How do you define a social enterprise? The traditional way of looking at it has been that any venture that positively impacts the under-served is a social enterprise. But then issues arise as quite a few commercial enterprises too positively impact the under-served. Many of these enterprises raise money from committed impact investment firms, which do not always eye their investment from the prism of the return on equity they will get. They are more bothered about the impact that the firms create.

In the next few weeks, a 15-member working group appointed by the Securities and Exchange Board of India (SEBI) will come up with detailed norms and structure for a social stock exchange, which was proposed by Finance Minister Nirmala Sitharaman in her 2019-20 Budget. There are some global models to look at. For instance, Singapore has an Impact Investment Exchange Asia and the Social Stock Exchange in London. The idea behind the social stock exchange is to open up the investor base to a broader spectrum and not confine it just to venture capital firms, family offices and wealthy individuals who want to improve the lot of the under-served segments of society. In her Budget speech, Sitharaman highlighted the need to take the capital markets closer to the masses to meet social welfare objectives related to inclusive growth and financial inclusion. Entities working to realise social welfare objectives will be able to raise equity and debt through the proposed exchange and also enthuse the larger public to participate in social causes.

Sankalp summit

At the recent 11th Sankalp Global Summit in Mumbai held for two days in the last week of November at the Renaissance Convention Centre overlooking the picturesque Powai lake, a plenary session focussed entirely on the modalities of defining a social enterprise and the structure that the proposed exchange can take. Three of the panellists – TV Mohandas Pai, Chairman, Manipal Global Education Group; Vineet Rai, Founder, Aavishkaar Group, which was organising the Sankalp summit for the 11th year; and, Amit Chandra, Chairman, Bain Capital – are part of the SEBI working group. The other panellists were UK Sinha, former Chairman, SEBI; Usha Thorat, former RBI Deputy Governor; and, PN Vasudevan, Managing Director and CEO, Equitas Small Finance Bank.

Sankalp Forum, established by the Aavishkaar-Intellecap group, a major player in the social space, has been organising the summit to bring together various players in the social sector.

One way of defining a social enterprise, said Mohandas Pai, a panellist and a member of the SEBI-working group, was an enterprise that focusses primarily on improving the lives of people, especially the vulnerable sections of society and which also tries to earn a return.

A stock exchange for such ventures, said Pai, enabled companies to raise capital, provided liquidity to the investor, created a brand for the enterprise that would help it attract and hire the best talent and, gave the companies the opportunity to pay attractive remuneration to its employees using different options.

Types of social enterprises

Social enterprises themselves are of various types – for-profit, non-profit, non-governmental organisations and those working for charity. The SEBI working group would have to come up with a structure that matched both sides – the investors on one hand and enterprises with a social good – for them to meet and raise capital and invest.

Vineet Rai, Founder, Aavishkaar group, felt that one should not be rigid in defining what is a social enterprise – whether it was a for-profit company or a non-profit entity. Instead, the focus should be on the impact created.

There was a difference between investments that made an impact and impact investment per se. They may sound similar, but there is a huge difference, he argued.

For Rai, the challenge was not about whether we are making an impact or not, but how pronounced that impact was and how long do you hold on to that belief.

Once listed on a social stock exchange, wouldn’t the enterprises be under pressure to perform to offer returns to their investors? Would they have to compromise on their social goals? These were issues that the working group was grappling with. It should be clear that a desire for impact should take precedence over a desire for returns. The working group was thinking of various models because of the complexities of the Company Law. There would be legislative changes required. Different kinds of instruments would have to be thought of to marry all the conflicting interests. The exchange’s job should be to help entrepreneurs and ventures implementing socially impactful projects to raise money. At present, several were struggling to get funds to proceed with their idea.

Are there any models to follow? According to Vineet Rai, there are no well-performing operational models. There was only one, a serious one, in London, which was struggling. But, he said, India was different. The size and scale of the opportunity was enormous. Considering that, it will have to be a path-breaking model.

There was also the dilemma for entrepreneurs accepting funding from a mainstream VC or a PE fund versus getting it from an impact investor. With a mainstream VC/PE player, said Vasudevan of Equitas Small Finance Bank, you knew what returns they expected of you. An impact investor wanted the enterprise to create impact and also worried about the return, which was most often along the lines of what mainstream VCs expected. From day one, it was a commercial transaction and both wanted returns to give back to their respective investors. The question also was whether it was social capital or risk capital. If you want only impact, it is social capital. If you want returns, it is risk capital.

UK Sinha, former SEBI Chairman, said the moment you talk of a stock exchange, you are talking of public money. That comes with its own set of expectations. He felt that the government should consider giving tax break for capital gains for the social stock exchange to become a success in India.