The announcement of a social stock exchange (SSE), to list social enterprises and voluntary organisations, by the Finance Minister in her Budget speech has gathered much attention among social impact enthusiasts across the globe. According to a McKinsey study, ‘impact investors’ in India poured a total of $5.2 billion between 2010 and 2016, most of which was concentrated in sectors like financial inclusion and clean energy. Yet as per a survey conducted by Brookings India, 57 per cent of the social enterprises identify access to debt and equity as a barrier to growth and sustainability.

India, a home to more than two million social enterprises (non-profits, for-profits and hybrid models), needs careful planning while designing its social stock exchange. SEBI set up its working committee on SSEs on September 19; however, many experts have already proposed distilling learnings from those of other countries. Some of these exchanges are either information sites, like in the case of the London Stock Exchange, or list non-profit projects only.

Defining a social enterprise

Canada’s Social Venture Connexion (SVC) and Singapore’s Impact Investment exchange are more advanced in terms of accreditation, valuation and monitoring, whereas the Brazilian model didn’t use such valuations at all. While formulating a similar product for India, we need to have an extensive as well as ‘cautious’ approach. There is no consensus in the wider social impact community about what is and isn’t a social enterprise, therefore the definition itself first needs more objectivity.

One suggestion is to keep it in line with Prof Muhammad Yunus’ definition of social business as a non-loss, non-dividend paying company which is created and designed to address a social problem. Once we have a shared frame of reference in place, we can design impact valuation parameters for social enterprises based on social and environmental mission; target beneficiaries; service delivery; stakeholder involvement; and impact measurement.

Continuous monitoring of these metrics is crucial to the success of such a platform. Impact evaluators and impact rating agencies may also partner with SEBI on this task and provide a reliable source of impact evaluation for the investors.

Listing of social enterprises on an SSE would also improve visibility of social enterprises in the eyes of large investors and philanthropic organisations. Apart from equity capital, social enterprises need debt, particularly to meet working capital requirements. Currently, only a handful of private impact investors provide patient debt to early-stage social enterprises.

Listing debt products on the SSE would encourage banks, NBFCs and other investors to participate in the growth journey of these social enterprises and thereby deepen their impact. SSE impact valuation would also help in supporting an ecosystem of innovative financial products, such as results based financing (SIBs, SSNs, etc), which is a next big leap for the impact investing community in India.

Valuation metrics

We also have a lot to learn from our experience with SME exchanges operated by both BSE and NSE, which have been in existence for almost eight years now. Most of the early-stage social enterprises also fall under the SME category, but these require more handholding than others, especially when it comes to raising capital.

For a social stock exchange to meet its intended objectives, we need to take measures such as: educating market participants about the valuation metrics weighing both on social and financial returns; amplifying the efforts of creating and supporting social businesses; bringing policy and regulatory reforms to support investors, and facilitating research and development for small social enterprises.

It is important that the SSE encourages participation of socially inclined investors to avoid mission drift of its listed enterprises. Rewarding investors by issuing certificates, like in the case of income tax return filing, for supporting social missions of listed enterprises can add more value to their financial returns.

India has one of the most developed social impact ecosystems amongst emerging economies. With India spearheading the modern technological movement, social enterprises here have enormous growth potential. In such a scenario, it is important to support these enterprises with the ‘right’ capital. A social stock exchange may prove to be path-breaking here.

Krishna is MD & CEO and Kalra is Portfolio Associate at Yunus Social Business Fund, Bengaluru