One of the more interesting measures in this year’s Union budget was a proposal aimed at streamlining the development and social impact sector. The proposed introduction of a ‘social stock exchange’ (SSE) anticipates increasing public participation in the sector, expanding investment and organised tracking of the benefits. While details still need to be worked out, the vision of an SSE may addresses some serious transparency and accountability issues that are creeping into the development sector, while increasing investor participation. There is no history of such a platform in India and most countries that have set one up have taken varied approaches. These range from the exchange functioning as a knowledge bank for impact investors and voluntary organisations, to the exchange acting as a platform where instruments such as shares issued by voluntary organisations are traded. In her budget speech, finance minister Nirmala Sitharaman described the new exchange as such: “It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. I propose to initiate steps towards creating an electronic fund raising platform – a social stock exchange – under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.”If this is any indication, then the proposed SSE will be designed as new fundraising medium that will allow listing of ‘social enterprises’ and/ or ‘voluntary organisations’ so that they can raise money through equity or debt, or a combination of both by way of units of funds. Many in the market are currently speculating that the use of the word ‘exchange’ essentially means that such instruments or units shall be tradeable. It is also fairly clear that the Securities and Exchange Board of India (SEBI) is the government’s choice for regulating the activities proposed to be conducted on the SSE. Also read: Budget 2019 Reeks of a Lack of Real AmbitionIn order to analyse this choice, it is necessary to delve into how the SSE is likely to function, the nature of entities it wishes to govern and most importantly whether this kind of governance falls within the existing SEBI machinery. For example, in case the SSE is merely a directory aimed at connecting potential investors with relevant social organisations, it may be better to establish an independent body akin to the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) set up primarily to act as a database of existing credit arrangements between lenders and companies in India and serves as a ready reference for lenders to diligence potential borrowing entities. The formulation of the SSE proposed so far, involves listing of organisations and also creation of an e-fundraising platform both of which may hugely benefit from the reliability of the SEBI mechanism and the reputation it enjoys with investors both in India and internationally. SEBI also has a deeply organised and well-oiled grievance redressal and dispute resolution system that may be used even for the SSE without much modification. Furthermore, the capital markets regulatorI has a decent track record of updating its regulatory arsenal to ensure that the laws do not fall behind market conditions, this adaptability may be its strongest suit while stepping into a sector where malfeasance and lack of transparency are very commonplace.However, before SEBI can assume control of the SSE structure, whenever it is finally decided, it needs to address some specific concerns relating to the strategic philanthropy sector. First and foremost is the list of players in this market. The contours of a ‘social enterprise’ and a ‘voluntary organisation working for the realisation of a social welfare objective’ will have to be defined – because, the wider the scope of these terms, the more diverse will the regulatory framework need to be. Unlike any other sector, there is a wide spectrum of organisations that exist in this space, diverse not just in their corporate make-up but also in the work that they undertake and what level of participation they actually have with the said objective of social welfare.Also read: India Inc Must End its ‘Bribe, Settle and Move-on Culture’The next set of players are the potential investors. The treatment of investors will have to vary on the basis of who falls within its ambit. For instance, should only high net-worth individuals and companies that work in the impact investment sector be allowed to participate? Or should it be open to public participation? Both will require a different regulatory framework.The level of disclosures to be made by the organisations raising funds will also vary on this basis. This will get further layered in case of foreign funding (even though, the government has been traditionally sceptical of foreign funding in this area). The foreign investment provisions in India fall within the purview of the Reserve Bank of India (RBI) and may need to be modified to allow for this nature of funding activity. The final set of players will be some new classes of intermediaries such as impact assessors, valuers, trustees, etc – the whole gamut of which can be identified only once the infrastructure is set up. SEBI will need to formulate regulations to govern their registration and scope of activity. Despite, the enormity of the task, it is not an altogether unchartered territory for SEBI.Second, is the issue of return on investment (ROI). Most investments are run on a return of investment basis and the popularity of an investment is often wholly dependent on how high such ROI is. In case of impact investment, the ROI will most likely be the benefit to the social welfare objective the investor is contributing towards. The calculation of such a return, for which no accepted criteria exists at the moment, gets even more complicated in cases where an investor invests in a portfolio of social welfare organisations, whose objectives could be vastly diverse – tracking of the actual benefit is therefore likely to require a whole new substructure along with the ability to quantify such benefit in a comparable manner. If the corporate social responsibility (CSR) obligations of companies are also included in the mix, the returns may also be in the form of tax rebates, which are provided on a one-time basis annually against the annual CSR contributions of a company. Finally, an important concern is that of tradeability. In due course, when government agencies are able to address the first two issues raised above, the issue of tradeability will still be one of the trickiest courses to navigate. In case an instrument issued on the SSE is to be traded, the primary question will be the value to be assigned to such instrument. An additional question will be regarding the transferability of the tax rebates that were discussed above.Also read: Explaining the Rise in Revenue Deficit Between Modi Govt’s Interim and Full Budgets It would seem that trading in instruments issued by social welfare organisations will require an additional mechanism that calculates the value of each such instrument on the basis of the ROI methodology that is devised. The kind of valuation that is assigned to such instruments, will also need to increase or decrease organically on the basis of a matrix which will also have to be designed. Even with these issues in tow, the fact remains that the above functions are not dissimilar to the work that the SEBI already undertakes and accordingly, setting up an additional body to regulate and/ or govern the SSE will inevitably delay the launch of this platform, lead to a loss of opportunity to capitalise on the credibility that the SEBI already enjoys in the market and add a financial burden on an already struggling sector. In conclusion therefore, based on the limited information that is available, the SEBI may be the body best suited to the role of regulator of the proposed SSE. Its extensive expertise notwithstanding, the extent of overhaul it will require over the existing infrastructure, the totality of the new laws, policies and formulations that need to be drafted and the time it will take to achieve and finally launch the SSE may be gauged only after the specifics have been brought forth.Neeti Bhatt is a New Delhi-based lawyer.
