India wants to leverage its stock market for social impact. Will it work? | News | Eco-Enterprise

Indian social enterprises and organizations will soon be able to raise funds on the stock exchange, as the securities regulator has approved the creation of a social stock exchange.

This could help boost impact investing and fill gaps in Indian public sector spending, say impact investors and social sector organisations, at a time when government coffers are stretched and fears inflation curb public spending.

In October 2022, the Securities and Exchange Board of India (SEBI) – which approved the establishment of the Social Exchange (SSE) last year – issued a detailed framework for the exchange to operate within the Bombay Stock Exchange ( BSE), the largest in the country.

Non-profit organizations and for-profit companies working to create social impact could list and freely trade their shares on the stock market for a range of socio-economic causes such as health care, education, poverty reduction poverty, malnutrition and affordable housing.

How it would work

The idea was first floated by Finance Minister Nirmala Sitharaman in 2019 for social organizations to raise funds from institutional and retail investors.

The SSE concept was first tested in South Africa in 2006, when the South African Social Investment Exchange (SASIX) was launched on the Johannesburg Stock Exchange. The idea is simple: just as investors invest in listed companies around the world by buying back their shares, they invest in projects with social impact, thus making capital available to the social sector.

The idea is attractive for a large emerging economy such as India facing difficult development challenges.

“If we want money to flow easily in a sector, we have to make it easier for people to invest in the sector. This is the idea behind a social stock exchange: that one can invest in [social] projects on a well-regulated platform and bring in more money in the market than is currently invested,” said Ramraj Pai, Managing Director of Impact Investors Council (IIC) in Mumbai..

SEBI, India’s financial regulator, will allow non-profit organizations registered as charitable trusts to list and issue zero-coupon bonds on the stock exchange. Zero-coupon bonds are debt instruments that raise funds in the market, but without the obligation to pay annual interest and principal. Additionally, for-profit social enterprises could raise funds by selling stocks or investments through mutual funds.

However, not-for-profit and for-profit listed entities would be required to file annual impact assessment reports, which would be audited by social auditors, indicating the extent of the impact achieved, such as the total number of targeted people reached, changes in their lives, and challenges and gaps in project implementation.

An SSE can complement public spending, said Astrid J. Scholz, social entrepreneur and founding-managing partner of Sphere. “If government efforts aren’t big enough, there’s a role for philanthropy and increasingly there’s a role for impact investing. And in such a scenario, it might be helpful to have an SSE,” she said, adding, “If investors in India are generally keen and open to investing in private offerings on an alternative stock exchange, that might then be a very powerful mechanism. .”

“[The SSE] will bring momentum to the upstream impact incubation and acceleration pipeline by unlocking capital for impact start-ups and SMEs, ultimately creating healthier downstream impact markets,” said Amit Bhatia, founder of Aspire Impact, a social enterprise based in Gurugram, at Eco-Business. India’s annual impact investments – which stood at around $2.6 billion in 2019 and are growing at a compound annual rate of 26% – will get a boost, he said.

Why India Needs an SSE

Despite being one of the fastest growing economies in the world, India faces increasing development challenges. About a quarter of its population is poor, according to a government policy think tank. In 2022, it ranked 107 out of 121 countries in the Global Hunger Index, recording the highest rate of child wasting in the world; and ranked 132nd out of 191 countries and territories on the United Nations Human Development Index (HDI) 2021/22.

In 2021-2022, India spent about 8.6% of its gross domestic product on the social sector. However, compared to other major emerging and advanced economies, its government spending remains low. For example, in 2019 India spent around 3% of its GDP on healthcare, while China, with an economy more than five times larger than India’s, spent over 5%.

In 2020, Indian Prime Minister Narendra Modi reaffirmed India’s goal of achieving the United Nations Sustainable Development Goals (SDGs) by 2030. However, according to the United Nations Development Goals Report for 2022, India has struggled to make progress on 11 of the 17 SDGs.

India boasts the largest impact investing market in Asia, but a 2022 report by Bain & Company found that to achieve the SDGs by 2030, India would need to spend around 13% of its GDP each year, far less than it actually spends. . Moreover, even though the wealth amassed by Indian billionaires has increased exponentially, their philanthropic giving has grown at a slower rate.

Therefore, according to investors and social sector organizations, an SSE could prove useful in leveraging Indian financial markets for development, for the first time.

Another obstacle to funding nonprofits in India has been the government’s crackdown on foreign funding sources, said Varun Aggarwal, founder of India Migration Now, a migration research, policy and advocacy organization. in New Delhi. The Foreign Contribution (Regulation) Act (FCRA) controls the flow of foreign funding to nonprofit organizations. In January 2022, the government revoked the FCRA license of around 6,000 non-profit organisations, including Oxfam India and the Missionaries of Charity associated with the late Mother Teresa, stifling the flow of capital to a variety of social sector projects .

“Donors are uncertain, nonprofits are uncertain. If we look at the last 10 years, especially the last three to five years, we have seen foreign funding for nonprofits become a big challenge due to FCRA requirements,” Aggarwal said.

To make it really work…

Investors and financial experts say investing in the SSE must be a more lucrative opportunity and suggest SEBI and the government could offer tax breaks to investors, for example. Otherwise, investors may not want to invest in a sector with poor financial returns.

IIC’s Pai said that while investors are looking for good-quality projects that can generate returns, SEBI needs to put an incentive structure in place “because not all investors are philanthropists.”

Obtaining global evidence of the success of SSEs is difficult.

A 2021 study by the International Center for Not-For-Profit Law in Washington DC, USA, and Samhita Social Ventures in Mumbai, found that of the seven SSEs examined, four were no longer in operation and most did not have a strong business. model. Additionally, the study found that small business investors favored organizations based on their size rather than the quality of their work and were biased against small local organizations.

“The question is whether an SSE accelerates the flow of capital or does it increase the volume of capital available to social enterprises – and I think the answer is: maybe. There are only a handful of SSEs in the world and the evidence base is not strong one way or the other,” Scholz said.

Jayati Ghosh, professor of economics at the University of Massachusetts Amherst in the United States, said private sector investment cannot replace public investment, as private sector investors seek to maximize returns, which she said would be a barrier to making longer-term investments. and a significant social impact.

“Much of the investment required must necessarily be public investment, as some of these activities are unlikely to ever be commercially profitable, even though they are socially necessary,” Ghosh said.

Ghosh cited health and education as examples of sectors where quality universal services are unlikely to be commercially profitable. “There are significant information asymmetries that necessitate strict regulation when private investors come in. [Hence] it is essential to have high levels of public investment. In these areas, public investment must be the first priority.

Yet as central banks around the world raise interest rates to contain inflation fueled by pandemic-induced supply chain disruptions and Russia’s invasion of Ukraine, market risks financials rose amid an International Monetary Fund (IMF) warning of an impending global recession. This means that investors would become risk averse.

Eco-Business experts interviewed said that while financial conditions remain challenging globally, this is a step in the right direction for India to be able to divert more capital into financing the social sector. “We’re starting from scratch,” Pai said.

According to Scholz, there is no evidence to suggest that the flow of capital towards creating social impact would be hampered by fears of recession or rising interest rates. For example, she says, even if the economy were down, it would be necessary to invest in the supply of clean water.

Bhatia of Aspire Impact said that without tax breaks or incentives, investors have invested over $10 billion in India’s impact investment pool. He said India as a market has a high investment premium, which would also show up in both impact investments and an SSE.

“With over a dozen impact unicorns, India is and will remain a leading impact nation, especially in this decade of action for the SDGs,” Bhatia said.