The word ‘exchange’ entered the lexicon of economic theory in 1776 – when Adam Smith used the famous expression ‘ truck, barter or exchange’ in his magnus opus An Inquiry Into the Nature and Causes of the Wealth of Nations. Here, he argued that “this propensity is common to all men, and to be found in no other race of animals.” While Smith used these three words as synonyms, each has a different connotation now: trucking has moved into the domain of logistics, barter is best used to describe transactions in informal markets, and exchange is the platform that brings investors to pool their capital for undertaking endeavours well beyond the ken of individuals. The joint stock company, with liability limited to shareholding, saw the advent of institutional arrangements, which led to the growth, spread and global dominance of not just the British East India Company but also similar corporations of other European powers.
Transactions on the stock market are unique because, in an exchange, transactions are mediated rather than occurring directly between two parties. The price of stocks is listed publicly for all to see and observe, and investors take decisions based on the prospectus (in the case of initial public offerings or IPOs) or the track record of earnings/potential earnings. An independent regulator like the Securities and Exchange Board of India (SEBI), ensures that investors have adequate information before they commit their funds to a particular portfolio, the basic assumption being that investors would like to maximise returns on their capital.
However, while the belief that capital always likes to perpetuate itself is substantially true, it is not the whole truth. After a certain threshold, both corporates and high-net-worth individuals (HNIs) wish to do something for society, and, in the process, leave a legacy by establishing institutions that prioritise public or social welfare. Traditionally, individuals and families endowed the religious establishments in their vicinity – the local temple, church, mosque or Gurudwara. This was followed by the establishment of educational centres, hospitals, museums and endowment funds to promote literature and the arts. Still others opted to address issues relating to gender, child rights, poverty alleviation, access to education, climate change mitigation and so on.
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Philanthropy and CSR in India
As India grows in its economic strength, the contribution of corporates and HNIs to philanthropy and charitable causes also registers a steep upward graph. In the last fiscal year, the total contribution to these social causes was over Rs 105,000 crore. In addition, another Rs 27,000 crore was committed to Corporate Social Responsibility (CSR) funds. Many of these corporates and individuals would like to put their resources into institutions that can sustain themselves in the long run as ‘social enterprises’, which are revenue-generating businesses, but with a twist.
The primary aim of such organisations is to achieve social objectives, such as providing quality education in informal clusters or Below Poverty Line (BPL) habitations, addressing gender issues by producing affordable sanitary pads, or providing reasonable healthcare and clean energy. But even though profit is not the primary goal, it is an essential part of the paradigm as it ensures the entity’s sustainability. In fact, many social enterprises operate like typical corporate companies. But the major difference between them and other organisations is that the profit these firms generate is not necessarily used for pay-outs to stakeholders; it is reinvested into their social programmes. This helps social enterprises plan and execute long-term projects, bringing the required technological and professional skills on board.
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Importance of Social Stock Exchange
This is where Social Stock Exchange plays a seminal role. In her Union Budget speech for FY 2019-2020, Finance Minister Nirmala Sitharaman outlined a vision of the SSE: To meet various social welfare objectives related to inclusive growth and financial inclusion. The SEBI was tasked with implementing an actionable plan. For this purpose, it constituted two teams – one under the Tata group veteran Ishaat Hussain in 2019, and the second under National Bank for Agriculture and Rural Development (NABARD)’s former chairman, Harsh Bhanwala, in 2020.
Hussain and Bhanwala examined the global best practices from Singapore, Brazil, South Africa, the United Kingdom and Canada. They consulted widely with stakeholders across the spectrum before recommending that India was ready for an SSE and requesting that the mandate be given to the National Stock Exchange (NSE). The notification to this effect was issued earlier this year.
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Trading platform for social sector
The SSE will now serve as a trading platform for social enterprises to obtain funds transparently and efficiently by using various fundraising instruments under regulatory guidelines. Under the rules, any social enterprise – be it a Non-Profit Organization (NPO) or For-Profit Social Enterprise (FPE) – that establishes its primacy of social intent, is eligible for listing on the SSE. Immediately thereafter, NPOs can initiate the fund mobilisation process by issuing instruments such as Zero Coupon Zero Principal (ZCZP) through a public issue or private placement. As per Outlook, for ZCZP issuance, regulations have prescribed the minimum issue size as Rs 1 crore and set the minimum application size for subscriptions at Rs 2 lakh. For FPE, the procedure of issuing and listing securities would remain consistent with the existing exchange processes. The only caveat is that they will also list the ‘social impact score’ – a score or rating that assesses the environmental/social effects of a company’s initiatives – of their past interventions.
Thus, SSEs will gain access to additional capital at lower costs because of process standardisation and the elimination of individual negotiations. Many social enterprises have reported that they could expand their operational outreach if they had access to capital. Even from the point of view of the investors, an independent impact assessment body will offer information, much like a credit rating agency. Securities of the best-performing social enterprises will carry a premium, while inefficient companies will be penalised by the market. As impact investment scores become public, the flow of funds into sustainable development would increase, thereby reducing the burden on the government for social programmes. Additionally, the SSE will offer an exit option to the investor. Unlike a donation that cannot be retrieved after being given, an investment through the SSE can be traded, thus increasing liquidity for investors in times of dire need. No wonder, then, that SSE’s time has come.
Sanjeev Chopra is a former IAS officer and Festival Director of Valley of Words. Until recently, he was Director, Lal Bahadur Shastri National Academy of Administration. He tweets @ChopraSanjeev. Views are personal.
(Edited by Zoya Bhatti)
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