Socially relevant

| Updated on May 11, 2021

Ensuring funds flow to non-profit organisations   -  PTI

Ensuring that only credible social enterprises use the social stock exchanges is the right approach

With the technical group set up by the Securities and Exchange Board of India (SEBI) submitting its report on establishing a social stock exchange (SSE), it is hoped that the regulator will move fast in setting it up. The wide-ranging report has managed to plug most loopholes that can be exploited by unscrupulous entities masquerading as social enterprises. The path is now paved for credible Non Profit Organisations (NPO) as well as ‘For Profit Entities’ to access the large pool of donors in the country through the SSE. India has set a global precedent by mandating that all corporates should set aside a part of their income towards corporate social responsibility activities and we can now follow this with a vibrant stock exchange dedicated for social causes. There is no dearth of donors in the country — the impact investing ecosystem is very active and philanthropic funds from wealthy individuals are plentiful. However, there is a need to ensure that these funds are channelled to the right cause and social stock exchanges can act as the connecting link.

The technical group has rightly given much emphasis on ensuring that only the deserving enterprises are allowed to use the platform. There are three filters suggested to establish the social impact objective on the enterprises — first, the activities of the entities have to fall within 15 broad eligible areas that include eradicating hunger and poverty, promoting education, health, financial inclusion etc.; second, that the activities should be targeted towards underserved or less privileged population segments or regions, and, third, that at least 67 per cent of the social enterprise’s activities should qualify as eligible activity for the target population. The technical group has tried to avoid misuse of funds raised on the platform by barring entities such as corporate foundations, political and religious organisations. Disallowing professional or trade associations and infrastructure and housing companies is also right as these entities can crowd out the more deserving social causes.

The requirement that the NPOs registering with the social stock exchange should be at least three years old, with annual cash flow of ₹50 lakh and should have received funding of at least ₹10 lakh will help raise the bar. These financial filters are needed as it is far more difficult to evaluate social outcomes. The main set of participants in the SSE is likely to be social impact funds and, therefore, reducing the corpus of these funds from ₹20 crore to ₹5 crore and the minimum subscription for individuals to these funds to ₹2 lakh, is the right move. Other instruments suggested for fund raising such as zero coupon zero principal bonds and development impact bonds will give social enterprises a wide array of options to choose from.

Published on May 11, 2021

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