The Budget speech of 2019-20 witnessed a major initiative put forward by the Government of India to take the capital markets to the masses to meet the social welfare objectives related to inclusive growth and financial inclusion through a regulated Social Sector Exchange for the social and development sector.
While a novel concept in India, various other countries like Brazil, Canada, Mexico, Kenya, Portugal, Mauritius, Singapore, South Africa and the UK have already institutionalised the SSE models. Some countries like Germany US, Thailand and New Zealand are in various stages of planning1 While most of them are similar in their fundamental motives, each one of them has developed a format unique and suited to their individual needs.
Following the announcement of the concept of Social Sector Exchange (SSE), a working group was constituted which framed and released a draft report in June 2020, detailing the architecture, a preliminary regulatory framework and fund-raising mechanisms that could be availed by the constituents through the SSE. The report, additionally, recommended an all-inclusive approach to develop an ecosystem as an enabler to the growth of the Social Sector.
Traditionally, Non-Profit organisations have always sought funding support from Government spends, Retail and International funding, philanthropic grants and Corporate Social Responsibility (CSR) grants for their programs and activities. In FY 2018, the total funding in the sector stood at INR 2.8 lakh crore, having grown at the rate of 11% from 2014 to 20182. The recent years also saw impact investing as a viable option of funding, where investors blended financial returns with social impact.
Despite the numerous funding options, the sector has always struggled with a deficit in funding and capital requirements. Added to this, the 2020 COVID-19 pandemic and the recent amendments in the FCRA Rules have thrown the entire sector out of gear with most of the capital being diverted to relief operations leaving the NPO’s with deeper funding problems.
So, would the SSE be the solution to this problem? This should be examined in the light of the structure and regulations suggested by the Working Committee.
The SSE as conceptualised in the draft SEBI working report is an electronic platform that brings together the various constituents like the Non-profits and For-profit Social Enterprises to raise capital by listing their securities and other financial instruments and socially-minded investors (Individual and institutional) to invest in these instruments, diversify their portfolio and strengthen the social securities market.
The exchange is proposed to be operated as a separate segment under the existing financial exchanges. A noteworthy point is that the proposed SSE has included a full spectrum of investors into its fold- Retail and institutional, Domestic and international. The main beneficiaries of the SSE are the social enterprises, namely non-profit organisations (NPO), which include societies, trusts and Section 8 companies as defined by the Companies Act and for-profit Enterprises (FPE), a class of enterprises that create positive social impact or have a social impact as their primary objective, despite engaging in business that delivers profits.
The growing interest in investments in the area of social entrepreneurship, where positive social impacts and profitability go hand in hand forms the premise on which some of the funding instruments (e.g. pay for success structures) are designed to give the investors financial returns by creating a positive social impact.
1Social Stock Exchange for Social Enterprises and Social Incubators: An Exploratory Study for India Discussion Paper # 243
2 Analysing the concept of Social Sector Exchange in India- KPMG
