defined, the SSE’s creation may quickly turn into a sham, ignoring the needs of grass-root level organizations. 

Since these social organizations are supplanting the government’s efforts in providing critical services, it would only be appropriate if the extensive government machinery is roped in to help with filing procedures for small NGOs operating in the remote corners of the nation.

The concept of an SSE has been adopted in varying models in South Africa, United Kingdom, Brazil and Canada. Impact investing has increased considerably in the past few years in India. With more corporates working towards facilitating environmental, social and governance goals (ESG) as part of CSR can go a long way to serve the greater good.

But a blind application of any SSE model would be inadequate, perhaps even counterintuitive without giving due regard to the specific needs and context of the Indian social sector.

The government would also need to take on a pro-active role to widely push for the use of specific funding instruments mooted by the panel.SEBI has proposed three instruments for fund-raising: mutual funds, social venture funds and zero-coupon-zero-principal bonds.

Walk the Tightrope

Government agencies would have to engage in educating ground-level social actors about these instruments as well as prepare them for compliance capabilities. The SSE would also have to review the existing instruments and their compatibility with the new instruments.

On the other hand, investors would need to be incentivized and educated as well, not just about the funding instruments, but the entire process of SSE. The tax benefits and incentives offered would  need to be clearly specified with respect to the new financial instruments. This would require setting up new tax regimes specifically suited to the SSE and integrated with the existing regulations.

The entire process of raising money and deploying them effectively would need careful regulation that meets the approval of both the investor and investee. The entire governance structure would therefore need a democratic base to ensure proper representation, efficiency and transparency.

Mandating regular impact evaluation may provide accountability to the investors, but on the other hand, would entail putting greater constraints and burdens on enterprises that do not have these capabilities. The SSE is faced with the complex task of maintaining an equilibrium.

A great degree of scrutiny is required before implementing the SSE. However, if such concerns are taken into account and specifically addressed, slowly, but steadily, the woes of not-profits can be adequately fixed, leading to a financially strong social sector.

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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