India's social sector is set for a period of growth. Finance Minister Nirmala Sitharaman's 2019 Budget declaration was a timely intervention in this regard when she announced the setting up of a Social Stock Exchange (SSE) under the ambit of the Securities and Exchange Board of India (SEBI).
The SSE, a first of its kind for the country, would allow for listing social enterprises and voluntary organisations working for the realisation of social welfare objective so they can raise capital as equity, debt, grants, or performance-linked payments.
According to a Brookings India report — The Promise of Impact Investing in India (July 2019) — India faces an annual financing gap of $565 billion in meeting its Sustainable Development Goals by 2030.
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The introduction of the SSE and the consequent appointment of a Working Group that has come up with a set of recommendations will give an impetus to addressing part of this gap. This is especially significant now, as the COVID-19 outbreak and its aftermath have sent shockwaves across the world, adding to the burden of livelihood and lives affected. Innovative means of channelling funds towards development is a key priority, and I applaud the Ford Foundation's recent announcement selling social bonds worth $1 billion by borrowing from its future as a strong example of this much-needed impetus towards development financing.
A bridge for funders and social enterprises
The Working Group’s recommendations for setting up the SSE include the principle of creating a platform that will match funders looking to support development objectives with organizations delivering impact.
Philanthropies, retail donors, CSRs, impact investors and mainstream equity investors can come together on the SSE and social enterprises — both not-for-profit organisations (NPOs) and for-profit enterprises (FPEs) — would have access to a wider pool of funds.
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By recognising the diversity of NPOs in terms of size and the reporting burden they can take on, the Working Group has made it simpler for smaller organizations to list on the exchange by enabling aggregator mechanisms, such as Social Venture Funds.
Adopting similar reporting standards for NPOs and FPEs is another positive step, as it will break the silo of legal structures allowing funders the option of selecting projects based on impact rather than legal status.
Validation of impact and pay-for-success
The one area that could benefit from a clear set of guidelines is the validation of impact measures. The Working Group has set out a comprehensive reporting framework on social impact, in terms of reach, depth, and inclusion. However, in the initial years, it is proposed that the data is self-reported. To build trust on the SSE platform and to enable faster transactions that don’t rely on heavy, independent diligence, it would be a strong value-add for the SSE to require some simple, low-cost audits to validate the social impact data. The costs of these audits could be absorbed by the capacity-building fund proposed by the working group to ensure that smaller organisations do not have high costs associated with listing on the SSE.
For instance, the Social Stock Exchange in the UK only lists companies that have passed the 'social impact test'.
Data validation and its benefits in unlocking funds for the development sector may be analogous to what the credit-rating instruments did for debt and bond markets, in India and globally. Such impact data not only improves transparency and enables stronger matching of funds but also forms the basis for more innovative finance instruments. The Working Group has supported instruments such as pay-for-success and impact bonds for nonprofits.
Our own experience at the Michael & Susan Dell Foundation has shown the effectiveness of these instruments when it comes to responsible impact development. In fact, with the Quality Education India Development India Bond (DIB), we are seeing impressive impact results, and much higher than targeted outcomes.
The structure of transparency and incentives has allowed for a much stronger focus on impact. As India looks at setting up the Social Stock Exchange, we should also find a way to include and encourage the participation of FPEs in such DIBs, possibly through social venture funds (SVFs).
Another area where the Social Stock Exchange can extend beyond the current funding instruments is to enable debt funding. Similar to the Working Group’s suggestion on listing smaller entities through the Social Venture Fund route, we may evaluate how the SSE can enable debt listing through pooled structures for NPOs and FPEs.
There are global precedents of this. The Impact Investment Exchange of Singapore, which is run in partnership with the Stock Exchange of Mauritius and is open to limited accredited investors who want to invest in social enterprises, supports debt and equity models.
Liquidity is a key element of a stock exchange and, while it is simpler to create liquidity for equity and debt instruments, the Working Group has also suggested liquidity mechanisms for grant structures as well. The concept of listing a 'zero-coupon zero-principal' bond can allow for the exit of early-stage donors of a project when the project shows proof of concept and impact, and other donors are willing to support it. Similarly, the SVF can allow for the tradability of its units. Global tailwinds of the COVID-19 pandemic have triggered a new wave of investor interest in social impact development. Organizations, funding agencies, and philanthropy funds are looking for ways to invest in impactful programmes that create livelihoods and opportunities.
By allowing for a platform that caters to the needs of funders and beneficiaries, the SSE is a positive step in that direction. A set of rules that defines impact validation and promotes incentive-led instruments will nudge the SSE on the path to becoming a vehicle for positive growth.
(The author is Country Director, Michael & Susan Dell Foundation, India)
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